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Yes, these are the worst economic conditions since your grandfather’s primary vehicle was a tricycle, with no end and little clarity in sight.
So let’s gather ourselves and sort out which numbers really matter and which ones merely perpetuate the fear that’s gripped the financial and real estate markets for months. First: Denver actually scores remarkably well on the index of overall housing-related distress. In 2008, area foreclosures declined almost 12 percent from 2007, the first year-over-year decrease in more than a decade. Second: Our home prices “only” declined by 5.1 percent from January 2008 to early 2009—compared to the national average of 19 percent—a relatively slight dip that made Denver one of the nation’s top housing markets in 2008.
Of course, such a “victory” doesn’t mean we should revert to the pre-meltdown shenanigans that characterized real estate almost everywhere, from Denver to Durango and beyond. And we shouldn’t forget that certain pockets of Denver—primarily around the city’s perimeter—are still suffering (see “Street Cleaning”, page 28). But our housing market, while fragile, still offers opportunities to get good deals—and sometimes even cash in. All you need to know is the difference between fact and fiction. With that, let the truth telling begin.
Myths & Realities
Myth Now’s the time to score a good deal on local foreclosed properties.
Reality While there may be opportunities, many bank-owned homes have serious drawbacks—and can be difficult to land anyway. The wave of bank-owned homes coming to market, which is now ebbing, gave prospective buyers the impression that they could snap up a first-rate pad on the cheap. There may be scattered examples of this, but it’s not often the case. “Foreclosures are often not priced all that much better than other listings, are often in extremely poor condition, and may require you to wait months for the bank to approve or respond to an offer,” says Lane Hornung, a Boulder-based broker associate for COhomefinder.com. Foreclosed homes, too, frequently are not in the tony ZIP codes in which many buyers would like to put down roots.
Michael Canon, a broker associate with Your Castle Real Estate, says that when there are deals on well-maintained foreclosure properties, buyers must be prepared and act fast to land them. “The competition is fierce,” he says. “[Bank-owned] properties often sell in less than five days on the market, for about a three percent premium over list price.”
Myth National real estate trends and stories accurately reflect what’s happening in Denver.
Reality Real estate is more local than ever. We’ve all been overwhelmed by the almost daily dose of bad news from the national housing scene. But national trends seldom are relevant to any local housing market. Denver has been getting mostly good news lately: Foreclosures are down, home values are declining slower here than in other parts of the country—and are actually rising in some neighborhoods—and the metro area appears to be in for a milder recession than most other urban centers. Even so, Denver real estate is so hyper-local that buyers and sellers in Wash Park or Highland often tell entirely different stories than their counterparts in Belcaro or Uptown. “Denver houses and neighborhoods are heterogeneous,” says Your Castle Real Estate’s Michael Canon. “Even neighborhoods that have the same house built at the same time by the same builder can have substantially different values.”
Myth Sellers should list their house at their preferred price, even if it seems high.
Reality High list prices often result in stale listings—a nightmare for sellers. Real estate agents agree that few things undercut a home’s true value quicker than appearing to be undesirable, and few things make this more apparent than a house that has been on the market too long. “There’s a real downside to ‘just testing’ the market,” says Lane Hornung, a broker with COhomefinder.com. “Price-reduction notices are not as effective as new listings.” Your Castle Real Estate’s Michael Canon says the current situation has created a condition called “downward price stickiness,” in which buyers offer what they think the house will soon be worth while sellers hold out for what the house used to be worth. Unable to find buyers, nondistressed sellers often withdraw their house from the market, but then the property carries the scarlet letter of having gone stale or, eventually, having to be relisted. Sellers who obsess too much over getting lowballed now should think about the big picture. A family that’s trading up because it’s growing might get five percent less for its current house, but chances are it’ll be able to buy a bigger one for a similar discount. That house, in turn, will provide even greater gains once the market turns around.
Myth Real estate is a commodity—a house is a house is a house.
Reality Individual Denver neighborhoods and their homes cannot be compared or equalized so easily. “Every market is different, every neighborhood is different, and in many neighborhoods the sub-markets are different,” says Michael Canon, a broker with Your Castle Real Estate. “When deciding what a house is worth, you have to account for factors such as house sizes, schools, crime rates, nearby parks, and proximity to bank-owned properties.” That is why all the online research in the world can’t tell you a house’s full story until you’ve actually seen it. “Websites like Zillow look at every 1,000-square-foot, three-bedroom house as if each one is the same, but that isn’t the case at all,” says Paul Tamburello, an associate broker with Distinctive Properties. “Zillow can’t smell a house, or see what kind of view it has, or what it’s next to.” In addition, data from these sites often are drawn from public records, so the numbers can sometimes be months out of date—an eternity in such a volatile market.
Despite the preponderance of local and national data and resources, real estate still is a visceral experience for buyers and sellers. People zero in on homes based on research, but they decide whether to make an offer because of how a home made them feel. This is why, when buying or selling a home, no volume of numbers can take the place of good old-fashioned legwork.
Myth You can get a steal by anticipating the market’s low point.
Reality It’s impossible to precisely identify a micro-market’s nadir. The burst housing bubble has created an enticing but precarious opportunity to time the market just so and wring maximum returns. But while it’s possible for risk-tolerant investors—using data such as days-on-market, price changes, inventory levels, and foreclosure intensity—to “narrow down” a market’s lowest point, Your Castle Real Estate’s Michael Canon says “exogenous factors” make it impossible to exactly peg the bottom.
The overzealous impulse came into play before the Democratic National Convention last August, when some rental-property owners held off on writing leases because they thought they could make a killing on the influx of visitors. “They were passing up 12-month leases because they thought they could get rich off the DNC, but come September they couldn’t find any renters,” says Brad K. Evans of Denver CORE (Colorado Real Estate). The bottom line, COhomefinder’s Lane Hornung says, is that “if you wait for the market to hit bottom, you’ll miss it.”
It’s Still (Pretty) Easy Being Green
It would be logical to assume that the economic downturn spells doom for the greening of real estate. But while individual projects may be slower to come to fruition, the overall movement is still in the pink. There currently are at least four multiunit residential complexes under construction in Denver—totaling more than 560,000 square feet—that have applied for LEED (Leadership in Energy and Environmental Design) certification status.
Green construction costs only about three percent more than standard construction, so it’s unlikely that environmentally conscious building will grind to a halt because of the bad economy. “The LEED certification has made RiverClay that much more attractive to buyers,” says Sarah Harman, a partner with RiverClay, the Jefferson Park complex that to date is Denver’s only LEED-certified Silver residential building. “A few years ago, only about 20 percent of our clients asked much about green building, and now it’s flipped to 80/20, so green building may be pushed forward where other construction sectors lag.”
But while making environmentally sound decisions about home purchases or improvements may be the socially conscious thing to do, for the time being most people will let their wallets decide. Lane Hornung, a Boulder-based broker associate for COhomefinder.com, says “green-related” searches of his company’s database comprise less than one percent of all searches, and have increased by just 10 percent in recent years. “I guess in these tough times homeowners are more interested in another type of green,” he says. “As in dollars.”
How to Take Advantage of Historically Low REFI Rates
By Joe Lindsey
With interest rates for 30-year fixed mortgages hovering around five percent, there’s arguably never been a better time to refinance. Here’s what you need to know.
Identify an Entry Point
Ask your mortgage broker how low rates need to go to justify a refi. You want a monthly payment that’s low enough to recover closing costs in 12 to 18 months.
Set Your Financial House in Order
Get comparable sales info as a prelude to an appraisal, and get your FICO score to eliminate nasty surprises.
Expect Stringent Underwriting Standards
Fannie Mae and Freddie Mac now assess progressively higher rates or fees for every 20-point drop below 740 on your FICO score, even on refis, says Bill Rodriguez of the HomeW.I.S.E. Team at Cherry Creek Mortgage Company. Homeowners with nontraditional incomes (like the self-employed) may have a harder time qualifying.
Pay Points if You Have to
A “point” is an upfront payment of one percent of the loan’s value; in return, the lender “discounts” the interest rate by about a quarter percent. Normally, the payoff time is too long to justify this approach on a refi (where points are tax-deductible only over the 30-year life of the loan). But interest rates on no-point loans are high enough that you may get a better deal paying a point or two in exchange for a lower rate.
Hope Your Neighbors Are Keeping Up With the Joneses
In areas with high foreclosure rates or plummeting values, lenders may reject even qualified owners on a refi. Lou Barnes, owner of Boulder West Financial Services, says lenders are now looking at “micro-neighborhoods, sometimes intra-ZIP code,” something he’s never seen before.
Rates are fluctuating wildly, but don’t try to time the market. “If you get to a point where you can refinance into a solid fixed-mortgage product and recoup your costs quickly,” Barnes says, “close your eyes and proceed.”
The Downtown Lowdown
Spire’s unconventional business model preps for its ultimate test.
In 2007, Randy Nichols started a project that seemed risky at the time. By late 2008, it looked downright insane. At 14th and Champa streets, just over the right shoulder of the “Big Blue Bear,” the Denver developer planned to erect Spire, a $175 million high-rise that, along with several other projects, would reinvent the city’s downtown skyline. What’s more, he planned to begin construction on the 496-unit building without doing presales, normally a standard procedure.
The whole thing almost fell apart in late summer 2007, when a German bank, Nichols’ primary financier, got spooked by the then-nascent U.S. foreclosure crisis and pulled out of the deal. After several months of manic scrambling, Nichols cobbled together new funding, and since January 2008 Spire has risen from the ground and from the dead. The project is slated to open in late October or early November, a couple of months ahead of schedule.
Spire is one of several downtown high-rises that have mostly weathered the economic storm. The site at 1401 Lawrence was sold last year and now sits in limbo, but the Four Seasons hotel and private residences project at 14th and Arapahoe streets continues to shoot skyward, with a scheduled opening in mid-2010. Several other multiunit buildings in and around downtown also have opened since 2008.
Unlike the Four Seasons, whose units range from just under $900,000 to about $7.5 million, Spire’s $210,000 to $1 million price point is targeting a more diverse clientele, and how quickly the building fills up will provide a barometer for Denver’s downtown revival. Nichols is cautiously optimistic. “We’d certainly love to have a booming economy, everyone flush with cash,” he says. “But I think we have a pretty compelling product, even in a down market, and maybe particularly in a down market, because people always have the need for housing. People may not be selling many multimillion-dollar units, but anyone can afford a $200,000 unit.”
With 5,000 people on the mailing list for the building and sales having begun in April, Nichols has his fingers crossed. “Maybe we’ll be able to sell all 500 units within 60 days,” he says. “But maybe that’s wishful thinking.”
How to Get the Best Return on Investment from Your Remodeling Project
Thanks to cable standbys like HGTV and the DIY Network, popular interest in home renovation projects was booming before the housing crisis hit. Even in the wake of the downturn, the National Association of Realtors released a report recently that showed the value of homeowners’ investments in remodeling declined in 2008 only about half as much as the overall decrease in home prices nationally. So it still pays to remodel—but given people’s desire to monitor their finances more closely these days, it’s useful to know what types of changes can offer something beyond mere cosmetic upgrades.
Start by going green—especially if you’re working on a tight budget. “If you’re going to live in your home for even a year, increasing energy efficiency is the best thing you can do,” says Barbara Baker, owner of I Am Enterprises Construction, a company that buys, renovates, and resells houses, primarily in northwest Denver. “Get an energy audit with Xcel Energy or any of the companies that offer them, and put in new insulation, doors, and windows.”
When making more visually pleasing changes, compare materials’ cost versus their relative durability. Fiber-cement siding can be preferable to vinyl or aluminum, and cement countertops will save money over marble or granite. Home-improvement experts also suggest avoiding anything too trendy or bold, especially when the last thing you want to do is start all over again once the fad has faded.
Xcel‘s Insulation Rebate program covers 20 percent of the cost of insulation and air-sealing upgrades, or $300—whichever is less—for certain energy-efficient improvements. Installation must occur between January 1, 2009, and December 31, 2010, to qualify.
Go Invest, Young Man!
Is your IRA a laughable shadow of its former self? Lately, ours is barely big enough to scrape together a down payment on a used Hyundai. There may be an alternative, however, to simply sitting tight, fingers crossed that stocks will soon rebound. For disciplined, self-directed investors (please reread that last clause carefully), moving IRA funds into real estate holdings is becoming an increasingly attractive option.
“The traditional investment counselor wants to sell you stocks and bonds, and hasn’t had much incentive to look at real estate,” says Terry McCullough, a broker with the Kentwood Company at Cherry Creek. “But over time, real estate usually offers the highest returns you can get, and they can be even higher now because prices are so low.”
This option usually appeals to a certain class of investors. “There’s a common misconception out there that real estate isn’t an option for IRA or 401(k) investments, but we’ve seen an influx of people who are looking for alternatives to the stock market,” says Patrick Hagen of Entrust New Direction IRA, which has about one-third of its holdings in real estate. “Real estate is at a seemingly low point, so there are good deals for people who have money to buy, and a lot of people are turning to retirement accounts because they can’t get a loan from the bank and don’t have money sitting in their bank accounts.”
Hagen says the sweet-spot Entrust investor is 42 to 55 years old, owns his own home, and has anywhere from $80,000 to $250,000 in his IRA accounts. Hagen stresses that Entrust’s role is more facilitator than counselor because the company’s investors are particularly self-directed and diligent about their accounts. “Our clients are people who know what they want to do and how to do it,” he says. “They’re trying to create their own rebound rather than waiting for the market to do it, but [to invest in real estate IRAs] you really need to make sure you have enough money to do what you plan to do.”