This is a great post about the new strategy of defaulting on mortgages.

Michael

Market Conditions - As of August 1, 2009

In July, the national unemployment receded back to 9.4% from 9.5% in the prior month.  This is a positive sign that the bottom of the recession appears to be close at hand, if not already past, as unemployment is a trailing indicator.

Denver's market continues to demonstrate some indications of stalling - the absence of move-up buyers.

Let's start with the facts:

Remembering that 6 months is the tipping point between Seller's markets (below 6 months) and Buyer's  markets (above 6 months), here is how Denver is faring:

•·         Nationwide - 9.4 months of inventory, down from 9.8 months the prior month

•·         Denver - 5.82 months of inventory (seasonalized over the past 12 months), up from 5.72 the prior month

Denver's sub-markets by price were the following:

•·         $0- $200k (up to the median price) or 50% of the market - 2.3 months of inventory (strong seller market) - This improved by 0.1 months from the prior month;  below $100k, the months of inventory is 1.1 months and between $100k and $200k, there are 2.74 months of inventory.

•·         $200k to $400k (median to the $100k annual qualifier) or 50% to 88% of the market - 5.9 months of inventory (seller market)  - This is up slightly from last month and continues a trend from the past 8 months; this segment is up from a low of 4.3 months in December 2008.

•·         $400k to $1m - 14.4 months of inventory (heavy buyer market) - There has been no change since last month

•·         $1m and up - 48.7 months of inventory - Though the rate of deterioration is slowing, the deterioration is continuing - up from 47.5 months last month.

So, 88% of our addressable market is seller to strong seller market and remaining firm with a composite of 3.93 months of inventory.

Listings are static at 20,890. This has not materially changed since January and has been nearly exactly the same for eight straight months. 

The 5 years' average is 28,609 listings, meaning listings were down 22.8% from historic levels.

Sold listings were 4,440. Though up from last month, the 5 years' average is 5,083, meaning 12.7% fewer homes were sold.  

As a result of the failure of the market to close sales, Denver's market strength is weakening and, prices are moving down.

•·         Median sold price - $230k down from $238k last month

•·         Average sold price - $277k up from $283k last month

•·         As a result of high end homes listing, but not selling, the average list price was $539k down from $540k last month.   The lack of high end mortgages precludes them from being sold readily, and increases the risk of higher end foreclosures in the near to intermediate term.

Days on market (DOM) is 100 days, the same as the prior month.

Now, the problem:

Denver continues to suffer from homes that contract for multiple months, but fail to close.  This month, 1,899 homes were under contract for more than a month, up slightly from the prior month's total  of 1,899 homes.

Here's the logic:

•·         Up until the financial crisis last October, about 5059 homes per month were active up to the $200k price point; now only 3550 are active.  This means a 30% reduction in inventory.

•·         Solds per month at that same price point over that same period were up from 1219 homes sold to 1383 homes sold.  That is a 13.5% increase in activity.

On the face of it, that's a good thing.  However, the average buyer moves up 50%.  That move up activity is not being seen in the market.  In fact, sales activity is down 12.3% in the $200k to $400k market, the next higher price bracket.

•·         Solds were down to 1220 (after the crisis) from 1391 per month (before the crisis), meaning  one would expect that pipeline of sellers in the sub $200k market would normally be a pipeline of buyers moving up-market to the $200k to $400k market.  That is not occurring.

Indeed, the diverging of the $0-$200k (decreasing months of inventory) and the $200k-$400k (incrasing months of inventory) segments shows that people are not buying up - a requirement for a sustained recovery.

This leads this author to believe that Denver's market is stalling now. To be direct, the market's failing to fill the sales pipeline in the buy up segments indicates that the gained success will be elusory.

Indeed, if interest rates continue to climb, things will soften more quickly than alluded to here.

What a great article!

As our nation has tumbled - and, hopefully, stabilized - through this cascade failure of ethics and rampant illegalities in the housing market, my mind turns to the people most hurt in this process:

1. The remaining, decent, hard-working homeowners whose homes are SO FAR UNDERWATER that they can only be listed by Jacques Cousteau!
   • A significant number (estimated in the 20%+ range, but as HIGH AS 58% in Nevada, see chart: http://1.bp.blogspot.com/_pMscxxELHEg/SbBiutEMTvI/AAAAAAAAEts/B8th8T3WLjg/s1600-h/PercentMortgagedNegativeEquity.jpg ) are now underwater on their homes.  Yet, they pay their mortgages on time.
2. State, local and school coughers now drained from reduced property valuations/taxes and/or lost transfer taxes on the sale of real estate
3. Adults who were misled about the loans and/or the valuations on the homes they were purchasing.
   • Although I believe all adults are responsible for their actions and the contracts to which they sign their names, there are a meaningful amount of folks who get slammed with a REAM of paper at a one-hour closing and are expected to read and understand all the peculiarities/legalities of a document it took years to prepare and seconds to sign.
   • I mean, I have an MBA and I read all my loan documents - and require my lenders prepare my client packages at least three days prior to a closing for their INFORMED REVIEW. However, I am sure there is stuff I don't understand in those documents as a borrower!
4. And, yes, I will put in a plug for us Realtors®, who get stuck cleaning up others' messes and, yet, get blamed when we had NOTHING to do with the loans or the appraisals.

So, given these varied stakeholders being hurt - many having NOTHING to do with the transaction itself - I wonder aloud: Why aren't sub-prime mortgages not considered defective [bank] products? AND, why aren't their HUGE class-action suits getting fired up?

I mean,

• A Ford Pinto gets hit from behind and explodes like an artillery shell and it's a product liability issue when people are hurt.
• Lead gets into toys and it's Mattel that's taken to task for faulty products and had to pay multiple millions in civil penalties for toys it DIDN'T EVEN MANUFACTURE!!!
• Bridgestone/Firestone made tires that spontaneously disintegrate and the trial lawyers descend like flies on pooh.

So, where are the "product liability" suits from aggrieved homeowners, school districts, counties and states that lost billions in revenue from the "defective loan products" foist upon our great country?

What's the liability? Let's run some quick calculations:

Denver's median home price (SFR) is just shy of $200,000.  Let's assume this crisis has caused values uniformly across all homes in the United States of all types to drop by 5%, or $10,000.  Using that placeholder, here is the potential impact to lost equity:

1. Nationally, per American Housing Survey: 128,203,000 homes (seasonal, rental, owner occupied) x $10,000 =   $1,282,030,000,000... Nearly $1.3 trillion!
   • Source: http://www.census.gov/hhes/www/housing/ahs/ahs07/tab1a-1.pdf   
2. Colorado, per the Census (est. 2006) there were 2,094,898 housing units.  Assuming that same $10,000 of lost equity due to how bad foreclosures are, that equates to $20,948,980,000 or nearly $21 billion in lost equity just in Colorado.  

In short, this touches everyone in the country -- profoundly.  Those numbers are the size of multiple TARP programs.

So, where are the product liability suits? I can point to 100% of the remaining homeowners on any given block that are hurt from ill-conceived, manifestly corrupt loans and lending practices. 

Why aren't they suing? When will they?

I am as Conservative as they come and I am not fond of most litigation, but I wonder - again, aloud - where are the product liability lawsuits?!?!

Imagine my pleasant surprise!  I received the following email today as I started my work day:

Hi there,

I am interested in viewing one of your properties while on my holiday here, could you please call me on my overseas mobile +882 135 503 28 to setup a time. As I am travelling and unable to pickup emails regularly so please call.

Kind regards,

Elizabeth Casey

---------

Mobile: +882 135 503 28

How awesome!  Someone hit my website and wanted to see my listing! 

Oops! One problem: I recently started investing full time and committed to only working with referrals (prior clients) in my licensed capacity.  I had referred out all my internet leads to other brokers.

So, how did Elizabeth find me?

Well, I "Binged" (not cool to Google anymore) Elizabeth.  I found out that Elizabeth has been in nearly 200 markets coast to coast in the past 24 hours.  (Though I am not sure, she has been described as traveling with a fat man driving a sleigh and 8 reindeer.)

It sounds like a dial and pay scam in the vein of a "900 number" dial and pay. It's a paid toll service. (See here: http://area-codes.1keydata.com/area-codes-8.php#882 )

So, please beware of Elizabeth.  You have been warned.

One final thought: it's sad that our industry is perceived as so desperate that we would chase every lead like it's the last lead on earth.

This is exactly why I work by referral!

Michael Clarkson

Market Conditions - As of July 1, 2009

Reports can be retrieved at: http://images.agentcenter.com/client/4/3/9/23934/2009.06_Blog_Information.pdf  

In June, the national unemployment rate inched up to 9.5% from 9.4% in the prior month. That is the 2^nd highest it's ever been since statistics have been tracked consistently, starting in January 1948.  Recapping the five most recent highs have been:

•1.       10.8% - November and December 1982

•2.       9.4% - May 2009

•3.       9.0% - May 1975

•4.       7.9% - October 1949

•5.       7.8% - July 1976, November 1976, July 1980, June 1992

Despite Denver's market news looking initially optimistic, there are some troubling signs that require monitoring.

Let's start with the facts:

Remembering that 6 months is the tipping point between Seller's markets (below 6 months) and Buyer's  markets (above 6 months), here is how Denver is faring:

•·         Nationwide - 9.6 months of inventory

•·         Denver - 5.72 months of inventory (seasonalized over the past 12 months)

Denver's sub-markets by price were the following:

•·         $0- $200k (up to the median price) or 50% of the market - 2.4 months of inventory (strong seller market) - This is static from last month.

•·         $200k to $400k (median to the $100k annual qualifier) or 50% to 88% of the market - 5.8 months of inventory (seller market)  - This is up slightly from last month

•·         $400k to $1m - 14.4 months of inventory (heavy buyer market) - Notably up from last month

•·         $1m and up - 47.5 months of inventory - This is up 4.2 months in just one month!!!

So, 88% of our addressable market is seller to strong seller market and remaining firm.

Listings are static at 20,853. This has not materially changed since January and has been nearly exactly the same for six straight months.  Listing levels have only increased by 1,105 in a metro area of nearly 3 million people!!!! That's embarrassingly anemic!

The 5 years' average is 27,009 listings, meaning listings were down 22.8% from historic levels.

Sold listings were 4,186. Though up from last month, the 5 years' average is 5,102, meaning 18% fewer homes were sold. 

As a result of this market strength, prices are moving up.

•·         Median sold price - $238k up from $220k last month

•·         Average sold price - $283k up from $262k last month

•·         As a result of high end homes listing, but not selling, the average list price was $540k up from $538k last month.   The lack of high end mortgages precludes them from being sold readily, and increases the risk of higher end foreclosures in the near to intermediate term.

Days on market (DOM) is 100 days.

Now, the problem:

Denver continues to suffer from homes that contract for multiple months, but fail to close.  This month, 1,886 were under contract for more than a month, down from 2,196 the prior month or 310 homes.

Assuming all of those 310 homes went from under contract to closing, only 248 additional homes were sold, which would be an anemic pace.  If none of those long-term under contracts closed the 558 incremental homes sold represent a disturbing trend: Insufficient volume to force up prices meaningfully for an extended period of time.

Here's the logic:

•·         Up until the financial crisis last October, about 5059 homes per month were active up to the $200k price point; now only 3550 are active.  This means a 30% reduction in inventory.

•·         Solds per month at that same price point over that same period were up from 1219 homes sold to 1383 homes sold.  That is a 13.5% increase in activity.

On the face of it, that's a good thing.  However, the average buyer moves up 50%.  That move up activity is not being seen in the market.  In fact, sales activity is down 12.3% in the $200k to $400k market, the next higher price bracket.

•·         Solds were down to 1220 (after the crisis) from 1391 per month (before the crisis), meaning  one would expect that pipeline of sellers in the sub $200k market would normally be a pipeline of buyers moving up-market to the $200k to $400k market.  That is not occurring.

This leads this author to believe that Denver's market may stall in the next few months, if the $200k to $400k market does not improve commensurate with activity in the sub $200k market.

Indeed, if interest rates continue to climb, things will soften more quickly than alluded to here.

Yep. You heard me.  Realtors are price fixing around the country!!! And the Department of Justice is doing NOTHING about it!!!

First, let me state: There is to be no discussion of percentages!!! 

Secondly, my question is: Is it price fixing when banks set commission rates in short sales - when they are not the Sellers (nor parties to the contract). Are they, in effect, price fixing in the markets in which they practice that activity? And, aren't we, as Realtors, complicit in that activity by accepting those rates?

I do realize that practice is a tortious interference with each broker's listing/buyer agreement (but who is going to sue?), but it is not also a criminal act under Anti-Trust?

Let me the lay out the logic of the argument in my mind:

•1.       Each office is independently owned and sets its own commission policy - sometimes allowing that to be done at the broker associate level. This is the way IT SHOULD BE and, I suspect the Department of Justice wants it to be to comport with Anti-Trust legislation.

•2.       Short-sale and foreclosure properties comprise 30% to 50% (or more) of the active listings in most markets presently.

•3.       Banks - who are not parties to the short-sale transactions [though stakeholders] - demand novations and/or tortiously interfere with established commission contracts to impose alternative commission structures on the brokerage community.

•a.       Bear in mind that the "Exclusive Right to Buy" or "Exclusive Right to Sell", as we call them in Colorado, are SEPARATE from the "Contract to Buy/Sell"; thus the requirement they are novated/tortiously interfered with imposes a condition outside of the "net price approval" for a home on the purchase contract.

So, if it's illegal for us to conspire to set prices, then why isn't it illegal for a non-party to the listing/buying agreement and the contract for sale to set commissions across a market, state or country?  Isn't that price fixing?

Then, isn't it complicit to accept those novations from a 3^rd non-party to the contract?

TO BE CLEAR: I AM ASKING THIS QUESTION AS A LEGAL MATTER. I AM NOT SUGGESTING ANY PATH OF ACTION. HOWEVER, MY QUESTION IS: IF PROACTIVE PRICE FIXING IS ILLEGAL, ISN'T REACTIVE PRICE FIXING JUST AS ILLEGAL??

Banks selling their REOs is one thing (they own them); their interference with established agreements -when not a party to the sale [though a stakeholder] - is another. 

In my mind, this is no different than gas stations setting prices based on what they are told from their distributor...which has been successfully prosecuted before.

TO REITERATE: I AM ASKING THE PHILOSOPHICAL/LEGAL QUESTION, NOT ADVOCATING ANY PARTICULAR ACTION.

I am not a lawyer, but I am an MBA and Economist by academic training. It sure walks like a duck, quacks like an "anti-trust violation duck" to me.

Here is a link to my "July Real Estate Update":

http://realtytimes.com/128/MichaelJClarkson

This Newsletter is full of interesting and useful information that I think you will enjoy whether you are a buyer, seller, homeowner, or renter.

This month's issue includes topics such as:

"The Contract Offer: What Price to Start With";
"Campaign To Extend and Expand Housing Tax Credit";
"Going Green May Help Sell Your Home";
"Housing Starts Are Up Again";
"Selling Your Home May Be Influenced by What Buyers Can't See";

Plus a roundup of June real estate activity as well as much more advice and information.

I hope you enjoy this monthly newsletter. If you have any comments, please e-mail them to me. Or, if you would like to see a certain topic covered in future months, let me know that too!

If you do not wish to receive this Newsletter each month, please reply to this e-mail with the word 'REMOVE' in the subject line.

Sincerely,

Michael Clarkson

Are you paying "The Procrastination Tax"????

In these times of economic hardship, there is a tax so many pay WILLFULLY!!! I can never understand why, but they do:The Procrastination Tax.

You pay it, and don't even realize it! And it's likely the biggest discretionary tax you will pay!  It's a tax paid for with trade-offs.

Well, remember when you bought that Jan Michael Vincent "AirWolf" Leather Jacket back in 1984, instead of putting that $500 in Apple Computer stock? Well, that $500 of Apple Computer stock, if bought on September 7, 1984, would be worth over $22.5k today, though it peaked over $33k in December 2007.

What is the "AirWolf" Jacket worth today? Uh, not that much. And, THAT'S assuming you can live through the humiliation of admitting you ACTUALLY watched "AirWolf".

Don't you wish you could have THAT decision back? That's an example of a trade-off gone sadly awry.

Like that decision you wish you could have back, here is an opportunity to avoid as costly a mistake by waiting in the market, assuming buying up is a right move for you.  I have shared this exercise with clients and they appreciated it -- the insight about the money lost to lost opportunity.

So, let's assume this is you:

• You have a $200k home
• You want to buy 50% up (as most folks do) to a $300k home
• You put down 3.5% (or $10.5k) with a $289.5k loan on your new home and are able to get a 5%, 30-year fixed mortgage
• BUT, you wait, because you think you can get that last $1k or $2k out of the market and then rates creep up.

What does that cost you?  Well, depending on how long and how far rates move, potentially, a lot!

Take a look at this table.

Even if you make no decision, you really actually HAVE made a decision - or acquiesced to the decisions the market is making for you. If rates drift up to 6%, you will pay $2,179 per year MORE.  In short, the longer you delay, the more you pay, all for waiting.  The market made that decision for you. I call it the "Procrastination Tax".

Now, if you think rates will go down below 5%, then you get some uplift.

Have rates come down? Do you think they will again? Conventional wisdom is betting against you.

Think about it: at 5%, rates can go only go down a numerical maximum of 5%, but they can go up INFINITELY!!!  Though unrealistic that they would go up infinitely, it is more probable that an upward change would occur rather than a downward change.

BUT, that isn't the only cost of waiting.

You also have the cost of lost appreciation, too!

You can lose on the front end with interest rate changes and on the back end with missed appreciation opportunity. 

So, if you waited one year to pull the trigger on:

•1.       A $300k home

•2.       With an FHA loan (3.5% down)

•3.       And saw rates go from 5.0% to 6.0% and

•4.       Held onto the $300k home for 10 years,

How much Procrastination Tax did you just pay?

• Incremental payments due to interest rate change (year 1 to year 10):  $21,792
• Lost appreciation (you only lose the 1 year of waiting, assuming prices stay relatively the same on both homes): $3,786 
  • Remember, 3.79% is a fairly low appreciation rate for Denver and is only indicative of the years prior to the mortgage crisis, not the next 5; the historical, national average is over 5%.
• Total incremental cost of ownership caused by delayed decision: $25,578 or 8.53% of the $300k home price (new home).  That's the cost of your "Procrastination Tax".

So, consider this my $25,578 gift to you, but it's only good if you use it.  So, knowing me just made you $25,578 - how many other folks have done that for you today?