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Posted: November 01, 2010

Waiting for a burst of optimism

Colorado's real estate market, like the rest of the nation's, has yet to find its footing

David Lewis

Q4RealEstate_Nov.jpg

Some people have started comparing President Barack Obama to ex-President Jimmy Carter. However, it is probably more accurate to compare Obama to President Richard Nixon.

This is because President Carter inherited an economic mess, stagflation, which was compounded by an economic crisis and an OPEC oil embargo, which he then deepened and prolonged through price controls and such.

President Obama is more like Nixon, who from President Lyndon Johnson inherited a war, guns-and-butter federal spending and a sagging economy, then got slammed by an Arab oil embargo, then messed that up with price controls and abandoning the gold standard. Then he resigned and handed the whole steaming heap to Gerald Ford, who handed out Whip Inflation Now buttons. When that didn't work Ford lost the election to Carter, who put on a sweater and gave Americans a fireside lecture about their malaise.

Come to think of it, maybe Obama seems like all of them: helpless.

Looking back over the decades, the U.S. economy generally - and finance, banking and real estate in particular - have really stunk for long periods. These long bad eras then are punctuated by bursts of optimism, which are followed by bouts of euphoria, which finally pop like a bubble.

Three years after the downturn began, we know real estate still stinks because we typed "real estate stinks" into Google and received 312,000 results in 0.18 seconds.

In the interest of precision we then typed in "the national real estate market," Colorado included, and received 258,000 results in 0.91 seconds. And we found it still stinks because the sum and substance of policies pursued by the Federal Reserve Board, and the U.S. Congress and President Obama (Bush, too) have been to attempt to let the financial, banking and real estate industries down e-e-easy, which has meant a long, slow bleeding period followed by an even slower recovery.

In October, 30-year fixed mortgage rates tied their record low, 4.32 percent, and 15-year mortgage rates reached their all-time low, 3.75 percent. At the same time consumer confidence fell to the lowest level since February. Yet in 2010, U.S. homeowners regained $1 trillion of the $7.5 trillion in home equity they had lost since first-quarter 2006, according to the Fed.

Nationally, Fannie Mae in September reported that "serious delinquencies" on single-family mortgages (defined as loans 90 days or more in arrears) had risen for three straight years until March 2010, whereupon their numbers began to decrease. Serious delinquencies continued to decline month by month, reaching a 10-month low in July.
Show a little gratitude, people, will ya?
The good news is that real estate values and consumer confidence eventually recover. "Eventually" can be a long time. But there are signs that "eventually" has begun, and the metaphorical buds of spring have begun to poke their first green shoots above the scorched and blackened real estate landscape. (You knew that was coming, didn't you?)

The Federal Reserve Board in August reported that "economic growth at a modest pace was the most common characterization of conditions" in five Western districts, including our own. The Fed also saw modest growth overall in its No. 10 region, which includes Colorado.

However, real estate in No. 10 pretty much stinks, the Fed noted.

The Fed's August Beige Book reported that over the summer the region's residential real estate activity had "dropped sharply" while the commercial downturn "lessened somewhat." Residential construction dropped. "Home sales plummeted ... especially for higher-priced homes," while home inventories rose.

Housing starts continued to decline and expectations "remained weak, although one Colorado contact believed a floor seemed to be forming in that state....

"Real estate agents blamed the steep drop in home sales on expired tax credits and increased customer uncertainty, and most expected little improvement in the near future." Mortgage lenders reported some improvement due to refinancings. Construction fell; vacancy rates stayed flat; office rents/leases fell; commercial real estate customers continued reporting financing problems and "high economic uncertainty."

Indeed, that remark about a floor forming under the Colorado real estate market could be the most noteworthy phenomenon in the Fed report. Now all the real estate market here has to do is get up off the floor.

In a slump such as ours "the floor" may be defined as recovering from abnormal levels of foreclosures and overall inventory. So the nationwide decline in serious delinquencies cited above indeed is important. And if that decline is cause for cautious optimism, the drop in foreclosures in Colorado's biggest residential market should be cause for actual optimism.

That's because foreclosure filings - a leading indicator - are falling in Colorado's metro areas, while foreclosure sales - a trailing indicator - continued to rise.

"Foreclosure filings totals have generally fallen slowly or remained flat since August of 2009," the Colorado Division of Housing reported regarding metro areas as of July.

Mesa County was the only county surveyed to report an increase in foreclosure filings; Mesa also ranked second only to Weld County in the rate of foreclosure sales per household.
Meantime the 900-pound simian of Colorado real estate, the Denver metro market, held its own.

Comparing the seven-month period of January to July 2009 to the same time in 2010, Denver County foreclosure filings fell 22.4 percent, the biggest drop of any county; followed by Larimer County, 20 percent; and Adams County, 17 percent.

Likewise the S&P/Case-Shiller Home Price Indices detected a pulse. The national news noted that Charlotte, Dallas, Denver, Phoenix, Portland, Tampa and especially Las Vegas saw home price declines in July. Denver was down 0.4 percent from June but down a mere 0.1 percent from a year earlier.

This could argue a continued depressed market. Or it could argue for stability, a market floor.

Real estate professionals, who are survivors and optimists by nature, saw that 0.1 percent price decline as a real positive.

Meantime, the Northern Colorado Commercial Real Estate 2011 survey found some bright spots: a bottom for northern Colorado commercial real estate; improved leasing and sales; and "value growth possibilities for multifamily, student housing and senior housing," says Steve Laposa, director of the Fort Collins-based Everitt Real Estate Center.

Likewise, the study indicated similar conditions throughout the Front Range, and "not only the Front Range, but it applies almost nationally," Laposa says.

CBRE Econometric Advisors came to much the same conclusion, and predicted that apartment revenues in Denver, Boston, Philadelphia and San Jose would "fully recover in 2011."

CBRE-EA said one reason apartment properties were doing so well was "the increase in the overall number of renter households by choice and by necessity, particularly in the South and West regions of the country."

What does "by choice and by necessity" mean?

"People can't afford to own," Laposa says. "That's what."
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David Lewis is a freelance writer based in Denver.

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