Sunday, November 22, 2009


About 214,000 of the 1.1 million homes with mortgages in Colorado are "under water", according to a new report by First American Core Logic. Mortgages are said to be "under water" or "upside-down" when a homeowner owes more on a mortgage loan than the home is worth.

Nationwide, 23% of all mortgages have negative equity positions, led by Nevada (65%), Arizona (48%), Florida (45%), Michigan (37%) and California (35%).

According to First American, most of the loans in trouble share common characteristics:

* the vast majority of upside-down loans were originated between 2005 and 2008, with 2006 being the peak year for negative equity loans

* adjustable-rate loans have defaulted at rates far higher than fixed-rate loans

* in much of the country (including Colorado), new construction has taken a more serious hit that traditional resale homes

* homes originally purchased for $250,000 or below have accounted for nearly 80% of Colorado's completed foreclosures, although it appears more higher end properties are now falling into foreclosure

Although all areas have been affected to some extent, it is very clear that certain areas have taken a heavier hit than others. Communities like Brighton and Commerce City, which were flush with entry-level new construction during the early years of the decade, and areas with older housing stock, like Aurora and Lakewood, have seen foreclosure rates far higher than cities with a more diverse mixture of housing stock.

For my clients, the name of the game is always to "buy it right". Hoping future appreciation will bail you out of a marginal home purchase is not a good strategy. Researching, analyzing and finding motivated sellers (including banks) is a much better approach to protecting yourself long-term, although it often takes more time and patience.

And remember that with new construction, you are always paying a premium for the "shininess" of your new home. Understanding what is "retail" and what is "wholesale" when it comes to buying a home is critically important in a volatile economy. Make sure your agent isn't just a cheerleader for the housing market.

Today, you need a realistic perspective about both the potential upside - and downside - of buying into different areas and different price points as the national economy struggles to regain its footing.