Monday, December 26, 2011


As 2012 arrives, the entry level of the Denver market is truly ready to launch.

Why do I say this?
Consider the following…

If you think of the real estate market as a giant conveyor belt, there is one sector of the market that has been rolling at full speed for three years… and that is with buyers coming in to purchase entry level housing, generally priced below $250,000.
Currently, this sector of the market accounts for 34% of all listings, but 59% of all buyers.  There are just 1.25 homes on the market below $250,000 for each one currently under contract, an absurdly tight ratio, and the absorption rate is below 3 months. 
One leg up, in the $250k - $400k price range, the conveyor belt slows.  Here, there are 2.54 homes on the market to each one under contract (still a functional market) and the absorption rate stands at 4.99 months.  In this range, you have 29% of the inventory accounting for 25% of sales, which is basically a balanced market.
From $400k - $600k, the conveyor belt beings to stall out.  There are 3.88 homes on the market to each one under contract, and the absorption rate is 6.79 months.  Home in this category account for 17% of properties on the market, but just 10% of contracts.
Above $600k, the conveyor belt simply stops.  Homes above $600k account for 19% of the inventory, but just 5% of the contracts.  The absorption rate from $600k - $1 million is 12.24 months, and above $1 million, it’s 22.48 months.  There is simply no price support at the top of the market, and I do not see this changing unless there is a radical (and unforeseeable) turnaround in the economy.
The other major theme in our market is lack of inventory.  With fewer than 13,000 homes on the market, we have 36% fewer homes for sale today than one year ago – a stunning turn of events that I can’t recall seeing at any time in my 17 years as a broker.
There are two reasons for the lack of inventory:
1)      Far fewer foreclosures, and
2)      Loss of the traditional “move up” market
Foreclosures are down 50% from the peak year (2007) in Colorado, and the mix of homes being foreclosed upon is very different than what we were experiencing even three years ago.  While the first waves of the foreclosure crisis pounded the entry level of our market, today it’s a mix of entry-level, mid-range and luxury homes that are going back to the lenders.  Statistically, the fastest growth in foreclosures is occurring at the luxury ($1 million and up) level, as buyers simply do not have the courage or faith in the economy to pay retail prices for high end homes in this market.
So what does it mean?
In January of 2011, there were 9,121 homes on the market below $250,000 – and just over 1,000 of these went under contract during the month.
In January of 2012, there will be fewer than 4,000 homes on the market below $250,000.  Over the past three months of the year (traditionally the slowest three months of the year), we have averaged over 1,500 homes per month going under contract below $250,000.
With inventory down 60% from one year ago and the number of monthly contracts up roughly 50% from the same time period, how can we not be on the verge of price recovery at the entry level?
These are not small shifts – this is a 60% reduction in inventory with a 50% increase in demand! 
Very few of the buyers I am talking to have any idea how dramatic this change has been, or what it should mean for prices going forward.
The bottom line is this:  if you can buy a home in today’s market with prices that are 10% to 20% off the peak, with a rate in the 4’s, you should be in fabulous shape for many years to come. 
In a few years, when rates work their way back up to historical norms, FHA assumptions will become as common as short sales, and today’s buyers will see future buyers paying a premium to assume their partially amortized loans with rates in 4’s.
In case this isn’t clear, let’s review one more time:

· The overall inventory of homes for sale is down 36% from one year ago
· The overall inventory of homes for sale below $250,000 is down 57% from one year ago
· Overall demand for homes under $250,000 is up 50% from one year ago
· With just 1.25 homes for sale to each one under contract below $250,000, and an absorption rate of just 2.97 months, there is hardly anything for first-time buyers to choose from and sellers have far more leverage than they have had in four or five years
I’m looking for listings under $250,000 right now, because these homes are salable, and they should be salable at prices better than we were seeing one year ago, or even six months ago.
There is no new construction coming online to compete with these homes, there are far fewer of them being foreclosed upon, and we are seeing a new generation of very well qualified buyers replacing a generation of marginally qualified buyers who were never equipped to make it for the long haul.
The beginning of 2012 will reveal a housing market below $250,000 that is very, very different from the one we have seen over the past few years, and buyers who wait are going to have to be willing to spend a little more and perhaps settle for a little less as values in many neighborhoods begin moving higher.
While the higher end of the market will continue to suffer, the entry level will start the year red hot and burn even brighter by spring.  You can bank on it.

Thursday, December 15, 2011


I have been in my current home for six years and I have refinanced on two occasions.  A few years ago, when rates first went below 6%, I felt like I was being given a gift and I locked in a rate in the mid 5's.  Then, last year, rates dipped below 5% and I felt like there was just too much money to be saved by refinancing once again.

Now, 30-year rates are near 4% (with 15-year rates in the mid 3's) and I'm hearing the siren song again.

I do not want to paint the picture that refinancing is automatically a great move for everyone.  It can be an expensive proposition, and unless you shorten up your loan term (which I recommend if you can afford to do it), you essentially recast your loan onto another 30 year payment schedule.

You also need equity in your home, which is not something everyone has these days.  And if you made a 20% down payment (to avoid mortgage insurance) and your home has lost value, you may either have to bring in a large amount of money to pay your loan balance back down to 80% of current appraised value, or take on the extra expense of mortgage insurance.

So there are reasons to avoid refinancing, or at least think critically about it, before you sign on the dotted line.  But when the savings are just too great to ignore, it's hard to resist.

The one constant through my six years in this home is that I've always made additional payments on my mortgage each year, without fail.  I set a housing budget six years ago and I've stuck to it... so now, even though my payment is significantly less than when I first moved in, I make the full payment as if it's still my original loan. 

Generally speaking, one additional payment each year on a 30 year loan will shorten the life of your loan by about 13 to 14 years.  That's a huge savings opportunity and solid financial planning.

So now, with 30-year rates around 4.00% and 15 year rates even lower, what to do? 

If I refinance into a 15-year loan with a rate in the mid 3's (essentially the same payment I had on my original 30-year loan, which was in the high 6's), I'll have my house paid for in less than 20 years.  That basically means I own my house free and clear 30% faster than with my original loan.  That's a good deal.

The best thing to do, as always, is to gather enough information to make informed decisions.  Talk to a mortgage lender you trust and see how much money there is to be saved by taking advantage of today's incredibly low rates.  And if home values are a concern, give me a call and I'll be happy to pull some comparable area sales information so you can proceed with clarity and confidence.