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March 2011 – Real Estate Market Update

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Real Estate Market Update
Clinging to the New Normal
The market continues to struggle to keep pace with last year’s market, one that was fueled by the home buyer’s tax credit.
On a national front, February’s home sales report was weaker than expected. The month over month drop of 9.6% in sales grabbed most of the headlines, but the more relevant data point is probably the 2.8% decrease in sales compared to last February. Either way, this is a market that is stabilizing, but fighting to hang on.
Here in Colorado, the solid start to 2011 we experienced in January grew weaker in February. For all the markets along the Front Range, closed sales volume this February decreased 7.8% compared to Feb 2010. In Boulder County, the market was stronger, posting a year over year gain of 1.9% in February.
Sales volumes are struggling to keep pace with last year’s tax credit driven market.  Expect year over year comparisons to remain challenging through June.
The supply of inventory dropped slightly in February
Inventory levels remain relatively stable as the current level of demand was able to absorb new listings as they came on the market.  The supply of inventory at the close of February along the Front Range stood at 9.2 months, indicating a buyer’s market on a macro level.  In Boulder County, the inventory supply was even larger, 11.5 months compared to 12.5 months a year ago.  (Note – supply of inventory is based on how many months it would take to sell all the active listings at the current sales pace. Six months of supply is considered a balanced market that does not favor sellers or buyers.  Anything over six months favors buyers, and a supply of less than six months favors sellers.)
Prices continue to hold fairly steady.  The median price of a single family home that sold in the Northern Colorado markets (from Boulder to the Wyoming borderwas $223,998 in February, up 0.9% from the Feb 2010 median price of $220,000. In Boulder County, the median price of a home sold in Feb was $370,000 compared to $336,250 last year, reflecting an increase in sales activity at the higher end.
The historical, lagging data points cited above, of course, reflect what has already occurred in the market; they do not offer any insight into the underlying trends and forces that may shape the market in the future.
Two trends that are not commanding any attention in the headlines, but may prove quite important in the long run for the real estate market are affordability and the comparison of renting vs. owning.
Specifically, two related trends are unfolding: 1) the affordability of buying a home is reaching record levels and 2) owning is becoming less expensive than renting as rental rates soar.
First, affordability. Affordability is a measure of the relationship between home prices (which dictate the size of monthly payments), and disposable income (which dictates one’s ability to make those payments).
According to the economists at PMI Mortgage Insurance, 35 states actually have home prices below what they should be based on disposable incomes, and are very affordable.  PMI cites Colorado as a state where home prices are in line with incomes.  In effect, we did not experience the big home price increases of the bubble market, and our disposable income has kept pace with the modest appreciation we’ve seen in Colorado.
Second, renting vs. owning. A recent survey from Deutsche Bank showed that renting a home is now more expensive than paying a mortgage. “That’s the first time in 20 years that this nation has seen that, and yet the rental market continues to surge,” says CNBC real estate reporter Diana Olick.
Both these trends, affordability and renting vs. owning, are long term trends. Don’t expect them to move the real estate market tomorrow.  However, they are underlying market forces that, if they remain in place, could support a sustained recovery in the nation’s housing market.
John Rebchook
Inside Real Estate News by John Rebchook
A monthly conversation with John Rebchook, Editor of InsideRealEstateNews.com and former real estate Editor of the Rocky Mountain News, and Lane Hornung, President of 8z Real Estate.
Many prospective home buyers believe if they want to get the deal of a lifetime in this market, they need to focus on distressed properties, such as foreclosures or short sales, in which the lender accepts less than the mortgage amount.

Not so fast, says Lane. Our conversation this month discusses why ignoring market-rate resale homes – those sold by willing sellers to willing buyers – and focusing solely on distressed properties isn’t necessarily the wisest move.

Rebchook: Lane, the home-selling market is entering the prime season. What is different about this season?

Hornung: It used to be simple. It used to be when you would think about the selection of properties you were looking for, it would be either resales or new construction. Now, you have to go up one level. There are a number of choices within the resale market – the owner-occupied, bread-and-butter, market-rate homes, or, you can go down the distressed property path.

Rebchook: And there are a lot of choices if you go shopping for a distressed property, aren’t there?

Hornung: Yes, there are. But not all distressed properties are created equal. There are short sales, REOs (real estate owned or bank-owned foreclosures), and now we are seeing a lot of HUD properties. I’m seeing a huge increase in the volume of HUD contacts.

Rebchook: Lane, you say that not all distressed properties are created equal. Does that mean buyers need to have a different expectation for different distressed property types?

Hornung: Absolutely. If you are considering a short sale, the bank may respond to you very quickly, or it may respond very slowly. In some cases, it may not respond at all. We would counsel all buyers looking to buy a short sale regarding what a long process it can be. If you are in a hurry, you are probably going to be disappointed if you are set on buying a short sale.

Rebchook: Lane, there is a perception among many consumers that they will always get a steal when they buy a distressed property. Is that correct?

Hornung: I think there is a common misperception that distressed properties are always screaming deals. Part of it is because there is so much in the media about it.  Even you talking to me right now on this topic helps fuel that perception. And sometimes it is true. Sometimes they truly are screaming deals.

Rebchook: But not always?

Hornung: Buyers of distressed properties often want to get “X” percentage below the list price. The flaw of that strategy is the assumption that the list price is a valid starting point. Sometimes it’s a great deal at 100 percent or 102 percent of the listing price. It is very common for someone relocating from a bubble market like Las Vegas to expect to buy at 65 percent of the list price. Guess what? If they try that strategy in a market like Boulder, they probably won’t end up buying anything.

Rebchook: Lane, does it make sense for buyers to limit their house-hunting to distressed properties?

Hornung: Let’s say that distressed properties account for roughly a third of the inventory right now. If you decide you only want to look at distressed properties, you are limiting yourself to a third of the market. And that’s crazy.  That means you are ignoring two thirds of the market.

Rebchook: And because the owner-occupied homes on the market are competing against the distressed properties, that affects their property, correct?

Hornung: That’s right. What you should be saying is that I want a house that fits my budget, fulfills my lifestyle needs and is a good value.  That way it doesn’t matter whether it is a so-called “distressed” home or a home sold by an individual owner.

Rebchook: Thanks, Lane.

Marsha Badger
Mobile: (303) 818-1390

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Data Log
– U.S. house prices declined 0.3 percent on a seasonally adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.3 percent decrease in December was revised downward to a 1.0 percent decrease. For the 12 months ending in January, U.S. prices fell 3.9 percent. The U.S. index is 16.5 percent below its April 2007 peak and roughly the same as the May 2004 index level.
– Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 9.6 percent to a seasonally adjusted annual rate of 4.88 million in February from an upwardly revised 5.40 million in January, and are 2.8 percent below the 5.02 million pace in February 2010.
– All-cash sales were a record 33 percent in February, up from 32 percent in January; they were 27 percent in February 2010.  Investors accounted for 19 percent of sales activity in February, down from 23 percent in January; they were 19 percent in February 2010.  The balance of sales were to repeat buyers.
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