Michael Clarkson

Occupancy Is at Record and Near-Record Highs in Denver

Lastly, occupancy of rental units is running at historic highs.

As I was quoted in the Denver Business Journal, many of you are starting to invest in real estate. First time investors are starting to jump into the market. With a near perfect storm of low interest rates, high demand, fewer new homes coming online, and the strong local economy, Denver is becoming starved for rental housing. Here's what some of my very own clients are doing. (Click here to see the Denver Business Story.)

Additionally, apartment rents are going up and there are increasingly higher rental standards.

Why? Demand.

Landlords can be picky in tight markets, not so much in soft markets. So, several first-time landlords are taking the plunge. They are getting the rents they ask and are getting the better tenants.

(To see more about rents in Denver, see the Denver Business Journal article. In the article, rents increased 1.2% over one quarter, or at a pace of 5% per year.)

In the national map below, the darker the shading of a state, the higher the vacancy rate (or lower the occupancy rate). Colorado is shown at 10.1% vacancy statewide. However, many local news stories in the Denver Business Journal and Denver Post speak to occupancy rates of 94% to as high as 98% as noted in the previously noted article

So, as you can even see here on this national map: It's always a great time somewhere to invest in real estate. (I still like Denver and Colorado.)

So, what do you think? Do you think it's a great time to buy and sell real estate? As you can see, now you know why I am always saying it IS a great time to buy and sell real estate.

Lower Home Inventories - Crisis? Been there. Done That!

What do lower inventories tell you intuitively?

It tells me that supply is lower than demand. And when supply is lower than demand, what happens to price? It goes up!

Well, below is a chart showing the national scene. You can see the preliminary number for February 2008 - the latest statistics available - show 9.6 months of inventory.

Just looking at this chart, you get a real sense of why there is panic: Months of Inventory (how long it would take to sell all the actively listed homes to sell if no more came on market) has more than doubled. Most of THAT change took place in the past 14 months.

Here are the Months of Inventory numbers from the National Association of Realtors®:

•· 2005 - 4.5 Months of Inventory

•· 2006 - 6.5 Months of Inventory

•· 2007 - 8.9 Months of Inventory

•· 2008 (February) - 9.6 Months of Inventory

Even to the casual observer in real estate, one can see the aggressive action by the Fed in January has appeared to start a downward trend of that line. The Fed has dropped the Fed Funds Rate from 5.25% a year ago to 2.25% in its last meeting. The market is pricing in another drop in the next meeting on May 9^th.

Although it might have been a time of great anxiety a few months ago, for those strategic purchasers who were prepared, an opportunistic buying opportunity existed. And, despite the soft market, practitioners in the hardest hit areas tell me that "well-priced homes move quickly". The challenge - as with any market - is the person who acts emotionally as opposed to being armed with data often loses: loses out on opportunity, loses out on bailing out of a bad market.

So, what is the market saying: On a national basis, the market is leaning toward a buyer's market. So, how is Denver?

For those of you who have worked with me in that past year, I have been saying that the Buyer's Market is fading in Denver.

Yeah, I know, you don't believe me. Well, I think most people trust me, but have a hard time believing something that flies in the face of what they hear on TV/Radio all day long. Most people tell me they think I sound like that commercial referenced earlier. However, the data is the data.

Denver got hit harder about 6 years ago when the tech implosion took place. Since then, the markets have been improving. Many clients to find themselves shocked to see foreclosure homes on which they are bidding having multiple contracts offered for them.

Let's look at the same data for Denver.

First, you will note that the Months of Inventory is running around 6 months. Six months is the tipping point between being a Buyer's Market (Months of Inventory over 6) and a Seller's Market (Months of Inventory under 6).

As an FYI, I use a trailing 12-months average to calculate months of inventory. I use that to take out the fact that Denver is a seasonal market: 60% of the transactions take place between April and September, 40% of the transactions take place between October and March. So, without that de-seasonalizing, the winter inventory would be exaggerated by 2 months and the summer inventory would be shrunk an additional 1.25 months. So, unless people started to look, purchase and close in the same month, it's realistic to associate the entirety of the client's search window - which can be up to a year.

Based on information from Metrolist, Inc. for the period February 2007 until February 2008.

Note: This representation is based in whole or in part on content supplied by Metrolist, Inc. Metrolist, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by Metrolist, Inc. may not reflect all real estate activity in the market.

The chart above shows that Denver was affected from the mortgage crisis, but that we are still about 50% better than the national average! The current Months of Inventory is running about 5.9 months, just slightly into "Seller's Market" territory. When you include areas outside the metro who still post to the Denver MLS, that number jumps to 6.5. That's about 40% better than the national average!

You will note that there was an upward trend in Denver in February. That appears to be the result of:

• People listing after the holidays
• And, newly confident sellers jumping into the market.
  • 5,400 new listings came on market in February. In March, 1,800 of those came off market in some form (sold, under contract or withdrawn).
  • The 5,400 represented at 31% increase in listings from the prior month.

From this data, I see an increasingly favorable environment for Denver real estate, and the fading away of the Buyer's Market.

This data is reinforced when taken in the context of my blog entry about the Case/Schiller Index drifting to a 20-year low (click here to view), a story that broke in late February. You will recall that Denver was #7 of the top 20 markets surveyed. And you will recall that Denver had moved to #7 from #16 since 2000. So, the above data would tend to correlate strongly to the good news about our Months of Inventory.

As I always say - as well as the hundreds of thousands of folks out there who practice real estate - all real estate is local. Here is how the local market is faring on a locale-by-locale basis as of April 4, 2008, looking back into the month of March.

As you see above, the market is very specific, even on a community-by-community basis. Louisville has 2.5 months of inventory. Homes are selling so fast, that they would only move faster if they had wheels on 'em. On the other end of the spectrum, Greenwood Village and Castle Rock are at 9.0 and 9.9 months of inventory, respectively. They are emulating the national market at this time. While Littleton, just a bicycle ride away, is at 3.7 months of inventory. So, yes, it can be a great time to buy and sell at the same time in the same market - the Denver Metro.

Historically Low Interest Rates - Combined with an Aggressive Fed

Not only is the movement of homes improving, but the macroeconomic environment is too.

One of the things that is amazing to me - even as busy as I have been - is why more people aren't moving?!?!?! Rates are INCREDIBLE!!!!

The chart below shows the near term interest rates, which are running at about 5.75% nationally. Denver's rates seem to be running slightly higher, closer to 5.80%.

Immediately below is some research I found at the St. Louis Federal Reserve Bank's website. The chart is an historical reflection for the years 1970 to the present. The shaded areas are when recessions occurred (two quarters of economic contraction). In most of the instances viewed, recessions have occurred when interest rates spike quickly and they pass when interest rates drop.

Given this history, it would appear reasonable that in today's interest lowering environment that one would expect any recession would be mild - barring continued illiquidity in the market.

Just reflect on your own circumstances:

•· Is a 30-year fixed mortgage of 5.75% too high?

•· Is a 30-year fixed mortgage of 6.50% too high?

•· Is a 30-year fixed mortgage of 8.00% too high?

Chances are you had a home loan interest rate that was higher than any of those in the past. So, isn't now a better time to buy? You bet it is! It's historically good. Just take a look at the 30-Year Conventional Mortgage Rate chart to see for yourself.

So, why are folks sitting on the sidelines? Fear.

Everyday, there is some three-alarm story about the credit crisis. Let's talk about the facts: Only 2.04% of the loans are in foreclosure. That means 98% are doing just fine. Now, I have not been able to find the percentage of loan value that is in default, but I am betting that it is the lower balance loans, to first-time home buyers, that are in foreclosure in most instances. So, the actual balance of funds in foreclosure is likely less than 2.04%.

Just think: If you had 98% of your business/job going well, would you be in a position to howl in agony about how bad things are? I might not complain so much. However, good news never leads the news. So, take it in context. And if you need help understanding it, call me. If I don't know the answer, I will find it out.

Now, here's that look back to the historical 30-year mortgage rates.

Rate Cut Expected

Financial markets are pricing in an estimated drop in the Fed Funds Rate to 2% will be announced in the upcoming Fed Open Market Committee Meeting. The next meeting takes place March 18, 2008, with minutes - and the rate announcement - being released the second day of the meeting. So, expect some news on March 19, 2008, likely around lunchtime, Denver time. If the market is correct and the Fed drops the Fed Funds Rate to 2%, it will represent the lowest rate since November 10, 2004. The Fed Funds Rate is at a multi-year low of 3%, the lowest since May 3, 2005.

See the history of the Fed Funds Rate here: http://www.federalreserve.gov/fomc/fundsrate.htm

Folks:

I was featured in the following Denver Post article regarding foreclosures and home auctions. I wanted to share it with you. You can also see it at http://www.MileHighMLS.com

Foreclosures offer bargains, lemons

Although it's tempting, buying a house at auction isn't for everyone - and it may require on-the-spot payment in cash By Christian Toto
Special to The Denver Post Article Last Updated: 03/15/2008 02:58:39 AM MDT

An auction sign is posted outside this home under foreclosure in the Denver area. Realty experts expect to see a hefty jump in the number of homes put under the auctioneer's gavel. (Craig F. Walker, file photo)

Buying a Colorado home at auction is a process fraught with uncertainty. Imagine surfing eBay.com and your bid wins you not just a used toaster but an entire house.

With foreclosure rates spiking, more homebuyers may heed the siren song of the auction, a sound that can mean sizable savings for some. But it also might mean you're the proud owner of a money pit.

Opportunities to buy homes at auction are on the rise. Some experts say the share of homes sold at auction could double this year.

One potential advantage for today's auction shoppers is inventory. The number of foreclosed properties is clearly on the rise.

In 2007, borrowers lost 25,320 Colorado homes to forced foreclosure, almost double the number in 2006, according to the Colorado Division of Real Estate. Many of those homes could end up at an auction.

Foreclosed homes sold at auction present a risk to potential buyers because homeowners who have defaulted on their mortgages may take a physical toll on their houses before being evicted.

During that time "they could have been ripping out piping and plumbing," says Michael Clarkson, a broker associate with Re/Max Alliance in Westminster.

Clarkson says the number of homebuyers who go the auction route remains relatively low, but those who seek out auctions must do their homework.

Auction shoppers should consider the housing trends for the area in question.

"You can save 20 percent (on the house price), but if the market is going down, you're catching falling daggers," Clarkson says.

It also helps to examine the inventory trends around the particular house.

"If more houses are coming to market than are being sold, you may be in a declining area and you should be aware of that," he says.

Jorgen Frandsen, secretary with Foreclosure Solutions in Denver, says auction homes run the gamut from modest houses to expansive properties.

Homebuyers can work the auction circuit themselves, but Frandsen suggests teaming up with a realty agent.

"They can determine the true market value of a house," he says.

Anderson says auctions typically involve cash transactions, but cash isn't always king. House sellers can agree to financing arrangements.

National auctioneering firm Hudson & Marshall reported that winning bidders for its December 2007 auctions had to make a cash or check down payment of $2,500 or 5 percent of the selling price, whichever was higher.

In some cases, lenders will appear at the various auctions and offer approvals before the gavel swings.

Mark Marati, the employing broker for Lone Tree-based Benchmark Realty, says no matter how much inventory may be available at auction, most homebuyers aren't interested.

"The average Joe just looking for a house isn't looking for an auction house," Marati says. "They tend to need a lot of work. They're not easiest things to buy."

And he suspects auction inventory isn't as high as one might think.

"The banks don't want to give property away. . . . The auction is the last resort," he says.

The biggest reason a homebuyer might skip the auction process is the straightforward nature of paying the bill right then and there.

"When the gravel drops, you've got to write a check," he says. "If you can't, you shouldn't be there."

Tips for buyers at real estate auctions

· Conduct due diligence in advance of the auction. Inspect the property. Review any available documentation, such as previous inspections, appraisals, seller disclosure statements.

· Review the title search. The seller's representative usually requests this at the time of the listing.

· Arrange for financing. Clarify with the lender the qualifications and the amount available for a loan.

· Know the market. Check comparable properties and what they have sold for, and analyze nearby listings.

· Review the terms and conditions of the auction. Before auction day get a copy of the purchase agreement and the auctioneer's terms and conditions. Read and understand them.

Source: Ben Anderson, real estate auctioneer

Note: This representation is based in whole or in part on content supplied by Metrolist, Inc. Metrolist, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by Metrolist, Inc. may not reflect all real estate activity in the market.