Sunday, January 31, 2010


I sat in on a very informative and educational panel discussion this past Thursday looking at the economic conditions for Metro Denver in 2010 and beyond. The panel consisted of Mark Snead from the Kansas City Federal Reserve, Patty Silverstein from Development Research Partners, Tom Clark from the Metro Denver Economic Development Council, and Steve Westfall, a RE/MAX broker and one of the most prominent REO agents in town.

While Denver continues to outperform much of the nation economically, there’s no denying that we are facing serious challenges in the years to come. In the space below, I’ll summarize some of the key points made by the panel and elaborate on what it may mean for the Denver economy and the Denver housing market.


As a board member for the Kansas City branch of the Federal Reserve, Mark Snead studies “the numbers inside the numbers” of the US economy. One of his largest concerns… the massive commercial real estate losses projected for 2010 and 2011, which could result in a 30% devaluation by the end of 2011.

Additionally, American households have lost a combined $10 trillion of wealth in the last 18 months, with the average household seeing its net wealth decline by 17%. These kinds of losses obviously freeze consumer spending, which shrinks demand, which results in layoffs… exactly the scenario we have seen as the nation’s unemployment rate has topped 10%.

The upside for Denver? Energy.

As one of five “energy states” in the nation’s midsection, Colorado is benefiting from huge investments in new technology and the presence of the National Renewable Energy Laboratory (NREL) in Golden. Colorado has the highest percentage of college-educated residents of any state in the country, and the combination of a skilled workforce and new, green technologies will lessen the local impact of the national recession.


Patty Silverstein is President of Development Research Partners, a professional research firm based in Jefferson County that works with businesses and governments throughout Colorado to help identify trends, fiscal economic impact analysis and strategic business opportunities.

In Silverstein’s view, there’s no sugarcoating what happened to our economy in 2009. For the first time since 1938, personal income growth was negative (-2.5%) in the seven county Denver metro area. Retail receipts were down 11.1%, home sales were down 12%, and the region lost more than 55,000 jobs, many of which will not return.

2009 was also the worst year on record for residential real estate construction, with just 3,300 new homes being built. By comparison, the seven-county Denver metro region has averaged more than 17,000 new homes per year since 1980. (Taking new construction offline isn't necessarily a bad thing for existing homeowners, who no longer have to compete with builders)

The sum total of this contraction will be significantly reduced tax receipts, which will cause systemic shortfalls in tax revenue for quite some time. Government functions from public schools and police departments all the way down to animal control and street sweeping will face serious cuts in the years ahead.

The upside for Denver? Massive investments by Vestas Wind Energy and commitments from six different Vestas suppliers to set up operations in Colorado, as well as the progress being made with the Conoco-Phillips new energy campus in Louisville, which will begin operations in 2011.


As Vice President for the Metro Denver Economic Development Council, Tom Clark has one job – to recruit new businesses to the Denver metro area. Over the past seven years, Clark has helped to recruit the headquarters of over 40 corporations to Denver.

What does he see today? Clark calls it a “perception gap”.

“People hear that things are great in Denver, and we are attracting thousands of new residents, many from California," Clark said. "But the reality is that things are not as good today as they were three years ago. It’s simply that things are so much worse in other places.”

Clark says the Democratic National Convention did open Denver up to the world in 2008, and there is unprecedented international attention from corporations interested in possible relocations. The “new energy economy” will be a primary driver of growth, with both Denmark-based Vestas and Germany-based SMA (the world’s largest manufacturer of solar inverters) bringing jobs and international focus to Colorado.

Clark’s biggest challenge today? Working with DIA to attract at least one direct, non-stop flight from Luxembourg and Tokyo, so corporate CEOs and senior managers from Germany and Japan can have easier, direct access to Denver.


While the Denver metro region saw foreclosure filings fall by 12% last year (an exceptionally strong performance in light of last year’s economic challenges), Westfall says that job losses and national economic conditions are going to keep the foreclosures coming for the foreseeable future.

Working closely with some of the nation’s largest holders of mortgage loans, such as GMAC and Fannie Mae, Westfall says that executives in those companies are bracing for another rough year in 2010.

With statistics showing that 78% of modified loans go back into foreclosure within 12 months, Westfall says that many homes that would have ended up in foreclosure in 2009 are simply being pushed off into 2010.

And consistent with a theme that’s been running in this blog for the past year, the foreclosure problem is creeping up into higher price points while the lower end of the market is tending to solidify.

Citing a 58% increase in his average REO sales price in 2009, Westfall points to the surge in foreclosure filings in higher-end markets like Boulder (+36% in 2009), Arapahoe County (+15%) and Broomfield (+11.8%) as evidence that values are now eroding at the higher price points.

“A year ago, I started telling everyone I know to buy rental properties,” Westfall said.

As the nation’s homeownership rate continues to decline and more former owners become renters, that may not be bad advice.

Tuesday, January 26, 2010


Most of the conversation on this blog over the past few years has focused on the single family resale market. There are two reasons for this… first, nearly 80% of the sales activity in our market is made of single family resales, and second, about 90% of my clients are looking to buy or sell single family homes.

Because of this, sometimes we ignore condos, so let me take a few moments to educate you on some of the key differences between the single family market and the condo market, including some of the very serious issues facing the condo market today.

First, in overall terms, the single family market is healthier than the condo market. Of course, this is a generalization, and there will always be localized exceptions to every rule (condos near universities, for example, will be safer investments than condos in the suburbs). But overall, there are some characteristics of condo ownership that have made that segment of the market extra vulnerable to the economic downturn of today.

While the average homeowner will reside in a property for an average of almost 10 years, condo ownership tends to be a shorter term proposition. The most recent average reported by NAR was 4.6 years, which means condo ownership tends to be more transitional in nature and thus, as an investment, they are more volatile.

If you trace back 4.6 years from today, you are talking about the middle of 2005, or the peak of the “easy money” lending era. A disproportionately high number of today’s condo owners got in at the top of the market, with risky financing. Today, most cannot refinance, even if they want to. And without easy financing, the buyer pool has shrunk, leading to a surplus of inventory, leading to a loss of value, leading to an increase in foreclosures, leading to more losses in value… and soon the whole market is spiraling uncontrollably.

Because FHA has traditionally insured a higher percentage of condos than most traditional banks, FHA’s losses in the condo market have been severe. As a result, FHA is in the process of implementing a number of new restrictions on condo financing that will only hurt existing condo owners more going forward.

Last November, FHA was poised to flip the switch on new guidelines that would have restricted lending in condo developments. After outcries from condo owners, home owners associations and mortgage lenders, FHA agreed to phase in its new condo rules, some of which are already in effect and some which will now kick in at the end of the year.

These include:

· Not lending in developments where FHA insures more than 30% of the units

· Not lending in units where owner occupants occupy less than 50% of the units

· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments

· Not lending in units where a single investor owns 10% or more of the units

· Not lending in units where the HOA isn’t withholding sufficient reserves

These new guidelines are going to significantly reduce the number of FHA loans in many condo developments, which will further shrink the buyer pool and (at least in the short term) cause more defaults and value loss.

Saturday, January 23, 2010


Those of you who know me well know I call 'em like I see 'em. If you are thinking about taking advantage of one of the two generous tax credits currently on the table or buying a home for any other reason in 2010, you need to be looking at houses NOW.

There are three primary reasons why the next 100 days are going to be the busiest days of the year in real estate.

1) Tax Credits to Expire April 30

The $8,000 first-time buyer tax credit and the $6,500 "move up" tax credit (for those who have owned a primary residence at least five of the previous eight years) will expire April 30. You don't have to close by April 30, but you must have a property under contract by that date. In other words, if you haven't gotten your education, done your shopping, written your contract, negotiated your deal and cleared inspections by April 30, there is no guarantee you will receive a tax credit.

And if what happened at the end of 2009 is any indication (when buyers thought last year's tax credit was expiring), by early March the market will be flooded with buyers chasing limited inventory - that spells higher prices, fewer concessions and more compromise as buyers settle for "what's left" instead of what they want.

2) Fed to Discontinue Purchasing Discounted Mortgages

Why have interest rates been in the 4's and 5's for the past year? Part of it is that the economy has gone sour, but perhaps a bigger reason is that the Federal Reserve took the unprecedented step last year of committing to purchase $1.25 trillion (with a "t") in mortgages at discounted rates.

Experts estimate that the Fed's intervention has artificially lowered rates by as much as one full percent. But the Fed announced in December it would end its mortgage purchasing program in March. In simple English, the Fed has been the largest purchaser of low-yield mortgages for the past year. Without the Fed, rates have nowhere to go but up. And the Fed's out of the market 70 days from today.

3) FHA Tightens Guidlines, Again

With traditional bank lending severely curtailed by the economic meltdown, the Federal government has stepped into the void by making FHA (government-insured) loans the mortgage of choice for almost 50% of today's first-time buyers. Overall, FHA market share is close to 40%, when as recently as four years ago FHA accounted for less than 5% of the overall market.

Why are banks not lending? Their fingers have been burned, badly, and they simply won't touch anything with risk. But because ours is a credit-based economy, which will essentially collapse without the availability and free flow of credit, the government took extraordinary steps to keep lending via the FHA program.

Now the bad news... with all the risk FHA has taken on by making loans when no one else would, regulators are demanding that FHA tighten up its operations. This week FHA announced that, starting in April, it would be increasing the "up front" mortgage insurance premium (a surcharge tacked on to the base loan amount) from 1.75% to 2.25%, and increasing the annual mortgage insurance premium (which creates the reserves FHA uses to cover bad loans) from .50% to .55%. On a $200,000 loan, these new changes will cost borrowers more than $1,000 in additional costs.

In short, it's going to become more expensive to purchase a home, both through higher fees and costs plus the pain of higher rates. The problem with a higher rate mortgage is that it makes home ownership more expensive in perpetuity, or at least until you pay off your loan. The low rate environment we have been in is a gift to today's homebuyers, but the party is likely nearing an end.

Taking these things together, we're three months away from higher rates and higher FHA costs at the same time the tax credit is taken off the table.

Don't wait until March or April to compete with thousands of other buyers - commit and get serious about your search RIGHT NOW!

Thursday, January 21, 2010


Interesting post this morning on John Rebchook's real estate blog site, but it validates a theme that's been running through my posts for the last 18 months. The high end of the market in Denver (above $750k in Rebchook's article, above $600k in my world view) is crashing, while the low end (below $250k) is surging.

Rebchook's article, like my post on December 30, points out that while the Case-Shiller national index ranks Denver as the top performing market in the country (based on the index's projection of a year-over-year value loss of 0.1%), the reality is that many sub-$200k single family homes have seen increases in value of up to 10% (or more) in the past year. It's only the dismal performance at the higher price points which drags the overall market assessment down.

Some argue that the tax credits are the primary driver in the entry-level demand, but I don't think it's that simple. It's a combination of the tax credit, incredibly low interest rates, values that already adjusted downward, and the continual pressure that always exists on the entry-level as the population grows. You must also keep in mind that new construction, which was everywhere during the first years of this decade, has vaporized from the landscape.

I think the lower end of the market is simply being revalued (upward), based on demographics and the perception of value that exists there. At the same time, the high end of the market is also being revalued (downward), based on the lousy economy and the fact that financing is so hard to get. Much of the construction boom was fueled by easy financing... and so the "value bubble" was also based on easy financing.

Until credit becomes more accessible, there simply aren't enough qualified buyers (by today's standards) at the high end of the market to absorb the glut of homes we see today. And that spells continued deterioration at the high end, with continued upward pressure on those homes that are at more affordable price points.

Monday, January 18, 2010


One controversial rule regarding FHA financing - the one which states that FHA won't finance any home that hasn't been "seasoned" at least 90 days since its last ownership change - is being suspended by HUD until February 1, 2011.

The "No Flipping" rule, as it has been called, was intended to restrict FHA's exposure to flips, homes that are purchased out of foreclosure at steep discounts by investors, patched up, and then resold at a retail price.

For the past 18 months, flippers have been making big profits on the resales of distressed homes, as the $8,000 first-time buyer tax credit flooded the market with entry-level buyers who didn't want to do a lot of work. Since so many first-time buyers were (and are) using FHA financing, the "no flipping" rule caused complications for many buyers who did not know they would have to wait 90 days before submitting a contract on a flipped home.

But it also caused investors to be a little more deliberate in preparing these homes for sale, and encouraged a more thorough rehab before the home was re-listed on the market.

The new rule change will eliminate that waiting period. And so it will encourage more flipping.

With the current first-time buyer tax credit set to expire April 30, our market figures to stay very hot at the entry level for the next 90 days.

I have looked at hundreds of flips over the past few years... some done well, and some that were terrible. With any flip, a thorough, comprehensive home inspection is totally critical. As is a sewer scope, a furnace check-up and a roof certification.

Rule of thumb on flips: if the stuff you can see isn't done well, then you know the stuff you can't see is even worse.

While many flips look pretty, be very careful with them. And now that HUD is relaxing its "No Flipping" rule, there's even more reason to be cautious as many investors look to make a quick buck before the tax credit goes away.

Sunday, January 17, 2010


For years, I have placed a heavy emphasis on "relationship marketing", which means staying current with past clients, networking associates and business partners. I have done this through an assortment of means: client appreciation parties, pop bys, social events, and mastermind groups.

Toward that end, I am launching a new initiative for 2010 called "The Coffee Hour", where I'm setting up times simply devoted to getting together with anyone who wants to chat about real estate, business, networking, lead generation strategies, relationship marketing, politics... or life in general. My first "Coffee Hour" will be Thursday, February 11 at Udi's Restaurant in Olde Town Arvada from 8 to 9:30 a.m.

Can you make it? Just shoot me a note so I know that you're coming and I'll look forward to seeing you on the 11th!

Wednesday, January 13, 2010


Forbes Magazine has identified Denver as one of ten cities where home ownership makes more sense than renting, according to an article appearing in its February edition.

The survey, which examined 42 metropolitan areas around the country, considered the cost to own versus the cost to rent, prospects for employment and Moody's projections for appreciation over the next five years.

In Denver, Forbes is bullish on home ownership because the median price for a home has fallen faster and further than median rent, and because the regional economy appears to be poised for a stronger and faster recovery than the rest of the nation.

Other metropolitan areas on the list included Minneapolis, Boston, Chicago and San Francisco.

Monday, January 11, 2010


All things considered, Colorado's real estate market is among the strongest in the country today. Case-Shiller just identified Denver as the top market in the country, the nation's largest insurer of mortgages recently tabbed Denver as the only "improving" market in its 50-city survey, and many homes below $200,000 have seen double-digit appreciation in the past year.

But flash back to 2007, and it was hardly the best of times. Colorado was coming off of two consecutive years where we led the nation in foreclosures (hardly a prestigous honor!), dead inventory littered the market and cautious buyers were armed and ready to chop the legs off of any seller who dared list their home at a retail price.

In August of 2007, there were 30,827 homes for sale in the Denver MLS. Interest rates were in the high 6s, the economy was just starting to wobble, and Denver was showing up near the bottom of most reports on "Where to Buy Now". (In fact, it was a GREAT time to be buying real estate, at least at the entry-level)

Flash forward 30 months, and the picture is markedly different. At the end of December, there were just 16,456 homes for sale in the Denver MLS, a 46% decrease from the August 2007 highs and a 16% decrease from December of 2008.

While foreclosures continue to be a problem, the reality is that Denver went into the foreclosure trough long before most cities. While homeowners in California, Arizona, Nevada and Florida were still engaged in serial refinancings and pulling cash out their "ever appreciating" homes in 2006, Denver values were in full retreat, especially at the lower price points.

But because we took our medicine first, we're also getting healthier before anyone else.

This isn't to downplay the difficulties in the economy, or the widespread job losses, or the credit crunch that has made financing so difficult. It's just to say that, all things considered, we're ahead of the curve in terms of recovery. And with just 16,000 homes on the market and two large and attractive tax credits in play for the next three months, I would expect our values to hold up very well through the spring in the sub-$400k price range.

Friday, January 8, 2010


Why do so many Americans have a hard time keeping New Year's Resolutions? Why do people spend money on gym memberships and then quit after two months? In Robert Maurer's "The Kaizen Way", the author approaches the subject scientifically, studying the machinery of the human brain for clues as to why change is so often so difficult.

Maurer, a licensed psychologist who has worked with patients for over 20 years, explains that two of the most powerful influences on the brain are the cortex, or the "thinking" brain, and the amygdala, which controls the brain's "fight or flight" response.

In "The Kaizen Way", Maurer suggests that change is best approached incrementally, by breaking big goals down into small steps. This small step approach triggers the higher functions of the cortex while bypassing the stress-triggers in the amygdala. By taking small steps and then building upon them, we develop winning habits without undue stress. When we try to do too much at once, the amygdala is prone to overwhelming us with fearful thoughts or negative feelings, and we back off from that which we started.

Like many personal development authors, Maurer affirms that change is positive, and in fact necessary, for growth and achievement. Learning how to manage change and convert new disciplines into permanent habits is the key to becoming a better, stronger, and smarter YOU in 2010!

Tuesday, January 5, 2010


Dear Diary:

Met with the real estate broker who was referred to me today. His name is Dale Becker. Been selling real estate for 15 years, I get the feeling he knows what he’s doing.

Started with an initial consultation, about one hour long. He began by asking me questions. He wanted to know about my hopes, my fears and my concerns. The conversation put me at ease.

Then he talked about the market. It’s a lot different than what you read in the papers. There are at least three different markets right now, depending on price point, and the reality for someone buying or selling a home below $250,000 is going to be a lot different than for someone at the high end of the market.

We talked about interest rates, too. He seems pretty convinced they’re going higher. He should be a chart that illustrates how the government has essentially doubled the money supply in the past 18 months, and another chart showing me how the Denver market is outperforming the rest of the country. I’m glad to be here, and not in some of those places where the housing market bubbled up and now is crashing down.

Buying a first home has had me freaked out – it seems so stressful and I don’t want to make a mistake. But Dale explained the contract, told me how I have contingencies for the inspection, the appraisal, HOA documents, title work. Heck, I can even get out if I don’t like the financing!

I feel a lot better tonight. Sometimes you can get overwhelmed with what you don’t know, but now I feel like I have a lot more clarity about the road ahead.

One last thing – I really liked his conversation about working relationally, instead of transactionally. I had to let it sink in for a few minutes, but then it became clear.

Dale says that over 80% of his new business comes from personal referrals. And those referrals happen because he really focuses on taking care of his clients, not just slapping “deals” together. (I think that’s what happened for a lot of my friends!)

Dale educated me, he gave me a clear idea of what’s going to happen next, and he showed that he cared about building a relationship that will last long after I’m in my new home.

That’s really all I could have asked for. Now I’m ready to get started.

Homes are affordable, interest rates are low… the government is even offering me a tax credit of up to $8,000 if I have a home under contract by April 30.

Today was a good day!

Saturday, January 2, 2010


Let’s begin the year with another countdown – 129 days.

That’s all that’s left until the First Time Buyer’s Tax Credit ($8,000) and Existing Homeowner Tax Credit ($6,500) go away for good. Under both of these programs, homes must be under contract by April 30 and closed by June 30, 2009. No exceptions, no extensions this time around.

Interest Rates: They’re going up. One of the most telling charts I have seen in a long time is the money supply chart from the Federal Reserve, which accompanies this post. In it, you’ll see that the government’s desperate cash dump into the economy has effectively DOUBLED the money supply in 18 months. The amount of money in circulation is now five times what it was in 1994 and ten times what it was in 1985. This chart shows why 30-year fixed interest rates in the 5's are such a good deal - and why so many of us have fears about inflation.

More Interest Rate Jitters: One reason rates have been at such unbelievable lows is that the Federal Reserve has been purchasing mortgages (at artificially low rates) for the past year. Very few private investors are interested in locking in long-term, low-yielding notes when the printing presses are working double-time … hence, the government has been subsidizing our low rate environment by buying private mortgage debt with its freshly printed money. If that seems a bit gimmicky, it's because the Fed realizes our economy is credit-based, and if there is no credit being extended there is no growth for the economy. Getting people to buy houses or refinance mortgages usually unleashes a flurry of ancillary spending, which is why the Fed took this extraordinary step during the early days of the economic crisis. But with a price tag now approaching $1.25 trillion, the Fed has announced that mortgage purchases by the government will end in March.

FHA Troubles: Five years ago, FHA made up less than 5% of the nation’s mortgage market. Today, depending on where you live, FHA is insuring the loans of 40-50% of all new purchases. The primary reason is that private banks are being ultra-cautious, after years of freewheeling insanity. To keep credit flowing, FHA has stepped into the void, but now FHA’s reserves fallen below the congressionally mandated limits and some are calling into question the financial viability of FHA. What will that mean? Tighter underwriting guidelines, fewer exceptions, higher mortgage insurance premiums and possibly larger down payment requirements. If you are a first-time buyer and you plan to go FHA, realize that it’s going to get more difficult and more expensive to get financing in the not too distant future. (Note to prospective FHA buyers - this is known as a “call to action”!)

It Takes Jobs: Historically, there is no such thing as a “jobless recovery”. It will take job creation to stabilize and then rebuild our economy, but where are the jobs going to come from? The unemployment rate was 4.9% during the first quarter of 2008, 8.1% in the first quarter of 2009, and will be over 10% during the first quarter of 2010. Until this number levels and starts to fall, it’s going to be a slog. The very good news here in Colorado is that our unemployment rate is less than 7%, which is why our market has outperformed every other market in the country and is better poised to withstand the storms that continue to batter our economy.

New Construction = No Construction: The new home market is dead, which isn’t all bad if you plan to buy (or sell) a resale home in 2010. New construction, which grew hand-in-hand with easy credit, topped out at 2.07 million units in 2005. This year, we are looking at a total of about 550,000 new homes, or one-quarter of what was built just four years ago. As the population continues to grow, existing homes, and especially entry level resale homes, figure to be in greater and greater demand.

I’m a Realist: As you can see, I’m not a mindless cheerleader for the housing market. I believe there are sectors of the market that will perform well, and sectors that are may continue to have trouble. I believe the homeownership rate (which peaked at 69% in 2005 and is currently around 66%) will continue to fall back toward its more historical norm of 62-63%. That will create more renters and more opportunities for landlords (who are financing homes with fixed rates in the 5’s right now) but it will also make it more difficult to sell once the incentives of a large tax credit and historic low rates leave the scene. (Thinking about selling in 2010? Better re-read this paragraph!)

I do firmly believe Colorado is better positioned than almost anywhere in the country to weather these changes. As I have said before, we were first into the housing crisis (because of significant job losses in the early part of the decade) and we’ll be first out of it.

But this is no time to hire a part-time agent, go “for sale by owner” or make any other big decisions without a lot of serious research and assessment. Buying a home isn’t a game anymore, it’s a serious investment which requires careful analysis. And that’s where I shine.

Give me a call if you’re thinking about buying, selling or investing in 2010… there are opportunities in our market, but there are traps as well. I'll give you the facts so that you can make a decision that's based on clarity.