A BROKER'S LOOK AT THE END OF 2010
Mike Heraty, Managing Broker/Owner
Pagosa Source Real Estate Advisors
December 31, 2010
The year is over, and for many that may be a relief. Most business and property owners are looking forward to what we hope will be a better 2011. Our area has seen its share of failed or closed businesses, job losses and foreclosures. Still, there remains some strong resolve among those that have chosen Pagosa Springs as their home. Hardships are common among those that choose the mountain lifestyle. What God delivers in terms of challenging weather trends is sometimes offset by better than expected tourist traffic and positive publicity. In other years the economy delivers a severe negative blow and the Creator softens the impact with beautiful weather. We learn to accept whatever comes our way and often work hard to see beyond the present conditions, hoping like many, for better days in the time ahead. (Reminds me of the lyrics of the song "Better Days", a 70's tune by SuperTramp.)
So, the year ended with some tough economic realities. Our local economy has certainly not escaped the impacts of the economic trends rippling across the country and world. We are reminded again how dependent we are on the economies of the areas that have historically delivered both our tourists and our second home purchasers. When you look at what has happened to the Phoenix economy it is easy to see why we have seen a significant reduction in the number of Buyers from that market. When we look at the entire state of California we see similar conditions and an expected reduction in buying activity from the Golden State.
Other states such as Texas and Louisiana, which were pretty insulated from the hyper-inflated real estate economies of the years 2000-2007, have fared much better. Consequently, we are seeing an increase in the number of visitors and real estate buyers from those states. Recognizing it may be a good number of years before California and Arizona recover, it might be wise for our community to devote more marketing resources to our neighboring states to the east.
Another observation and prediction I have relates to some structural changes in the second home market in our area. It is my opinion that many middle class Americans may now be forever blocked from realizing their dream of owning a little cabin or second home in the mountains. While it is true that the Baby Boomers are still a huge force in the economy, especially the vacation home market, their present and future net worth and discretionary resources have been altered quite significantly during the current economy. Yes, it is also true that Baby Boomers are inheriting the wealth of the previous generation, and a large percentage of that inherited wealth had been growing in real estate equities. Much of that equity has been reduced during the last 2-3 years. Residential properties in Las Vegas, Nevada for example are now selling at year 2000 prices, in many cases 60% less than the peak of the market. So the amount of resources available to the Baby Boomers has been reduced from what was projected. At the same time, for many, their confidence in the security of real estate has been shaken. Most had not been homeowners during any previous period with a widespread decline in values. Adding to these factors is the change in the mortgage lending industry. It is more difficult to qualify for a mortgage on a vacation home as lenders are requiring higher FICO scores and larger cash down payments. These changes will reduce the number of buyers that will be qualified to purchase, and, in my opinion, shift the market towards the higher net worth buyers that are purchasing more expensive properties, and paying cash or using lower loan- to- value mortgages. This may be tricky for Pagosa. Higher-end buyers have more choices and when they do a thorough analysis of the positives and negatives of our area as compared to say Durango, Steamboat Springs, Winter Park, etc., we may come up short. How effectively our local leadership prioritizes, guides and governs in the next several years will have tremendous long term consequences for all of us. If we can improve our infrastructure and amenities and articulate a clear and positive path out ahead, people with money will be confident investing in our area. If on the other hand we flounder and wait and hope for some outside force to pull us out of the ditch, I am afraid we will be left far behind.
THE 2010 REAL ESTATE MARKET STATS SUMMARY
The number of homes sold for 2010 was ahead of the previous year; 206 units vs. 166 units for 2009. The total dollar volume of single family detached homes sold was $1,790,000 ahead of last year. The figures show a decline in the Average Selling Price, $328,000 in 2009 vs. $299,000 for 2010. The number of foreclosure sales reported in the MLS during 2010 was 69 while 41 were reported for 2009. The Average Selling Price for foreclosure homes was $190,000 during 2010, while the figure for 2009 was $199,000. Foreclosure activity overall is ahead of last year, with a total of 164 properties going back to the banks. During 2009 there were 87 properties that went through the foreclosure process. These figures do not include the properties that were deeded back to the lender in lieu of foreclosure. I estimate during 2010 there were another 20 or more in this category.
The market remains over-supplied with inventory. Presently there is a 37 month supply of single family homes on the market and the same level of supply of condos and townhomes. The land inventory is estimated at 87 months, based on the absorption rate for the trailing 12 months. A slight uptick in the number of new housing starts can quickly reduce this figure. New construction has fallen off so dramatically that demand for building lots has become nearly non-existent.
Researching further, there are some bright spots beyond these discouraging figures. The in-flow of foreclosures is beginning to decrease. We expect as the number of new foreclosures slows, the existing inventory will slowly draw down and prices will stabilize. Typically we would expect more investor purchasers to enter the market before prices begin to rise. The majority of investors are cash purchasers looking to buy below market and ahead of rising prices. These Buyers are not emotionally attached to the transaction and Sellers are often disappointed when they won't stay engaged in the back and forth haggling that was typical during the strong market.
For those owners that want or need to sell their property during this challenging economy, our advice is to first, lower your expectations. If the major financial forecasters are indicating there is a strong likelihood of a second dip in housing prices, don't expect a Buyer to pay what you feel is today's value. We turned down a lot of listings during 2010 from Sellers that were unrealistic in terms of their valuations. Buyers want to purchase at a discount to today's value so that they protect themselves from further future price erosion. To move property in a crowded room full of Sellers, your home must stand out as the best value among the many choices. You must be sure the condition of the property is top notch. Make the necessary repairs ahead of placing it on the market. Until the market is well into recovery and prices have stabilized, do not expect to be able to move your property without discounting the price.
For Buyers, carefully study the inventory. Scrutinize the comparable sales, closely study the available listings; utilize the experience and expertise of a seasoned real estate professional. Good real estate guidance is much more important during a tough market as without near term price appreciation it is hard to cover mistakes. For Investors looking to purchase foreclosure properties, first, select a Realtor to be your Buyer Broker. Remember, the Listing Broker is working for the bank. Even though some Listing Brokers may be "Transaction Brokers" they are still beholden to the banks as that is where most of their business is coming from. They are not likely to work to your benefit in any manner. If you have cash to purchase, be sure you obtain the appropriate "Proof of Funds" letter. You will need this in order for your offer to be considered by the Lender or Asset Manager. Be prudent in lining up the appropriate inspections. Often times the bank-owned properties have defects or grossly deferred maintenance; you need to allow for these things in your offer strategy. If you cannot purchase a foreclosure for 10-20% below current market value, walk away. Don't get drawn into a bidding war on a foreclosure. Someone with an emotional attachment to the property will always outbid you or force you to pay too much. Be certain your Buyer-Broker really has a thorough understanding of the market and provides you with good detailed statistics to justify the guidance being offered. If you follow these guidelines there are some very profitable opportunities to take advantage of during 2011.
Given the tough market we have been in, I feel blessed that the wonderful clients, customers and staff I work with enabled me to finish the year as the Number 1 Broker within the Pagosa Springs Market Area, with $13,393,000 in Closed Sales Volume. Please call me at 970 264-7000 to discuss anything related to the real estate market in SW Colorado. I have 37 years of industry experience that you can profit from.