INTRODUCTION:
The primary goal of this data is to paint the picture of reality in our local housing market, to provide a frank and honest discussion of strengths, weaknesses, opportunities, threats and real market conditions as they truly exist.
This data is the result of information pulled from the Pikes Peak Association of REALTORS’ website as well as conditions observed by sales professionals, builders, other competing real estate firms and individuals connected to the sale and exchange of real estate in the Pikes Peak Region.
DISCUSSION:
May has closed and with it the summer buying season has begun. For some buyers, this could be a very profitable summer. For some sellers, this could be a very frustrating summer... and fall... and possibly winter. The time to weigh odds, observe probability, and respect the rules of the market (made almost entirely by the buyers), IS NOW: A Good News/Bad News break down of the market as June begins:
GOOD: The market finally cracked 1000 units sold in a month at 1032.
BAD: 22% fewer units closed in May 2007 than in May 2006
GOOD: Average price is up $15,000 from last month and $7000 over May 2006 (2.2%) to $267,000. Median is up as well to $220,000, but that number is exactly where it was last May
BAD: 6567 single family homes are for sale, a 515 unit increase over last month, and 24% higher than last year. Optimists can make all the adjustments they would like for the late 1980's market: with the advent of the Internet, the extensive consumer interest in real estate values and markets, mixed with this volume of listings... The level of seller-to-seller competition has never been this high in Colorado Springs
GOOD: Average days on market (for properties that SOLD, this is a critical differentiator) plunged15 days to 82 days. The absorption rate on the market also dropped two weeks to 6.3 months of inventory
BAD: Price differentials (final sold price divided by final asking price) continued to erode, with the average home sold in May selling at 97.6% of asking price, one of the lowest percentages in years. This is especially notable given that May sales reflect the first wave of relocating buyer activity, and relocating buyers typically pay closer to asking price than local buyers.
The biggest punishment to asking price was in Southwest, where the 42 units sold at 95.2% of final asking price. As mentioned in the previous two editions, measuring the appreciation numbers in the Spring is a risky business. Average prices were down in March and April, but were up $15,000 and 2.2% over the previous year
this May. One month does not make a trend, and if anything, it shows the volatility at play in this market.
Listing activity for the month was heavy with 2258 new listings coming on the market. This number was 10% higher than the number of new April listings, but for the third consecutive month, the number of new listings was lower than the same month in the previous year. There were 2295 new listings in May, 2006. The seller frustration is that while one part of the competitive ballgame is approaching seasonal norms, another, the number of buyers, has been lower every single month this year. There were 18.4% fewer buyers in May 2007 when compared to May 2006, and for the year units are 13% fewer than the same time in 2006. So any positive gains to a slow down in listing inventory have not been sustained due to the continued lagging buyer activity.
Supply and demand rules real estate just like it rules all other economics. The supply of exiting listings is 50% higher than the average number of listings for sale in May over the last 8 years. For buyers, that’s gold. For sellers, that’s a pain to be reckoned with.
The supply of new listings coming on the market is stable. The demand to buy those listings from buyers is less stable, but consistent with the pattern over the last 8 years. If listing inventory actually decreases, or buyer activity increases, rate of sale will speed up. But sustaining levels of inventory and activity will keep the rate of sale at about the same pace, which right now is in excess of 6 months.
While the MLS posts a days on market of 82 days, the reality is that it takes 6.36 months for a listing to sell. The 82 days are the lucky ones that found a willing buyer and closed. But for 6576 listings to sell at the rate of 1032 a month... it probably means a 190 wait.
Advice for:
SELLERS: Fast or slow? The average time on market plummeted from the previous month by 15 days, yet the price differential also dipped. Both of these show the power of buyers, but also the willingness of buyers to put pen to paper for a new-on-market-listings. Buyers typically do not want to see properties the market has “already denied”, but are not afraid to commit to asking prices (if they’re accurate) for new on market listings.
Pricing with room to negotiate is not an effective strategy. The buyer will negotiate anyways. Pricing to negotiate is more an unintentional strategy of missing the market at debut. The first 30 days are terribly critical, and after day 31, the only way to catch up with buyer interest is via deeper and more severe price reductions.
BUYERS: Know your ability to negotiate. To roughly summarize the various forms of buyers, they fall into three categories, labeled A, B, and C:
The “A” Buyer is a cash buyer who can close whenever the seller needs. This buyer could be using their own cash or a bank’s, but importantly many first-time buyers in month-to-month leases are cash buyers who can close in a time frame that accommodates the seller’s needs.
The majority of buyers right now are “B” Buyers, buyers with cash that is tied up in a home that must sell in order to buy another home. These buyers will eventually be able to perform, but because the seller has to accommodate the buyer’s risk, a seller is far less likely to negotiate a lower price with a B Buyer.
A “C” Buyer is a buyer that can’t afford what they’re looking at, whether that’s due to credit, income, or just looking at properties $100K more expensive than their qualification. An unfortunate number of these buyers exist as well.
Many buyers don’t think about the prospects of not actually being able to close and the risk that represents to the seller, especially when asking the seller to take the home off of the market. Knowing your ability to perform and close in a time-sensitive market is extremely important. Interest rates are going up, so be mindful of waiting for a good buy that loses it’s monthly afford ability.
BUILDERS: Continuing to build at a sustainable rate with competitive pricing is a good short and long term plan. Right now builder spec homes represent less than 11% of the market, when it was as high as 20% of the market in late winter. Maintaining this balance is of great benefit. Buyers are still willing to pay for what they want, and spec homes are not as popular among buyers as a build-to-suit where they ] get exactly what they want. Since overall buying activity is not showing signs of increase, building to real demand on build-to-suit is likely a better economic strategy.
INVESTORS: The condo and townhome market is taking over the low-end single family market. The average condo/townhome sale is within a couple hundred square feet of a similarly-priced single family home, but averages 10+ years newer in terms of construction.
The Economics of Fast versus Slow
Right now, the market is experiencing a new form of instability in the form of a lack of a middle ground in the time it takes a home to sell. It is either fast... or forever. Properties that are listed right now are either selling quickly (less than 30 days), after a significant length of time (over 90 days), or not at all. In May, the market picked up steam for success-minded sellers. The average time on market for a property that found success
and closed was 97 days in April; that decreased to 82 in May. While that sounds like a great scenario, it was a great scenario only for sellers willing to be competitive on the day of first-listing, and reflected an increase in the large number of properties that sold in their first few weeks on market canceling out the properties that took longer than 82 days to sell.
The new rules of the post-bubble market almost universally favor buyers. In May, 166 properties under contract went back on market. In California terms, they went out of escrow, and in Colorado terms, they were Back on Market. The BOM designation can be a curse to any seller because a sophisticated buyer will not only ask their agent how many days a property has been on market, but how may price reductions a property has had (and likely, how big those price reductions were). When the agent researches that information, additional information surfaces such as previous contracts.
In May, for each six contracts that closed, one contract fell apart and the property came back to market. A seller’s home is now more likely to fail the buyer’s subjective discretion on inspection, more likely to be hyper-scrutinized after the contract is written, and in short, more likely to suffer from that horrible malady of “Buyer’s Remorse.” This is not because there is a sudden increase in inspection quality or more defects to be found in a residence. It is because buyers scrutinize more heavily and are more likely to walk away from a less-than-sure thing.
When buyer’s enter the market thinking remorseful thoughts, they are less likely to act on a property that has already seen 40 to 60 days of showing activity. The assumption from the buyer is pretty simple: “My time is valuable. This home has been exposed to buyers for six plus weeks, has not received an offer, and in addition
to that, it has been virtually toured and viewed on-line by hundreds more. In that time, a good value would have sold. I have so much selection to choose from right now, I won’t waste my time with this home and try and negotiate them down to make it a better value. I would rather work with someone more reasonable, and buy something that immediately presents itself as a good value. My time is valuable.”
Correspondingly, a property that has seen 80 plus days on the market is subject to all sorts of scrutiny by a buyer before it is even shown. A property that has seen more than 100 days on market may go weeks or months without a showing. This is especially true in areas that are subjected to direct competition from builders. This “Absorption Rate” may not be a literal piece of data carried in the hands of every buyer, but it is a measure of what buyers physically see (lots of listings) and emotionally feel (am I foolish to buy into this mess?). As a seller, the only way to overcome that sensation is to increase the value to the buyer to make a decision to buy. Value is not simply price: value is the ability to close by a certain time, make the transaction easy (the home is clean, benefits of ownership are readily visible, the advertised amenities function properly), as well as a price that is inline with fair market value. The buyers are setting the rules, and with 24% more homes on market this year than last, and a decrease in units sold... buyers are at least 24% more powerful than this time last year. That’s a rate to keep in mind as a seller.
Conclusion: The Coming Crunch?
There is some alarming news coming out of the county assessor’s office that their computer system is not accurately tracking the rate of foreclosures in El Paso County. The resulting data backlog means that the true foreclosure wave is likely yet to come, as if the already distressing rate of foreclosure has not yet reached it’s pinnacle.
Interest rates that have held together the buying market despite any real significant economic expansion this decade are beginning to rise, already at a point a half percent higher than they were two months ago. Media reports documenting why soldiers yet to be re-assigned to Fort Carson via BRAC (Base Realignment) still offer optimistic news about the coming buyer demand on housing. Economically, the demand from troops is logical. However, outside the economic realities of gas, quality employment opportunity for dependents and present supply of housing the emotional cost felt to soldiers seems to encourage other options.
The numbers in Southeast Colorado Springs start to paint that picture. There is an ugly reality to the fact that 38 single family homes sold in the Southeast MLS last month... and there were 357 for sale. That’s almost 9.5 months to sell through an MLS area with an average value less than $200,000. The emotional dynamics of 2007 presents a black and white picture for sellers (your home must be a good value to sell); but the picture is not black and white for buyers.
In the case of soldiers, an enlisted Army soldier has likely seen at least one, and possible more than three tours to Iraq, Afghanistan or the Middle East since 9/11. For a solider repositioned to Fort Carson, the strain or threat of deployment often encourages their dependents to consider other options; some of these options include staying “at home” with family, and for others it includes renting as opposed to buying. Soldiers are increasingly considering their options post-military, even if their retirement is jeopardized. If Colorado is not the soldier’s home state, or their specialty does not give them employment options post-military, the opportunity to buy in Colorado Springs is not as favorable as it once was in a more certain time.
Demographic changes are forcing their own burdens upon the market. Condos and townhomes are now competing head to head with properties priced under $200,000. In a city with a median sales price of $220,000, properties that are 10% below median logically would represent the product that is easiest to move in a stagnant economy. However, the owners of these properties are most likely first-time purchasers who purchased with little to no money down. Correspondingly, they have very little room for movement in price, and very little ability to increase their competitiveness against new townhome and condo construction, which is popping up all over town. While single family residences are generally 10% larger than their competition in condos and townhomes, they are also ten years older on average. By offering newer construction, HOA-provided maintenance and amenities, condos and townhomes offer a competitive option that can pull buyers into something that feels like a better value. Month after month these properties sell in a pattern similar to the single family residences priced between $150,000 and $200,000, do so in about the same amount of time, with similar price differentials and with similar average prices. Additionally, the areas with the five highest rates of condo/townhome unit sales (EAS, N/E, N/W, PWR and S/E) are all strategically located in the proximity of Colorado Springs major military installations.
That isn’t to say that owning a condo or townhome is a wiser investment than a single family property: there is 7.7 months of inventory in this category, compared to 6.3 months of inventory citywide. But it is to say that for buyers, the abundance of selection is more varied than before, and the oversupply of residences effects all price ranges and all areas.
As the market continues to remain unsettled buyers will continue to hedge their bets or retreat to more conservative locales that are always popular. Relocation season has begun, and like clockwork Briargate, Northwest and Fountain Valley all shaved two months of inventory off their sales rate in May compared to April.
The appreciation for value was most clear in Northwest where the absorption rate sped up by 2.4 months from 7.77 to 5.36 and the days on market decreased by 15 days from 87 to 72. Conversely, areas like Southwest and Southeast Colorado Springs showed a pronounced month-to-month slowdown, with Southeast adding almost four months to sales rate and Southwest showing a similar value focused buyer: in this area, the average time on market for success was only 62 days, but the rate of sale increased to 8.30 months.
The average asking price in the largely District 12 area was $603,000, but the average selling price was a more pedestrian $313,000, and that number was 5% off of asking price. It is encouraging to see traditional relocation markets like Northeast, East, Fountain Valley and Briargate show a marked pick-up in sales activity. But the lack of uniformity indicates that the market is still trying to find balance, wobbling around as if on a see-saw.
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