Wednesday, March 21, 2007

Foreclosure Update

by Osman Parvez
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I recently posted on the overstated data I've been using in my foreclosure updates. A few days ago the Colorado Division of Housing published their own data on foreclosures.

Unsurprisingly, Boulder County had the lowest foreclosure rate of any metro county with 1 in 144 occupied units in foreclosure. However, according to the new report, foreclosures in 2006 in Colorado were up 31% from 2005 (as compared to 85% according to Realtytrac). That's a huge difference.

Here's a link to summary and methodology of the new report and the data. Here's the press release.

(3/7/2006)

New 2006 Colorado Foreclosure Report

From 2005 through 2006 in Colorado, foreclosures increased 31% from 21,782 to 28,435. Between 2003 and 2006, foreclosures increased 110% from 13,575.

The study indicates that high foreclosure rates are primarily a phenomenon of the Front Range and the Eastern Plains. Foreclosure rates remain relatively low in the central mountains and on the Western Slope.

The counties with the most foreclosure filings per household were Adams, Weld, Arapahoe, Denver, and Pueblo. Adams and Weld counties topped the list with 1 in 32 and 1 in 37 households in foreclosure respectively. In Denver County, 1 in 47 households are in foreclosure. In the mountains and the Western Slope, foreclosure rates are much lower with Mesa County and Summit County reporting a foreclosure rate of 1 in 167 and 1 in 131 respectively. La Plata County reported a foreclosure rate of 1 in 382.

In the Denver Metro area, foreclosure rates ranged from 1 in 32 in Adams County to 1 in 144 in Boulder County. Boulder County reported fewer foreclosures her household than any other metro county. For example, Arapahoe County reported 1 in 43 and Douglas County reported 1 in 70. Statewide, there were approximately 1 in 58 households in foreclosure compared to 1 in 75 in 2005.

Throughout the Front Range, the foreclosure rate per household has worsened since 2003, the first year statewide Public Trustee data is available. The Public Trustee data contrasts with some earlier information released by other organizations that track foreclosures.

For example, Realtytrac has provided widely reported foreclosure data stating that in 2006, Colorado experienced 54,747 foreclosures, an 85% increase and had a total foreclosure rate of 1 in 33 households. In contrast, the new report indicates that Colorado has experienced an increase of 31% in foreclosures since 2005 and that only the most impacted counties have foreclosure rates near 1 in 33 while the statewide rate is 1 in 58.

This disparity is likely a function of different methods used in counting foreclosures. The Division of Housing assumes good faith on the part of Realtytrac, although it has concluded that the Realtytrac method overcounts foreclosures in Colorado.

The Colorado Division of Housing plans to continue counting foreclosure data from Public Trustees on a quarterly basis, and will be releasing data for the First Quarter of 2007 later this year.
Image: Casey Serin



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12 comments:

  1. What a great badge of honor. Yikes. Thanks again for the recipes.

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  2. Hey now.. I didn't want to disclose to the world that I share recipes online. Sheesh, people will take me for a softie or something...

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  3. Why no commentary on the recent housing numbers? Nothing new in Boulder? I'd love an analysis. How is it possible that Boulder can remain shielded from the collapse of the subprimes if it's the case that other comparable towns up and down the coasts are collapsing too? Or, out of curiosity, what other markets do you think are similar to Boulder's market? There must be some....

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  4. So here's an analysis that I think makes sense:

    Boulder has been more-or-less tied to an economy much larger than the local economies of Louisville, Longmont, Denver, and so on. This has helped to shield it from the local downturns in the economy, such that wealth has poured in from outside, even during bad times locally. This can explain the continued and relatively stable growth internal to the housing market here as opposed to outlying areas.

    Equity: Now, however, many of the wealthier bubble markets of the coasts are deflating, and some quite rapidly. What this means is that prospective buyers (from outside the local economy) will likely have their equity tied up in deflating real estate markets. They will either not be able to recapture their investment, and so will sell their own homes at a loss, or they will sit on their homes and wait for a turn around, thus not moving to Boulder. In either case, they will have less or no money to put into a home in Boulder. That will have significant impacts on demand for Boulder housing.

    Add to this the following factors:

    Foreclosures: Many Front Range markets are in serious hot water. Foreclosures in many local communities are up, these are expected only to worsen, meaning that supply of housing will be up and prices will probably drop in neighboring communities. As prices shift, there will be significant downward price pressure on houses in Boulder as well, since the price per square foot ratio will become worse and worse. (At present, you can purchase about twice as much house for your money if you buy in Longmont as if you buy in Boulder.)

    Lending Restrictions: financing a home has just become much more difficult. Even wealthier families seeking to purchase a home in Boulder, where median home price is approximately $600K, will need $120K down to avoid mortgage insurance. Not so easy without the fluid transfer of other equity (above). Even less easy now that the mortgage lenders will have to crack down and require _at least_ 5% to 10% of this $600K. This too will wipe out some demand.

    Piggybacks: Undoubtedly, many wealthy home buyers in this market have also financed their homes with piggyback loans and other such mortgage devices, even if they’re in the prime category. This is probably fine from the standpoint of foreclosure because it’s unlikely that these wealthier Boulder families with good credit will suffer foreclosure. Presumably they have a steady income and can handle even significant increases in monthly payments. However, this will exert pressure on families either to downsize, possibly at a loss, or to restrict the consumption of other goods to afford the payments. Apart from being bad for the Boulder economy, that means that housing prices will likely trend downward.

    Speculation: There is little question that speculators run a sizable cottage industry in the Boulder market. Anybody shopping for homes nowadays inevitably bumps into eager flippers looking for a quick buck. Such quick money can be found in this market, to be sure, but as the market softens, which it probably will, some speculators will be left holding the bag, and these places, unlike primary residences, will foreclose. Ouch!

    The time horizon of this deflation (or “correction”) is anybody’s guess; but I’d put my money on real estate being a bad investment at this time, at least in the next three to five years.

    Osman, do you have any thoughts? Numbers would help.

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  5. Great comment. I might need to create a Comment Hall of Fame in its honor. Seriously.
    While I don't agree with everything you've written Anon, you've clearly put thought into it. I appreciate that.

    The short answer is I don't view real estate in Boulder as being a "bad" investment, per se. Ultimately, the success of a real estate investment depends on a many factors. What's driving the purchase decision (investment or primary home)? Has the buyer done adequate due diligence on location and value? What will future maintenance costs be? Most importantly, how long is the holding period (I generally tell people to aim for 5 years, if possible). And don't forget, there are few assets you can acquire (with leverage, no less) in which you can also live and raise a family.

    As for speculation, we enjoy helping buyers with short term investments. Yet compared to the number of clients looking for a home to personally live in, it's a small slice. Perhaps 1:10, maybe 1:15.

    If there were easy to grab statistics on historic speculation comparing true bubbles (like Miami) with Boulder, I think you'd find our market to be relatively tame. Yes, of course it happens. But it just hasn't seemed that common to me.

    When buyers are serious and patient, do their homework on valuation, sift through the listings.. they'll eventually find homes that represent real long term value. But that's also precisely when they're likely to run into others doing the same thing and the house they wanted get snapped up. Because of our hands on approach and interest in helping people find value, we experience that alot. Maybe that's why it feels like there are a lot speculators out there when it's realy other value shoppers. Whatever the market does in the next 3-5 years, there will never be a shortage of buyers looking for long term value (as opposed to speculators looking for a quick buck).


    Again, great comment. No numbers for you this time around though. Too swamped with projects these days to post as regularly as I'd like, but stay tuned. I haven't dropped out completely.

    Best,
    Osman

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  6. Anon on 3/28...As far as I'm concerned you nailed it. last fall I called for a 20% drop in home values over the next few years in the Boulder area, maybe a little less in Boulder nd certainly more in others.....it's starting to unravel now....There is no way Boulder won't be low single digit negatives for the year

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  7. Boulder had sales volume in 2006 equal to 2005. Median prices didn't fall in Boulder last year, they rose. While I don't expect a strong rate of appreciation in 2007, a call for a 20% decrease in median home prices in Boulder this year is absurd. If the economy moves to recession quickly, perhaps we'll see that in the most frothy bubble markets. But Boulder wasn't one of those places.

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  8. While I don't expect a strong rate of appreciation in 2007, a call for a 20% decrease in median home prices in Boulder this year is absurd.

    Oz- He called for 20% over several years, not a single year. This is definitely a possibility over several years (especially in a price/sqft basis). And we are already halfway there for new construction.

    If the economy moves to recession quickly, perhaps we'll see that in the most frothy bubble markets. But Boulder wasn't one of those places.

    You have no way of knowing.

    Moreover, watching credit bubbles unwind is something that only old people have seen happen. You don't sound like your the right age to have experienced this, but perhaps I'm wrong.

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  9. Welcome to Osman's world: what goes up must go up (if it's in Boulder!). Come off it man, a few years of flat or slightly negative appreciation will be great for Boulder in the long term. It will allow some younger homeowners, families, to enter the community. You know - the folks who work for a living. Make Boulder tougher, less soft ;> Lord knows it needs it...

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  10. From a community perspective, I think it would be great if Boulder were more affordable. No doubt. But even over 5 years, a 20% drop in prices is extreme. Boulder typically has the second highest absorption rate in the area will doe exceptionally well even in the most severe downturn (which I'm not predicting, by the way).

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  11. I suppose I should clarify that I am the anonymous author of 3/28 who wrote the analysis that partly sparked this discussion, and I'm not the author of the subsequent banter. I appreciate this discussion, so I'll just identify myself as Dr. Bingo, Boulder renter and prospective first-time home buyer.

    I think that Osman is probably right that Boulder will withstand some of the foreclosure nightmare that's attacking San Diego, Las Vegas, Sacramento, Phoenix, and other bubble markets, but I'm not entirely sure that foreclosures on subprimes are the major concern. Matter of fact, it seems to me that foreclosure is only one factor that will influence price in Boulder and elsewhere. If the driving problem here is not that people with bad credit took out bad loans, but that there's a propensity even for rational people, betting on increases in the market, to take out loans that reset at abysmal rates sometime in the future, then it is the mortgage products and not the credit rating of borrowers at the root of the future price pain here. These mortgage products can be credited with inspiring the housing increase in many areas and will affect all buying sectors.

    So my next question relates to the prevalence of ARMs, HELOCs, Interest-Only Loans, etc., in the Boulder market. The reason I ask relates to the reset date of these loans. If these reset at all ranges sometime around now, it may not be the case that Boulder homeowners will have their lives foreclosed on them, but that they will opt to downsize, they will have strong motivating factors to sell at a loss, and so on. That means that prices will probably drop at all levels, or at least at levels where people have not taken out fixed-rate mortgages or refinanced several times.

    One thing that does seem clear is that the Boulder market got it's booster shot not from the innovations of the lending industry in 2003 and 2004, but from the tech boom of the late nineties. By some reasoning, it should have seen a collapse in real estate following the dot-com collapse and the departure of some of the local industries, but it didn't. I'm not sure why that is. That may bode well for Boulder prices in the longer term, because it suggests that the wealth is no longer tied to the tech industry, as it is in Louisville, and it may even mean that the injection of wealth functioned as a subsidy that transformed this community into a wealt-driven market; but it's not entirely clear that this will insulate it from the improvised explosive arms that have been planted at the base of the Flatirons.

    Thoughts? Do you have any friends in the lending industry who have a sense of the prevalence of these types of loans? Hopefully Boulder buyers are smarter than those who've made risky gambles. On the other hand, it's not at all clear to me that it was (or even still is) irrational to take out these adjustable loans. Given the right social discount rate, almost anything that costs less now and costs more in the future is a smart investment.

    Sigh.

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