LATEST CASE-SHILLER NUMBERS SHOW 4.4% PRICE GAIN IN DENVER

For the sixth month in a row, home prices in the Denver area showed a year-over-year price increase in April, rising 4.4 percent from April 2009, according to the latest Case-Shiller Home Prices Index, which was released earlier this week.

The increases came during the last month of the federal homebuyer tax credit, which expired April 30 and resulted in a flurry of first-time buyer home purchases.  Denver was one of 13 cities in the 20 city Case-Shiller survey that showed a year-over-year increase in prices in April.

However, as I've stated repeatedly in the blog, we continue to find ourselves in the most segmented housing market in many years, with fair-to-strong demand at lower price points and soft-to-no demand at the highest price points.

The 4.4% increase reported by Case-Shiller is actually a combination of the momentum of lower priced homes slightly outweighing the negative drag at the higher end of the market.  As of mid-June, there were about 2.5 actives for sale under $250,000 to each one under contract, compared to nearly 19 homes for sale at prices above $1 million to each one under contract.

Low-end warm, high-end cold. 

The 4.4 percent rise was Denver’s largest year-over-year price increase of the last six months. As compared to a year earlier, Denver prices climbed 4.1 percent in March, 3.6 percent in February, 2.6 percent in January, 1.2 percent in December 2009 and 0.5 percent in November 2009.

November 2009’s rise was the first overall year-over-year home price increase in the Denver area since November 2006.  Between those months, Denver had 36 straight months of year-over-year price declines.

As recently as early 2009, Denver was showing year-over-year home price declines of 5 percent or more, peaking at a 5.7 percent drop in February 2009.

THE SLIGHT EDGE

"Do the thing, and you shall have the power."

                                   - Ralph Waldo Emerson

What separates winners from losers?  What causes one to succeed where another may fail?  In Jeff Olson's "The Slight Edge", the author asserts that it is a fine line that separates most people from their dreams, and that it is the timely, consistent application of personal discipline that launches people toward great results.

According to Olson's philosophy, time will be your friend or time will be your enemy.  Time will reveal the quality of your work, or it will reveal your failure to prepare.  Like compounding interest, simple disciplines repeated daily yield amazing results.  Failure to take action, on the other hand, leads to a slow drift down a lazy river until one day you wake up at the crest of a great waterfall.  Tony Robbins calls this phenomenon "The Niagra Falls Effect".

Olson says that the world is full of negative people "because it takes far more creativity and skill to construct a building than to demolish it."  As a result, Olson says most people are in the wrecking business.

To overcome this negativity, we need to set and clearly articulate our goals.  We need to have deadlines.  And we need to work on the margins of each day to make sure we are constantly improving, constantly adding skills, and finding new ways to create value.

Olson's Slight Edge philosophy can be summarized well by a Chinese proverb:  "Be not afraid of going slowly - be only afraid of standing still."

The Slight Edge is about moving foward, all the time.  It's about working effectively, efficiently and with purpose.  It's a philosophy for gathering momentum, which leads to completion. 

In my business, it's about making one extra phone call.  Sending one extra note.  Going back to a stalled negotiation one more time.  The Slight Edge is about the doing the little things most people won't do so that you generate results that most people will not. 

It's not science, but discipline.  And personal discipline has always been the fuel that propels people to achieve their highest potential. 

ARE YOU AN "AUTHENTICK"?

Saw an absolutely fascinating article in Realtor Magazine recently about psychographics, the study of backgrounds, lifestyles, beliefs and aspirations to develop portraits of consumer behavior.

Years ago, Tony Robbins educated me on "Auditory, Visual, and Kinesthetic" learning. In other words, all people learn differently, and if you can tell whether people learn and communicate best by sound, sight or touch, it will greatly improve the quality of your communication and presentations. It's a high level skill and one I really enjoy applying in my business. (I'm a visual, by the way)

Psychographics seems to take it to the next level.

Dennis Cahill, who runs the Ohio-based company that created psychographics, uses the following chart to educate salespeople on how to communicate with different types of clients:

ACHIEVERS - are ambitious, hardworking and family-oriented. They often want a high-end home that reflects their success. They are looking for a sophisticated, low-key marketing approach that appeals to status.

AUTHENTICKS - are individualistic, community-oriented, environmentally conscious and aware of world affairs. They tend to like open, airy floorplans with large windows and plenty of space. They choose an agent based on relationships, driven by personal connections and referrals.

HEARTLANDERS - are guardians of traditional values, like family, country and community. These people are often drawn to established subdivisions and put an emphasis on community, but they do not like dramatic change.

TRENDERS - are early career strivers who want to grow up to be ACHIEVERS. They like popular neighborhoods and convenient urban locations that offer lifestyle as well as a place to live. They're often techy, and want you to be techy too.

SELF-SUFFICIENTS - are often blue collar workers or tradespeople. They lean toward traditional styles, but are not averse to fixer uppers. They like value and comfort, and don't want to be dazzled with statistics.

Of course, there are variances to all of these generalities, but the conversation is interesting. The goal is always to communicate clearly and deliver the information your clients need in a way that connects with them.

If ours is a service-based business, then part of that service has to be learning to communicate in the most effective ways possible. It means being a lifelong learner in all areas - not just in market statistics and home design, but in communication methodologies as well.

LIFE AFTER THE TAX CREDIT - CHAPTER ONE

Can't say this is a surprise, but the real estate market in Denver hit a wall in the 30 days immedately after the tax credits expired.  The absorption rate for homes priced below $250,000 rose by over two full months, from 3.36 months to 5.42 months, while the inventory of homes priced between $250,000 and $400,000 rose from 5.20 months to 7.75 months.  

"Absorption rate" is a mathematical calculation that shows how many months it would take to clear out all inventory in a given price range, assuming no new inventory was to come on the market.  For example, if there were 100 homes for sale in a given price range and 10 of them went under contract in the prior 30 days, you would have a 10 month supply of inventory.

Real estate economists will tell you that six months of inventory represents a stable market, favoring neither buyers nor sellers.  Any number below that (like the 3.36 months supply of sub-$250k homes we saw in April) represents a seller's market, while inventory above six months is considered to be a buyer's market.

Overall, during the past month the inventory of homes in Denver has risen from 5.00 months to 7.53 months, which basically reflects a 50% increase in the absorption rate.  Any way you cut it, May was not a good month to be selling your home.

We knew with the flurry of activity at the tax credit deadline, things were bound to cool off in May.  And they did.  In my opinion, it's going to be a good 60 to 90 days before the market stabilizes and we figure out what "normal" looks like going forward. 

Rates are still low, but with tax credits now out of the picture, the focus goes 100% back toward the overall economy.  No jobs, no recovery.  No jobs, no buyers.  No jobs, more foreclosures. 

I would gladly take a 1% increase in interest rates for two points off the unemployment rate.  When jobs return, there will be pent up demand for housing.  But until then, we're just in a holding pattern. 

The next move forward in the housing market is spelled J-O-B-S. 

  

IT'S NOT OVER UNTIL IT'S OVER...

When working with buyers and sellers, I sometimes use what my clients consider to be cliches:

"Don't count your chickens until they hatch."

"Buying (selling) a home is a process, not an event."

"It ain't over till it's over."

They're not cliches!

Truth is, in this environment there is no such thing as a "clean" deal.  And to emphasize that point, Fannie Mae has just rolled out its loan awaited LQI - or Loan Quality Initiative.

What is the Loan Quality Initiative?

Well, in simple English, it means there is no such thing as an "Approved Loan", ever.  At least, not until you get to the closing table and funds are wired by the lender. 

Under LQI, any lender wishing to sell a loan to Fannie Mae must re-verify pertinent credit application data prior to closing.  Obviously, if a buyer loses his job or changes employment, the approval is likely going down the drain. 

But what if, while a buyer is under contract, a collection agency files a $37 collection against him for an unpaid teeth cleaning bill from 1974?  Bye bye approval.  Hello default, and potential loss of earnest money.

What if the buyer purchases a new sofa for his new home on credit, one week prior to closing?  See above.  What if a buyer talks to a car dealer and gives permission for his credit report to be pulled (which can affect his credit score) while under contract to purchase a home?  Flush.  

We are undoubtedly living in the tightest, most restrictive lending environment in the past 40 years.  Lenders are scared, plain and simple.  They don't want to lend.  I see it every day.

From backup credit reports to secondary home inspections to third appraisals, lenders seem to act as if they are paid not to make loans.  It's crazy, really.  And it's a huge reason the economy is not turning around as fast as anyone had hoped.   

So when you're sitting with your loan officer for that initial consultation, don't zone out.  Don't daydream or otherwise lose focus.  Because when the loan officer tells you to cut up your credit card and not replace it until after you have closed on your home, she means it.

ON THE VALUE OF COHABITATION AND PROPERTY AGREEMENTS

One undeniable trend over the past few years is that more couples are purchasing homes before purchasing wedding rings.  And while different folks have different opinions about whether this is a good trend, one thing is clear:  it is critical to have some kind of written agreement in place before taking joint title to a home.

The law treats married couples differently than unmarried couples on many levels, especially in regard to estate planning.  Married couples often get federal and state legal protections that simply are not extended to unmarried partners.

At a minimum, unmarried joint home buyers should have two documents in place: a cohabitation agreement and a property agreement.

A cohabitation agreement details who pays for what.  If the mortgage payments are to be shared, how are they to be shared?  If bills, property taxes, or other expenses are shared, make sure they are clearly spelled out.

A property agreement defines an exit strategy.  If one person becomes disabled or dies, what happens?  If the relationship ends, is there a trigger that could prompt a sale?  Can one party buy the other out?  What if that person cannot qualify for a loan?  What if the value of the home goes down?

A good real estate attorney can help with both of these subjects, as well as an estate plan, which every committed couple should have regardless of marital status.  If one party should pass away unexpectedly, and no estate plan is in place, you could find that mother-in-law you never wanted suddenly empowered to make decisions that could radically affect your life and your finances.

The purchase of a home is a life changing event, and it should be treated with the care it deserves.  A few hundred dollars prudently invested in legal protections today could save thousands of dollars and untold angst down the road. 

THE FORECLOSURE CURVE: STATE BY STATE

Colorado currently ranks 43rd among the 50 states in mortgage delinquencies, according to new data from Lender Processing Services, Inc.  As of the end of April, 5.8% of all mortgage loans in Colorado were delinquent (60 days or more behind), compared to the national average of 8.99%. 

This continues to be a striking reveral from 2005 and 2006, when Colorado led the nation in foreclosure filings per capita, and it's one of the reasons report after report identifies Colorado as one of the nation's top spots to buy a home.

Of course, there are complexities to every market, and Colorado is no different. 

While the overall number of foreclosures is down, the mix of properties being foreclosed upon is certainly different than it was a few years ago.

While the first (and larger) wave of foreclosures hit the lower end of the market, where "easy lending" was most prevalent, today there are more and more higher end homes falling into foreclosure.  This trend seems to be driven more by job loss and economic conditions than by bad lending practices (although that is still a contributing factor), and I expect to see more distress at the higher reaches of the market until such time as jobs come back and the unemployment rate starts to fall.

Having said that, the overall outlook for the state remains positive, and the Denver area in particular continues to benefit from excellent press coverage about our housing market.  The state's population grew at the fourth fastest rate of any state last year, adding nearly 100,000 new residents, and with a growing, well-educated population, the fundamentals for housing (especially at the median price or below) should continue to strengthen as the nation pulls out of recession.

THE FORECLOSURE CURVE: HOW DIFFERENT LOAN PRODUCTS ARE PERFORMING

Another great chart from LPS today addressing the default rates on different types of mortgage products over the first four months of each year going back to 2006. 

The chart looks at eight different different types of mortgage products: 

- FHA

- Agency Prime (conforming loans sold on the secondary market)

- Non-Agency Prime (conforming loans retained by the originating lender)
- Non-Agency Jumbo Prime (high dollar loans held by originating lender)
- Option ARMs
- Subprime
- Alt-A (mostly "stated income")
- Other
 

In every case, there has been a clear and fairly dramatic decline in defaults, with the exception of FHA, which is only slightly improved (click on the chart to see a larger image). 

However, the underlyng trend is easy to see.  The number of mortgage defaults is on the decline, and will continue to decline as the economy recovers.

While there will be fewer overall defaults, though, it will be very interesting to watch the type of loans which default going forward. 

As I have stated repeatedly on this blog, the first wave of foreclosures was caused by poor lending practices, and it hit the lower end of the market in a disproportionately hard way.  Today's defaults are trending towards larger loans and bigger houses.  There will be fewer overall defaults, because there are far more "bread and butter" houses than executive-level homes in the overall housing supply, but the value losses will now come from the higher end of the market, as will the foreclosures. 

So what does this chart mean?  It seems to show that conditions in the largest sector of the housing market (the entry level) are improving, and with builders not adding inventory and far fewer foreclosures coming on the market, we could actually find ourselves looking at a housing shortage within the next two to three years.