John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... 
There were 3,602 home closings in the Denver area in March, a 47.9 percent increase from February. Source: Gary Bauer. (Single Family denotes condos and singl-family detached homes. Residential category denotes single-family, detached homes.)
Tax credits that will soon expire drove Denver-area home sales activity in March, with both under contracts and closings soaring both from February and from March 2009, shows a report released today.
There were 5,907 homes placed under contract last month, a 33.8 percent increase from February, when there were 4,414 homes placed under contract, according to the report by independent broker Gary Baue. That is the largest March from February percentage increase since the 36.6 percent increase in 1991, according to an analysis of the Metrolist data by InsideRealEstateNews.com. That also was a 22.4 percent increase from March 2009, when there were 4,826 homes placed under contract. By comparison, closings in March 2009 fell by 17.8 percent from March 2008. Bauer estimates the tax federal tax credits of $8,000 for first-time home buyers and $6,500 for qualified current homeowners, may account for 60 percent or more of the activity last month. Others estimate the tax credits, which require a house to be placed under contact by April 30 and closed by June 30, account for a third or so of the activity.
Closings, which reflect sales activity of prior months, jumped 47.9 percent from February, with 3,602 home closings, compared with 2,436 in February. However, last February was the worst February on record since 1998, when there were 2,380 closings. Still,the 47.8 percent gain was the third-best February to March since 1990, shows the InsideRealEstateNewsanalysis. Closings were up 12.4 percent from the 3,206 in March 2009. In the first quarter, there were 14,011 homes placed under contract this year, a 9.1 percent increase from the 12,840 placed under contract in the first three months of 2009. And there were 8,391 closings in the first quarter, compared with 8,159 in the first quarter of 2009, a 2.8 percent increase.
The tax credits played a role in “60 percent-plus” of the home sales in the Denver area, estimated Bauer. While that is twice as much estimated by many others, his research shows that 69 percent of the single-family homes closed in March were priced at $300,000 or less, and many of those who were first-time home buyers who could take advantage of the tax credits.
Tax Credits Critical For Buyer
The tax credits played a key role in Michelle Boudreau’s decision to buy a home. Boudreau, 30, and her 36-year-old fiance, paid $206,000 on March 15 for a home in Athmar Park in southwest Denver.
“I think getting the $8 grand from the tax credit was a big part of the decision,” said Boudreau. She said they may not have been looking to buy a home at this time, if not for the tax credits. But would they have bought it without the tax credit. “That’s a good question. I never really thought of that before. I think if were looking at the time, we would still have bought a house. But we may not have been looking if it weren’t for the tax credit.”
And she said the tax credit has been a bigger help than they even imagined. She believes they received a good deal- they paid about $87 per square foot, and because they bought it from a fix and flipper, it has all new appliances. “When you buy a house you think it is perfect, but you find out there are things it needs, so the $8,000 is going to come in handy,” she said.
Larry McGee, principal of the Berkshire Group, said it is hard to put a finger on how many buyers are being primarily motivated by the tax credits.
“Anecdotally, you hear a fair amount of closings are happening because of the tax incentives,” McGee said. “But I would not even want to throw out a number. It could be 1 percent or it could be 99 percent.”
He said the tax credits seemed to be more of a factor last fall, before the government announced they would continue them in early November. “I don’t know if we will ever be able to measure how important they are now,” he said. Indeed, slowly rising mortgage rates, now hovering around 5.25 percent for a 30-year fixed-rate loan, are a bigger factor than the tax credits, as far as getting buyer’s off the fence. While rates are still low by historical standards, they are higher than a few weeks ago, when well-qualified buyers could find them for slightly below 5 percent. And now that the government has stopped buying mortgages, most economist expect rates to rise.
Market won’t fall off cliff when credits are gone
Chris Mygatt, president of Coldwell Banker Colorado, said that the tax credits have played a “significant’ role at the lower-end of the market, and the big question is what happens when they are gone. “That is a huge question,” Mygatt said. “I don’t think anyone knows right now. But I remain cautiously optimistic. I think in Colorado, certainly, there is enough momentum building, that it will continue to drive the market.” But the market will not drive off a cliff, he said. “No, I don’t think so,” he said. “I think Denver and Colorado are in much better shape than many other places in the country.”
And beyond the tax credits, there was much to like about housing activity in March, he said.
“You can’t ignore that this was the seventh month running of increased sale prices,” Mygatt said. The average price of a single-family home closed in March was $274,950, 9.2 higher than the $251,583 in march 2008. And the median price of a single family home was $229,000, 12.2 percent higher than the $203,950 in March 2008. “I think now we have a true sustainable pattern. It’s a trend of rising prices,” Mygatt said.
In addition, buyers snapped up 28 homes priced at $1 million or more in March, when Boulder is included, a 7.7 percent increase from March 2009, he said. “And that is coming off a (32) percent increase in million-dollar home sales in February,” Mygatt said. “That is two consecutive months of increases from the same month in 2009. That is something we had not seen in at least 30 months. And these buyers are not being influenced by the tax credits.”
High-end home sales sluggish
Still, Realtor McGee said that expensive homes are not moving anywhere near the clip of homes priced below $300,000. Bidding wars for less expensive homes are not uncommon. To say that is not the case with expensive homes is an understatement.
“We have seven or eight $1 million homes for sale and they are just languishing,” McGee said.
But in an interesting twist, those buying $1 million homes – or what used to be $1 million homes – often are not millionaires themselves, McGee noted.
“The $1 million buyers are not wealthy,” McGee said. “They can’t write a check for $1 mililon. What they are is very well employed and have the resources to come up with a substantial down payment. Now, the people who are buying $2 million or $3 million homes, they are wealthy. Those are the kind of people who are not effected by the job market.”
And excellent deals can be found in homes that were in the $1 million range during better times.
Ed Jalowsky, of Ed Jalowsky Real Estate and Hottes Homes Realty, recently was looking at a distressed home in The Preserve in Greenwood Village, which previously had been sold for $974,000. The 5,000-square-foot home on a 30,000-square-foot lot was being listed at $549,000, and Jalowsky put in an offer for $425,000, although he does not think he will get it at that price.
Market will slow when tax credits end
Mygatt said the market will definitely slow when the credits are gone, but it is hard to say by how much. “That is a huge question,” Mygatt said. “I don’t think anyone has the answer right now. But I think that Colorado has enough momentum, and that the momentum will continue to drive the market.” But the market won’t be “driven off the cliff,” when the tax credits disappear, he said. “I think Denver and Colorado are in much better shape than most other places in the country,” he said.
Jeff Bernard, principal of Bernard Real Estate Analytics, agreed.
“There are still a lot of compelling reasons to buy a home, even after the tax credits are gone,” Bernard said. “The affordability is very high (based on incomes correlated against home prices),and interest rates are still low. There are natural, organic reasons making Denver an attractive housing market, even without the tax credits.”
Sellers, surprisingly, have typically not been able to raise their prices, because of the tax credits, said Chris Behrens, of New Era Realty Inc. In other words, they aren’t tacking another $8,000 on to the homes knowing the buyers will get that back from Uncle Sam. Behrens said the tax credits gave a lot of investors the confidence to buy homes, fix them and sell them. He said they want to make a profit, but most of them are not being greedy.
“If you want to sell a home quickly, you do not over-price it,” Behrens said. However, he said many first-time home buyers he is working with, say they really would like to take advantage of the tax credit, but if the window closes before they sign on the dotted line, they are not going to give up their search. “At the lower end, the real problem is supply,” Behrens said.
But Jalowsky thinks about the time that the tax credits are no longer available, interest rates will rise, as the private sector won’t be able to replace the government’s buying power for mortgages. “When that happens, prices will go down,” Jalowsky said.
Credit woes place homes out of reach for many
Tom Cryer, of the Kentwood Co., said he has heard that the tax credits account for about a third of the sales. But he said the big percentage increases in March in the Denver area, are largely explained because the market was at such a low level a year earlier. “The first quarter of 2009 was so dismal that almost anything we did this year would be an improvement. Still, the big percentage gains are encouraging.”
He said he sees a lot of parallels between Denver’s market today and where it was at in the late 1980s, before it rebounded with vigor in the early 1990s. “I am still of the mind that a lot of us in 2012 are going to be wondering why we did not buy in 2009 and 2010,” he said.
A lot of people, however, see buying a home as juicy, low-hanging fruit ripe for the taking, but their financial situation and the difficulty in getting a loan puts it out of their reach.
“If we had 40,000 foreclosures each year for three years, that is 120,000 people with bad credit,” Cryer said. “And if you include the spouses and other family members impacted, we might be talking about a quarter of a million people with impaired credit. They know about the tax credits, the know about the low interest rates, they know that homes are priced right. They just can’t take advantage of them.”
This year will trump 2010
Economist Patty Silverstein said that while the exact impact of the tax credits is hard to estimate, clearly it will mean that the beginning of the year will likely be stronger than the last part of 2010. “We are coming off a really low base, which makes the percentage gains very big,” said Silverstein, principal of Economic Development Research Partners. “And definitely, the tax credits played some role in this. We kind of have to wait and see how large. But I do think we are going to end 2010 with a net gain in sales from 2009, although I don’t think the sales pace of the first four months will continue.”
But there probably is at least one more stellar month in the cards.
“Hundreds of home buyers in Colorado are still rushing to beat the April 30 deadline for the home buyer Tax Credit,” said David Simonson, a broker with RE/MAX Professionals. “If they are successful, we could see some big sales number in next month’s report.”
Contact John Rebchook at JRCHOOK@gmail.com 303-945-6865.
I will definitely be interesting to see the numbers for April and what happens through the summer.
I think it's a pretty safe bet that April will be a strong month, and there probably will be a lot of closing through June. It will be fascinating to see what happens afterward.
I think we will see stronger sales continuing beyond the tax credit deadline but the news will not be good for sellers. The economy appears to be gaining strength but the foreclosures are still an issue that sellers have to compete with.
D. West Davies
All Things Pagosa
The real estate market should eventually self-correct, and if prices fall substantially after the tax credit expires, government incentives could be leading home buyers into a money-losing situation.