Under contracts plunge 41 percent following end of tax credits

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Buyers wrote contracts on only 3,883 homes in the Denver area in May, a 41.3 percent drop from April, when consumers scrambled to take advantage of the federal home buying tax credits that required a house to be placed under contract by April 30. In April, a record 6,616 homes were placed under contract, while last month marked the worst May since 2004 when 3,529 homes were placed under contract, shows a report released today by independent broker Gary Bauer, based on Metrolist data.

Under contacts were also down 27.3 percent from May 2009, when 5,343 homes were placed under contract.

“They were record drops,” Bauer said. “They were the largest percentage drops from 1990 going forward for any month, both for the consecutive months and year-over-year comparisons.”

Sales fell with tax credits

Bauer and other experts agree that the drop was because the $8,000 tax credit for first-time buyers and $6,500 for qualified existing owners expired at the end of April and require that the homes close by the end of June.

“April was such a frenzy; the numbers were inflated by the tax credits,” Bauer said. “Realtors were working up to midnight on April 30 to get homes placed under contract.Buyers are making multiple offers on homes and sellers were dealing with multiple offers.”

Still, Bauer believes the tax credits were worth it.

“I think we did steal some future sales,” Bauer said. “But in my opinion, it was a worthwhile program. And it has ended while we are coming into the prime selling seasons of the year – June, July and August. I think we are going to have a good prime season, but not a great prime season.”

Deja vu all over again

Peter Niederman, CEO of the Kentwood Co., wasn’t surprised that under contracts fell so precipitously when the tax-credit deadline passed.

“I think I mentioned to you in 2009, when it looked the tax credits were going to expire in November, that November was the only month last year that reported higher sales on a year-over-year basis from 2008,” Niederman said. “In my opinion, that is what happened in April. You had this huge pent-up surge in April, so under contracts were anticipated to fall in May.”

He noted that at Kentwood, the number of showings dropped in May from April, but not as much as the under contracts dropped.

Niederman, in a letter in his upcoming Gallery, a glossy magazine that highlights expensive listings by brokers at Kentwood and Kentwood City Properties, quotes Lawrence Yun, the economist for the National Association of Realtors.

Tax stimulus worked

“The second round of surging sales from the tax credit extension looks as strong as the original tax credit,” according to Yun. “Evidently, the tax stimulus, combined with the improved consumer confidence and low mortgage interest rates, are contributing to surging sales. The housing market now appears to be in a good position to return to sustainable levels even without government stimulus, provided the economy continues to add jobs.”

Niederman said he couldn’t agree with Yun more. And he is not dismayed that the market nose-dived in May, as far as under contracts.

“One month doesn’t make a trend,” Niederman said. Indeed, there were 24,510 homes placed under contract in the first five months of the year, a 4.9 percent increase from the 23,366 during the same period in 2009.

“If you want to look at where the trend is, you need to look at the year-over-year numbers,” Niederman said. “I am encouraged that we are about 5 percent ahead of where we were last year. When you look at the first five months of this year compared with the first five months of last year, we are still ahead of the game.”

Economist Patty Silverstein said that everyone knew that the tax credits would have an impact on home sales activity, but until today’s report, no one knew how big of an impact the market would experience.

“Obviously, from the under contract values, we lost some of the momentum we had in the market,” Silverstein said. “The market was sort of front-loaded. But we are now moving into the prime home sales season, and so we will know in the coming months how much we are moving into a steadier, sustainable pace.”

In fact, she said what is happening in the housing economy is not much different than what is happening in the overall economy.”If you are focusing on a little broader measure, and not just on the residential market, this whole economic recovery is going to see some fits and starts. The recovery, whether you are talking about the entire economy, or the residential market, is not going to be healed in just one year..”

Silverstein said she is more concerned about the 27 percent drop from May 2009 than the 41 percent drop from April. “That does kind of concern me,” Silverstein said. Indeed, May 2009 was not a stellar one for sales activity,with under contracts down almost 16 percent from May 2008. While this was the worst May in six years, there were other dynamics fueling the market in 2004, Silverstein said.  “Keep in mind 2004 was when those outrageous mortgage products started to come on the scene,” Silverstein said, fueling sales until the summer of 2008, when the house of mortgage cards collapsed the entire industry.

Realtors are people, too

Chris Mygatt, president of Coldwell Banker Residential Colorado, said the drop off in under contracts last month were “very predictable,” and the obvious culprit was the end of the tax credits.

But there also was a human factor in play that many people will overlook, he said

“People have to realize that real estate agents are people, too,” Mygatt said. “They have to manage their time like anyone else. They were extremely busy showing properties in April, evidenced by the fact that was the best April on record for under contracts. In May, the agents’ job was to get those contracts they wrote in April closed. So they were working with existing clients to get those homes closed before the June 30 deadline and did not have as much time to spend on drumming up new business. I think the June numbers are going to be very important. I think we may see a little bounce back in showings and under contracts in June.”

Mygatt was pleased to see the number of unsold homes on the market last month to rise 6.2 percent to 22,016 from 20,734 in May 2009, and increase by 2.1 percent from the 21,565 homes in April

Pragmatically, however, sellers would have been better served to have their homes on the market earlier, to take advantage of the tax credits.

“Yes, they should have, and that was what agents were telling them,” Mygatt said. “We did not have enough inventory in April, which was frustrating for buyers. But a lot of sellers just couldn’t get organized in time. If you aren’t involved in selling and buying homes all of the time, you don’t realize that it can easily take one or two months to get a home prepared to sales. You have to replace the carpets and paint it and clean up the clutter.”

Still, with the exception of May 2009, the current unsold inventory is the lowest May since 2002, when only 14,173 homes were on the market.

“That shows we do not have an excessive inventory of homes on the market,” Mygatt said. “We can easily absorb the extra homes on the market, without creating an imbalance between supply and demand and hurting pricing. We’re heading towards a more normalized market.”

Most metrics smoking

David Simonson, of RE/MAX Professionals, said the tax credit drove sales in the lower-priced part of the market. “It stimulated a lot of people looking in the $100,000 to $200,000 range into the low $300,000 range,” Simonson said. “Realistically, we are looking at a little wave – a little up, a little down. If you look at everything but the the under contracts, everything else was great.”

For example, the average price of a single-family home that closed last month was $273,285, about 4 percent higher than the $262,066 in May 2009, and the median price of a single-family home rose 4.5 percent to $230,000 from $220,000.

And the 4,365 home closings represented a 20.3 percent increase from the3,628 closings in May 2009 and a 4.2 percent increase from the 4,188 in April.

Also, the 2.1 percent increase in the supply of unsold homes in May from April, bodes well for the market, he said.

“I’m surprised in a good way,” Simonson said.

Market on upswing?

Jack O’Connor, a principal of RE/MAX Professionals, said that May marked the third consecutive month of continuing year-over-year increases in monthly sales. “Historically, three straight months of increased sold-data would signal a market on the upswing,” O’Connor said. “Since the tax credit artificially increased sales in April, watching this data over the next three months will confirm whether Denver is truly on the rebound, or if we are still bouncing along the bottom of the market.”

Meanwhile,  although job growth during the first half of the year failed to live up to expectations, Denver is now being widely cited as a city that will out-perform the national market in job growth and job stability for the next several years, O’Connor said.

Jobs key

“When there is a pool of jobs, people move to take advantage, which lowers inventory and drives prices up,” O’Connor said. “In this particular market, those buyers would have the additional advantage of buying at historically low conforming rates, at a time when average prices look comparatively favorable. That prompts properties to move and for appreciation to occur.”

O’Connor, who analyzed the market using a different methodology than Bauer used, found that there were 4,237 closed sales in the eight-county area in May, 10.4 percent higher than the 3,782 in May 2009.  O’Connor’s research also found that there is a 5.1-month supply of homes on the market priced below $500,000.  At current absorption rates, that would be considered a seller’s market, he said. By contrast, there is currently about a 30-month supply of unsold homes priced at more than $750,000, O’Connor said.

“The upper end phenomenon hasn’t been seen in 50 years,” O’Connor said. “It creates an unusual opportunity for a buyer that has been waiting to move up from a lower price range, to be able to get a sale at close-to full price on the seller side, and to pick-and-choose on the purchase side at very favorable interest rates.”

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Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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