Right before the election, another highly talkative agent in our company wanted to talk/preach/rant politics with me at our annual company retreat. We do not see the world through the same lens. In fact, I’m not sure both of us are using a lens. He started his scotch-fueled polemic with “I always vote economics” and I cut him short with “Micro, or macro?”
It’s not that I’m smarter than this other agent. God knows, he has experienced and lived through so much more than me. But the use of the phrase “economics”, as if there were simple rules that applied to everyone is often misused. More often when an individual refers to their economic observations, they are referring to just that: their world view and how that world is presently effected.
Likewise, “The Great Recession”. It is nearly impossible to be truly objective in any analysis of local and national economic trends because there are so many subplots and micro-stories at play. Locally, a couple people have projected pretty accurately the cause and effect relationships of The Recession, and UCCS Lecturer and Associate Director Fred Crowley is among the more accurate and humane. His email subject line yesterday was “Recession at the local level appears to be over”. The headline copy is similar to Rich Laden’s Gazette Article this morning. The macroeconomics of our fair city appear to be stabilizing, improving, or at least leveling off so they are no longer in full-tilt erosion. Those are the considerations that give rise to the declarative “recession at the local level appears to be over” and the more optimistic “July Home Sales Report Brings Some Hope”. One line has to do with the larger economy, the other a single segment . However, just because it is getting better for some, does not mean it is no longer getter worse for others. Additionally, the politics of personal benefit don’t always bring benefit to the greater marketplace.
Relationship between Single Family Foreclosures and Permits, El Paso County
Crowley points out in the latest Que that the local real estate market is showing signs of outright improvement. Listing Inventory is extremely stable, 2009 is on a pace for fewer foreclosures than 2008 (still the 2nd highest figure ever for the county), median sales price has climbed almost 7% since January and average price by more than 11%, both well above seasonal fluctuations. Building Permit activity showed strengthening in June just as foreclosure filings started to tail off, continuing what looks like a fascinating cause and effect relationship between the two seemingly unrelated marketplace forces.
All of these are very positive signs for the marketplace in general. The signs show that the elastic properties of the market have been stretched to their maximum in terms of inventory stimulus, foreclosure filings, and price declines. It also notes the relative affordability of housing now versus 2006 with superior interest rates in the present tense. Mr. Crowley does everything but afix a big R pin to his lapel and slap on his “It’s a Great Time to Buy” Hat… you know the one, it has “Ask me about $8000″ embroidered on the back.
If it is a great time to buy, it must be a time filled with “opportunity”. If there are “opportunities” than there must be circumstances that are not the norm that created those opportunities. One of those circumstances must also be “risk.”
Look at the new and improved Dave Ramsey-ish lending environment. Not only do buyers have to have jobs (how revelatory), they have to have income (no, these are not the same thing), and not only do they have to have income, they can only have so much reoccuring debt. Fair Isaac is no longer the gold standard. You could have a high credit score because of extensive use of punctually paid credit, but too much is now too much for many lenders. I had a deal fall apart yesterday before it began because the VA buyer had a 42% debt to income ratio… the lender would not consider secondary assets. Forty-two percent was a single percent too high for qualification, and instead of a $210,000 qualification he was stuck at $206,000. The former rules of fudging and elasticity were thrown out.
The HVCC rules that began MAy 1st for appraisals extend more benefit to buyers than is probably fair for a real estate transaction. A home must appraise against two comps in the last 90 days, three in the last 180, three active or pending listings must also demonstrate a pattern of stable value to support the contract price and the market conditions report must analyze and assess the risk of near-term and future depreciation of the asset. Completely removed from the HVCC worldview is “appreciation”. It is entirely based upon “will it depreciate more?” In three years time the groupthink has moved from ”home prices always go up” to “home prices always go down”. It does not take long to understand why HVCC impacts some markets more than others. Buy into any boutique neighborhood and there is a deficiency of sales comp units. Really desirable neighborhoods generally have a deficiency of supply. That is why buyers want in them. The rule of scarcity influences perceptions for demand. Under HVCC, all the risk for the buyer is eliminated. I’m telling all my buyers, “if it appraises, you got a good deal. Don’t be surprised if it doesn’t. And if it doesn’t, that might mean it is still worth your contract price based on history, but any of these four filters for value might have a missing link and correspondingly it just can’t appraise.”
This is set amidst the private microeconomic tragedies of foreclosures. A client last week went under contract on a home at a price 22% LESS than the 2006 closed price. Twenty-two percent less. In Flying Horse. How does that extend to macroeconomics? Well, it sure will screw with next year’s tax assessment when a 4600 square foot home loses 22% in value from the previous calculation. Imagine the number of sophisticated Zillow-using Flying Horse Engineers who pick up on that comp when their tax bill shows up.
How do these new rules of the game relate to Fred Crowley’s market assessment? Macroeconomics are showing signs of improvement. Microeconomics are continuing to evolve. The market WILL NOT return to the good ol’ days. Nothing like the old market will ever occur again. Buyer’s perceptual maps are changing, dramatically. The biggest house that maxes the budget no longer wins. The home with the most features no longer wins. The home that offers the best value is often judged by what home offers the greatest set of “benefits”. Any home can be improved or have it’s price adjusted. Case in point: my out of town clients this week grew up in Guam. I’m not certain, but reasonably sure that growing up on a volcanic dot in the South Pacific would influence a family’s ability to sniff out a real community versus something fabricated.
Their decision came down to three homes, two big homes with bells and whistles in Wolf Ranch and a new Keller in Cordera. This was after they had elminated 6 of the 12 neighborhoods I showed them simply based on “that’s not a real neighborhood… you’ll only know your neighbor when the garage door opens”. That’s a helluva litmus test. They liked the Keller even though it was 20% smaller and only 10% less because Cordera looked like an area that wasn’t afraid to shut off a street and have a barbecue. They liked family movie nights on the lawn. They liked a fitness center and pool. They liked how there were no beat up houses anywhere and the landscaping was looking great. They liked that the developer had gone out of their way to put in the trails and landscaping everywhere, even places with no houses yet.
In this neighborhood, just 5 miles south of Flying Horse, they asked the builder to take a little off the asking price and throw in some toys, and the builder countered. I’ve negotiated several buys with builders and this was the first time a builder actually wrote a counter. They are paying about $15,000 less for this home than my buyer is paying in Flying Horse, the builders are chief rivals, and the square footage difference is 40%. Within five miles one market is still experiencing all the pratfalls of market correction, and another is showing definite signs of appreciation: there is little doubt this home will appraise.
In an increasingly customized world, gross generalizations about what is going on “economically” or even in a single segment of “the economy” are becoming increasingly risky. Mr. Crowley somehow used for analysis “casual conversations” with a few REALTORS who indicated that homes were experiencing bidding wars. Rick Van Wieren is quoted this morning as saying that under $250,000 is hot because of first-time buyers. The truth is: bidding wars are not an indication of a marketplace recovering. Bidding wars are an indication of a single desirable property. Under $250,000 is not hot in the condo and townhome market. Under $250,000 is not hot for any home that has been on the market more than 60 days (which is about 70% of all listings). Under $250,000 is not hot around Fort Carson. That would be under $200,000. What’s the difference? About 25 in payment since these are mostly VA and FHA buys. Is the difference in a $850 a month payment versus an $1100 a month payment a big deal? A friend from church was over last night and just moved from one rental to another to save $150 a month.
Like politics, like real estate, all economics are local.