Market Overview

"Based on information from the Pikes Peak REALTOR Services Corp.      ("RSC"), for the period January      1, 2005 through October 9, 2008.  RSC does not guarantee or is in any way      responsible for its accuracy.  Data      maintained by RSC may not reflect all real estate activity in the      market."

DISCUSSION:
  In the real estate industry, the joke of the last two years has  been that you’d know when the market had turned when it looked better than your  stock portfolio. In an unprecedented turn of events, at this writing, the Dow  Jones Industrials are off almost 40% from their October 9, 2007 all-time high,  while the first real signs of a market improvement have just shown in the local  marketplace.

The Bail Out: There is no disputing  that the turmoil that has rocked all the G8 Nations, not just the United  States, began in the high rate of default in American home ortgages. If you have not bought  or sold a home in a while, and it seems all so unreal that lenders were really  giving out these loans, well, it was all pretty unreal. The rate of sale in  Colorado Springs in 2004 was 10% higher than the previous best-year ever in  2003, and then 2005 blew away 2004. By 2005 and 2006, 40% of all national home  sales were not primary residences. “Investors” (better called speculators) were  so into real estate they were buying anything with 2x4’s and a roof. The housing  bubble never really went burst, but it did deflate quickly. What burst was the  lending bubble. How these homes were acquired was far too often due to exotic  mortgages. While the rate of subprime loans was never more than 8%, it is  factual that almost half the loans used to purchase homes in Colorado Springs  in 2005 and 2006 were some form of 100% financing (VA less than 20% of that  mix). So while media outlets rant about “toxic subprime mortgage securities”  the problems are far deeper: when you look at the graph above, some ndividuals  obtained loans when they shouldn’t have received loans (subprime). But that was  2 out of 25 loans. What was being pitched to the other 23 out of 25 were  products no one should use (these were still called conventional). The problem  was not just a sub-prime product. It was a sub-prime process with sub-prime  thinking spread all around. Leverage is good. Over-leverage is bad.

Credit revolves around trust. Ninety-two percent of the loans were  supposed to be made to trustworthy individuals. But the products themselves  required infinite  growth in the housing sector. The second that stopped, it seized the flow of  cash, especially to those who made questionable loans. Now, banks and  corporations don’t trust consumers, consumers don’t trust consumers, and banks  don’t trust banks (the overnight lending rate is an astounding 5% add-on right  now)

“How  on earth are the numbers getting better in Colorado Springs real estate? Apparently global credit is seized, and  yet the Colorado Springs market saw more closings in September 2008 than  September 2007. That doesn’t sound like a seized credit market.

Here are the new realities of loans: Though Must Have Assets. Though  Must Have a Stable Stream of Income. Though Must Have Credit. Got the  Trio? Go buy something. Lack one or more? You’re on the sidelines and for a  while. Some lenders lent money in ways that were more flagrantly desinted for  failure than others. Today, a lender with a risky reputation has no liquidity.  That means they have a hard time lending, and may be headed out of business. If  a lender abused their investors’ trust by creating negative-amortized adjustable  80/20 financed loans for investment property (in layman’s terms, a risk on top  of a risk on top of a risk on top of a risk on top of a risk... see Washington  Mutual) that lender stopped receiving cash from their investors. This system  only works with a steady infusion of currency, which in mortgage terms, is  called a loan origination. The investors control the pipeline of origination  with their cash. and no investor with cash has the desire to be fooled with  right now. So the lenders with the highest rates of default are falling  apart... quickly. The lenders that maintained some (or a lot) of dignity and  passed up the easy bucks for a sustainable business model (see Chase, PHH,  Wells Fargo), are often the companies the consumer hears today buying the  smoldering assets of these other lending titans. Make no mistake: ALL LENDERS  have tightened their underwriting. But in Colorado Springs, they funded over  700 purchases last month. For the first time since March, 2006, this local  market can say “it’s actually better than it was last year.”

Remember sub-prime mortgages versus sub-prime thinking? The  sub-prime mortgages went to only 8% of the population. The other 92% were  offered crazy loans to make their expenses as low as possible. Some of that 92%  is now in the category of a sub-prime consumer because their credit was laid  waste in the implosion. But most of them are healthy and doing okay. The  national numbers may be one in six with problems, but that is not the case in  Colorado Springs. Year to date, the entire market is off around 7% in pricing.  Most of the rest of the nation is off in excess of 10%, many competing markets  in the west are off 15% or more. Most markets are in an inventory build phase:  we are in inventory reduction. Most markets are seeing fewer and fewer buyers.  We just saw an increase.

IN SUMMARY:
  Stephen Covey’s famous circle of influence and circle of concern  is writ large on the Fall, 2008 American Economy. There are the things you  can’t control and the things you can, influence and concern. Right now, what is  holding back the real estate market in Colorado Springs (and most of the Front  Range) are national problems. Jobs aren’t being created, credit is tight, and  our inbound buyers are still frustrated sellers in the markets they are coming  from. But for buyers in the local market, this is as rich an opportunity as any  in decades. Rates are at 6% or better on 30-year fixed mortgages. Colorado has  had a surge in relocation traffic every year this decade creating new  households for decades to come. Depending on the neighborhood you’re looking  in, prices could be at 2005 or even 2004 levels. Inventory is down 12% from a  year ago and sales activity was up almost 6%. Yes, the economy is in a  recession. But chance favors the prepared  mind. 

Advice  for all market participants: There are very few “want-to’s” in this market...  most of the buyers NEED to Buy. Most of the Sellers NEED to Sell.  

SELLERS: Out-condition and out-wit your competition. The amazing stat of stat’s  is that technically speaking, the under $300K market is a seller’s market.  There is less than a 6 month supply to sell through. Don’t try telling that to  a buyer though. Buyers want a good deal on a great condition home or they’re  looking at short-sales with an infinite amount of time on their hands. If you  need to sell, don’t play fair. Don’t give them the option of leaving behind  your home for a better one. Take care of any blemish and be the best bang for  the buck that you can be. Tactic of the Month: Feel free to write an offer to  fence-sitting buyers. Seriously. 

BUYERS: The Window is Closing. There will probably be more listings in 2009 than 2008 since there are so few “will-ing” sellers on the market. But are they staying off the market so they can sell for less next year? Not likely. This is your chance to drive the bargain. Tactic of the Month: Get 90-day rate protection for your loan. Rates are low, but volatile.

INVESTORS: Give your Child a Chance. If you have cash and a toddler, consider: in parts of N/E Colorado Springs, home can be purchased on a 15-year fixed loan that will cashflow day one. By the time your child is 18, that home will be paid for by the tenants’ rent, and you will have a turn-key college fund, free and clear. Only with super-low interest rates, strong rental demand and discounted housing values could this occur. And it has. Tactic of the Month: buy the most modern home you can. Tenants will pay a lot more for modern kitchens and big masters.