Tag Archives: Market Data

Return to Luxury?

The popular media was stunned when so many Super Bowl ads were pumping the idea of “buy luxury.” Aren’t we still in the Great Recession? Is it bad taste to sell the idea of $100,000 automobiles when 9.0% of the population is claiming to be unemployed?

Well, at least Audi found Kenny G a job. And it’s time to import (???) cars from Detroit (did the belligerent citizens in Windsor, Ontario suddenly invade and nobody told us?).

The reality is that the popular media loves to make stories out of trends that are obvious and/or sensational. So $3 million per 30 second spot (talk about obscene) creates an obvious segue for talking-head bloviating on the morality of luxury consumables. Of course, they never indulged in such shame-filled moralizing back in the day when those that could not responsibly afford such luxuries were buying them left and right in 2004 and 2005

Ben's fully-leveraged real estate ride, 2004 - 2006

(that spotlight would be on yours truly using a HELOC to buy an SUV like so many other stupid self-employed people were doing five and six years ago). The cable media bobblehead alternative is apparently a Despicable Me-style Pep Talk, where the evil villain Gru has to layoff all his robot minion. Feel your shame for wanting. Stay in the box. Rush to conclusions. Etc.

Or… look at the numbers. A close look at local real estate numbers shows a pattern that explains why luxury was getting pushed on Super Sunday. Those that can truly afford to buy luxury: have already started to buy luxury. It explains why earlier today I was talking to a luxury brand retailer about a likely Colorado expansion later this year. Those who have cash: they’re starting to spend it. Those who have cash usually don’t spend it stupidly (those who um, use a HELOC to buy an SUV, uh… they tend to spend it stupidly).

 

Proof: in 2010, there were 38 million dollar or larger MLS sales in the Pikes Peak MLS. This was up from 23 in 2009. The three-year average from 2007 to 2009 was only 45 units. Now in 2007 when big leverage was king, there were 71 sales over $1 million. Yet this is where it gets interesting and explains why Madison Avenue got luxury brands to plunk down for Super Bowl Ads: in 2007, 16 of these million dollar units were purchased with cash. That’s 22.5%. In 2010, 17 of the million dollar units were purchased with cash, including the five most expensive. That’s exactly double the rate of buyers using cash.

This trend was not restricted to the million dollar market. Despite six months of tax-credit stimulus pushing the lower-priced market, sales units under $300,000 were down by 8% in 2010 compared to 2009. It was the worst year for total sales in almost a decade. But average price was up almost 5%. Average price is merely the average value of everything that sold. That means while fewer properties sold in 2010, they were more expensive properties. Unit sales were off 8.4% under $300,000 in 2010. But from $300K to $500K, unit sales were up 11.4%. From $500K to a million, they were up 8.8%.

In 2007, there were 60 cash sales from $500,000 to $1 million; that was just under 10% of the total units sold in that time (608 units closed in 2007 from $500,000 to $1 million). In 2010, there were 50 cash sales from $500,000 to $1 million; that was just under 16% of the total units sold in that time (316 units closed in 2010 from $500,000 to $1 million). In 2007, buyers were more likely to use cash in the $600,000 to $800,000 price range (28 closed cash sales out of 268 or around 10%, compared to 11 closed sales out of 146 in 2010, or 7.5%). But everywhere else, the use of cash increased as a percentage of the marketplace. In 2007, one in ten deals from a half million to a million was cash; in 2010, that rate improved to one in six.

Not missed in this conversation is that the rate of sale of luxury properties is still half of the market peak for luxury (2007). But the refined story here is that in 2007, when leverage was king, there were far more consumers buying luxury items than the number that responsibly could afford such luxury. The reverse trend seems to be happening now: those that can responsibly afford such luxury are starting to buy. Just how artificial that 2007 “peak” really was is easy to identify based on the percentage using cash. Not only did 90% of the marketplace use money leverage to buy their homes in 2007, many bought with less than 20% down. Today, it’s nearly impossible to buy with less than 20% down. The specific numbers are not available on a local basis, but it is fair to theorize that more than 250 units of the 608 sales in 2007 used an interest-only, piggy-back second, 100% financing or balloon-product to buy their home, close to half the market; maybe 50 units did that in 2010, with most of those being VA Jumbos and professional loans tied to medical, legal and tax professionals.

These numbers further expose where change is happening in the market, and that this “change” is not strictly tied to the idea of the market’s “recovery”. It’s  change tied to consumer preferences. If a buyer is using cash to make a high-end purchase, does that change what they want in the home, especially compared to someone buying with a 2007-vintage 90/10/10? Doesn’t use of cash reflect a slower mobility rate? Doesn’t cash carry with it a higher sense of permanence and demand for lasting value? The 2007 sales year was off almost 15% in gross sales units from the year before, and had seven to eight months of inventory on the market most of the year, at one time hitting 7052 single family units for sale. Yet contrary to what was going on in the macro-market, luxury had a banner year in 2007. The average price in July of 2007 was over $270,000, the highest ever recorded. How could price go up if the probability of sale was going down? What was selling was irresponsible luxury, and all average price ever measures is the average of what sold.

What is unique today is that it is easier to call the purchase of higher end properties with cash a responsible acquisition. Buying with cash is not embracing money leverage: it’s enjoyment of the money. It’s not a hedge on the market: it’s the acquisition of a tangible property.

Change is starting to happen. The market is not being pushed one way or another by tax incentives. But it is being pushed by consumer preferences.

Ask a Real Estate Guru Wednesday

I was just asked a superb question via Facebook by my neighbor, Lt. Col. Scott Touney:

Ben, I have a question. If foreclosures are being de facto “frozen” due to legal proceedings, are those homes essentially taken out of the available supply? If they are out of the supply of existing homes, does that afford an opportunity for housing prices to increase during the period that those homes are frozen in legal proceedings?
Here is my Podcast Answer:

http://www.wellcomemat.com/wm_video_1/8C46275492

Market Report July 2010 (Mid-Year Stat Pack

Click For July 2010 Stat Pack

The First-Time Buyer Tax Credit perhaps worked too well: it fueled a sequel that provided both excess optimism and (later) damaging conditions that reversed much of the good accomplished. The intent and purpose of the tax credit was to activate the most easily activated segment of consumers (people who didn’t own homes, but aspired to own one) and convert them to homeowners. In the process, they would draw down the record inventory of homes, buy up and fix up bank-owned and distress-sale residences and help the market find equilibrium. A stable housing market would trickle to other segments of the economy and eventually stem the tide of the Great Recession. After November 30th, when the first version was to have expired, there were only 4301 listings for sale.  Despite the dreadful beginning to 2009’s sale year, the calendar year ended up 400+ units in sales,  and with 794 sales in November, the market had actually moved past equilibrium to a seller’s market: an equally-beneficial market is considered to be sitting at six months of supply, and November ended with a mere 5.4 months.
Today, during what is supposed to be the peak demand season of mid-summer, inventory is at 6.4 months. Last year at this time it was at 5.9 months. This is not a huge change, but it presents a serious problem looming ahead. This is shown in the first graph on Page 2, Single Family Home Comparison: in May and June of this year, the bottom fell out of the pending sales (ready to close escrow contracts) indexes once the second wave of tax-credit fever expired. In March and April, 1477 sales went to a pending status. In May and June, when the market demand should still be accelerating, only 1067 went to pending. In May and June last year there were 1360 pending sales. Instead of peak demand numbers in July, when they normally occur, it is fair to assume this year that July will be 10 to 25% off the pace it was at last year.
The real problem with a 10 to 25% downturn in volume is that it convinced a fair number of sellers (and agents) that homes were easy to sell again. What followed was the largest six month run-up in inventory in the PPAR MLS history: a 51% increase in only six months, and today 2000 more properties populate the MLS than started the year. With a 15% increase looming and a 10 to 25% decrease running the other direction, the market enters the second half of the year once again out of balance.

2009 End of Year Market Report

Updated Market Data

The 2009 Sales Year ended dramatically different than it began.

January was the depths of doom and gloom, lots of listings, lots of fear, skyrocketing job losses, Wall Street hemorrhaging.

Now, we’re back to worrying about Simon Cowel leaving Idol and “shocked” at the admission Mark McGwire used steroids. In other words, the economy is no longer a paramount concern.

But housing is. Last year, 62% of first-time buyers purchased a home because they had strong sentiments about home ownership. The good value rationale was sited as the number one reason among only one in ten respondents to the National Association of REALTOR’s Profile of Home Buyer’s and Sellers.

Locally, this bore itself out with a dramatic shift in the marketplace. The under $250,000 market improved throughout the year, while the $250,000 to $325,000 market made headway… and above $400,000, things actually got worse. Right now, 38% of all listings are over $300,000. Yet only 16% of all sales in 2009 were over $300,000.

Read more at Colorado Springs market leader in real estate information you can use, THE STAT PACK!

Where to Buy 2010, Part V: 59% increase in unit sales

All the data is Posted Here.

The hurry-up to the analysis is here…

Did the Gazette just describe the real estate market as “Soaring?” What happened to “plummet, freefall & plunge?
Remember November, 2008? There was not a cable-news network minute that went by without some new bank showing signs of weakness, some new stock plummeting, some new unimaginable sum in the billions of dollars being dedicated to a bailout of some enormous, household name entity that was ruled too big to fail. It was being called the biggest Wall Street Panic since the Great Depression and calling it the Great Recession seemed to be a euphemism for investors that were losing money to the tune of 30 to 60% in a single year. Terminology like plummet, freefall and plunge was routine. It was accurately applied to housing as average selling prices lost over 15% in 4 months and demand shriveled up.
December 2nd, 2009: Sales Increase 59%. Last November was the worst November in 15+ years in the Pikes Peak MLS. Numbers are numbers. A cynic looks at that increase and says, “that’s like the Broncos posting 10 points last week in a loss and winning with 16 the next. So what? The offense is still broken.”
In some regards, the system is still broken. There is less than 4 months supply of housing under $250,000 (that is NOT broken, that’s actually a hot-market). But there is over 10 months supply above $250,000 (that’s pretty slow, even for late Fall). If the numbers are used just to describe where things are today as compared to the recent past, the story is told halfway. It is better now than it was then; but how could it really be worse?
Where the numbers start to really illustrate and tell the whole story is when they are mapped and analyzed for trends. Months of Inventory has not been below 6 months on December 1st since the heyday of the boom market in 2005. That’s where it is now. Average price citywide is about $20,000 less than that time and interest rates are a full percent lower. And there are tax incentives to stimulate more demand, most importantly from first-time buyers who by definition, do not have a home to sell. The December Jobs Report showed a significant decrease in the rate of unemployment filings and durable goods orders are coming in ahead of forecast. Baby it’s cold outside… but the sun is shining. Consumers are cautious and value-oriented… but they are no longer terrified.
What Lies Ahead?
Be prepared for lots of forecasts and lots of media attention in the slow December News Cycle to be dedicated to the green shoots of a housing recovery. Some of this will be helpful, some of this will be accurate and a lot of it will paint with a brush broad enough to cover all 50 states in a minute and five seconds. The Real Estate Bust has definitely shown that real estate can move downward as a nation just as it can move upward as a nation. But the extremes of the market have been in coastal areas and places that posted unsustainable rates of growth. Middle America, places where population has continued to grow, places with lower than national rates of unemployment and neighborhoods that were less impacted by the explosive growth of new construction from 2003 to 2006 are the places where the recovery has already sprung. All of the above market conditions apply to Colorado Springs greater metro area.
“Value” will be the operative phrase to describe any recovery. The 2009 Profile of Home Buyers and Sellers showed that the overwhelming reason First-Time Buyers chose to buy a home in 2009 was NOT the First-Time Buyer Tax Credit. Over 60% had the desire to own a home. The 2nd reason? Affordability (10%). Third? Change in Personal Situation (8%). Only 6% sited the tax credit. And yet look at those November sales when the tax-credit was initially supposed to end. It is a nice carrot that helps propel buyers past the tipping point of personal desire, decent selection, low interest rates and real estate at a four to seven year low in price. The tax credit is eventually unsustainable and it certainly does borrow buyers from the future and activate them in the present. But what better time to do that than when housing affordability is at one of it’s highest levels in record? Who else will consume the inventory of properties of willing (or unwilling) sellers who either need to move or hope to change their real estate investment? It greases the wheels of recovery so that the majority of participants can once again begin to buy and sell real estate.
Make no mistake, the old days will not return and the market has changed in nature and what consumers consider “valuable”. Over 90% of 2009 buyers started their search online; 37% found their home via the internet, and only 33% by their REALTOR. That sends an enormous message to sellers: BUYERS WON’T BE FOOLED. Buyers want thorough property descriptions of high-quality properties and will not waste time looking at over-priced and under-conditioned properties. Affordability has increased. Probability of sale will begin to increase. But that will happen only for properties (and sellers) deemed a better value than their peers.

The New Que: What Fred Crowley Thinks is Going on in Colorado Springs

whiskey_2Right 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

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.