Denver I Q

The Metro Denver resale housing market was better in 2006 and 2007 than perceived and written about by local and national media.

The graphs below demonstrate the available resale housing inventory, total homes sold, and the absorption rate in the Metro Denver market for 2005, 2006, and 2007.

The absorption rate is the number of weeks it will take to sell the available inventory
at the current rate of sales, with no additional inventory coming to the market.

The absorption rate improves as the sales increase in the warm months from March to
October.

The market for 2006 and 2007 were very similar with regard to sales, while available
inventory was less in 2007 than 2006.

As home builder inventory decreases, the existing inventory sales will increase and
resale inventory will continue to decrease.

The Denver area residential real estate market is in much better condition than much of the United States, partly because there was little speculative sales in the past five years, and partly because of the solid economic fundamentals in the Denver area

The number of foreclosed properties did not have a noticeable effect on available
inventory, total sales, or the absorption rate in 2006 and 2007.

The graphs were developed from information supplied by Metrolist, Inc, the Metro Denver MLS provider.

-That’s 30-

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I just sat down with a Realtor friend of mine and she showed me a flyer on a condo she just bought. It was a 2 bedroom, 1 bath condo on the 3rd floor in a neighborhood in between Lowry and Fitzsimons in east Denver area. She asked me to look it over, so I did. When I saw the price on the flyer, my jaw dropped…$29,900, no I did not forget to add another zero to the end of that number. Then she smiled and asked me to guess what her offer was accepted for…$27,000. She plans on renting it for about $500 to $600 a month. She was able to pay cash but even with a loan she would be able to generate positive cash flow right off the bat.

Right now the rental market is appreciating due in large part to the foreclosures that have occurred. It is unfortunate that some home owners have had to lose their homes to foreclosure but they still need a place to live and renting is their only option until they can qualify to buy a house again.

 If you can buy a $50,000 condo and put 20% down, you would have a loan of $40,000. The interest rate on a full income verification, 30 year fixed loan for an investment property is about 6.5%. Assuming about $100 or so for HOA payments and about $50 a month for taxes, your payment would just under $400.00 a month. Now how much you can charge for rent depends on many things but let’s assume that you could get $600 a month on a condo like that. Could you use an extra $200 a month while you hold on to this property waiting for it to appreciate? What if you could find 5 properties like that?

There are currently loan programs that allow for only 10% down and stated income loans to buy income property if you are self employed. The rates on these loans can run form the high 6’s to the low 7’s.

 If you’re new at this (and even if you’re not) you will still want a Realtor to help you find the right property and make sure that the price is a good one but there may not be a better time to look into this then right now.

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Usually when someone has a headline like that they have a lineup of new and cool things that will be introduced, like a new line of cars or some new players for the Broncos (which could happen). I am not introducing a new line of mortgage products here. I wish I were. It would be fun to tell everyone that there are some new loans that would make buying a home much easier and cheaper. However, if you are buying or refinancing a home using some form of mortgage financing then there are some new things going on that you need to know about.

First of all, this is a risk based business. Always has been and always will be. The bigger the risk that you take the bigger potential there is for a problem. In the past few years there were riskier loans being sold to people that have now caused some of the problems we are seeing today. Because of this there is now a tightening in the lending business that could affect your ability to buy a home. In another post on the Denver IQ blog recently, Jerra Ryan wrote an excellent peice dispelling the rumors running wild that all properties in the Denver Metro Area were under the ominous cloud of a “Declining Market” If these rumors were 100% true then any home sold in these areas would immediately be hit with a 5% reduction in the maximum loan allowed. The truth is that this MAY happen under certain situations but it is not an absolute. However it is a good indication that the mortgage industry is taking a more conservative stance when it comes to risk.

Another result of the tightening guidelines is that you need better credit to get some of the loans that used to be easier to get. The minimum credit scores have gone up on most mortgage products as well as the amount needed for a down payment. Stated Income loans are much more difficult to get. The lending industry used to hear the accusation that “you give loans to anybody” Well it was never quite true but it is even less true today.

Another big change that you will see in 2008 is how appraisals will be viewed. Once upon a time when property values where going up and up and up and all was good with the world, an appraisal would come in and hardly be noticed at all as long as the bottom line value was where it needed to be. I believe that in 2008, we will see a crackdown on appraisals. There is a saying in this business that an appraisal isn’t an appraisal until the underwriter says it is. Appraisals will now be scrutinized down to the last figure and the last word. When a market area is in a decline then the investor that eventually buys the loan wants to make sure that the value is truly there. I have seen instances where an appraisal came in at a certain value but after a review, the value was dropped down to the point where the loan could not be done.

Well enough with the doom and gloom. There are some good things that are happening. Rates are generally down at this time. There is legislation pending that would allow for FHA insured loans to have a lower down payment, from 3% to 1.5%. This same legislation could change the maximum loan amount on an FHA loan up to $417,000. Up to now the maximum FHA loan limit in the Denver Metro Area (excluding Boulder County) is at $308,370. a change in the maximum loan amount would open up more good buyers to a higher purchase price if that is what they qualified for. FHA loans are not driven by credit scores but rather credit situations so they are more lenient in certain situations where a conventional loan is stuck to a FICO score rating. Also, There are still safe, 100% loan programs available. CHFA (Colorado Housing Finance Authority) has said that they will continue to support their 100% financing options even if a property is designated as being in a declining market.

So as you can see there are new things that you need to be aware of if you are looking to buy or refinance a home but there are plenty of reasons to move forward as well.

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The Business Section (Wall Street West) of The Rocky Mountain News (12/29/07) printed one “news” article, on “op-ed” piece, and a rather hard to comprehend Letter to the Editor,  all devoted to the housing “crises”. The letter to the editor simply made no sense, as it was difficult to tell if the writer was attempting to champion Realtors or dismiss them as self-serving.

The “news” article had a panic headline - New-home sales plummet in Nov. - , with an inset noting that the Denver-area new home market is down 29% in 2007. Down from [Read more →]

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Maybe not in your neck of the woods, but certainly in Colorado. Erin Toll, the Director of the Division of Real Estate in these parts was the beneficiary of a full page article (with picture) in Tuesdays Rocky Mountain News applauding her announcement of an “emergency rule” prohibiting prepayment penalties extending past the adjustment date of the mortgage interest rate. [Read more →]

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