CSU-CAR study draws skepticism

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The overall home appreciation in the Denver area was a mere 7.1 percent from 1999 to 2009, according to a controversial report released by the Colorado Association of Realtors, based on research by Colorado State University’s Everitt Real Estate Center.

Local real estate leaders, when informed about the findings by InsideRealEstateNews, viewed them with disbelief, disdain and as highly suspect, as they voiced a unified opinion that the results defied common sense, as well as flying in the face of other market analyses.

Denver is not Detroit

“My initial reaction is, we’re not Cleveland or Detroit,” said Lane Hornung, an owner of Cohomefinder.com and president of 8Z Real Estate, a sponsor of InsideRealEstateNews. “Their numbers don’t past the sniff test,” added Hornung. “You don’t even have to be in real estate. Just a regular guy walking on the street knows that we’ve had a couple of tough years, but also knows that if he bought a house in the Denver area for $100,000 in 1999, it’s gone up in value more than 7.1 percent. “

The report, he said, is saying that financially speaking, you would have been better off salting your money away in a 10-year CD earning only 1 percent, a year, rather than buying a house.

10-year appreciation closer to 50% than 7%

“I would guess that the overall rate of appreciation has ranged from 25 percent to 75 percent, with about 50 percent going to be right in there for most homes.”

Other reports back-up his gut instinct. The widely followed S&P/Case-Shiller index, puts the overall gain in Denver-area prices from 1999 to 2009 at 45 percent, while the Federal Housing Finance Agency puts it at 52 percent, Hornung noted. And Lon Welsh, principal of Your Castle Real Estate, said his analysis shows a typical single-family home in the Denver area rose in value 42 percent, or 3.5 percent annually from 1999 to 2009.

The report was unveiled last week, but InsideRealEstateNews.com held off on reporting on it, because of questions regarding some of its findings.

Mistake in narrative

Initially, and as late as Monday, the report, which initially was posted on CAR’s Web site, said that the Denver-metro area posted a 68.5 percent gain from 1999 to 2009, the most of the seven regions throughout the state. However, an accompanying table with the report put the gain during that period at 7.1 percent for the Denver metro area and the 68.5 percent gain for the Western Slope. The report no longer was on CAR’s Web site on Tuesday afternoon.

John Gerhard, director of research at the Everitt Real Estate Center said that in the narrative of the report, Denver Metro and Western Slope had accidentally been transposed. He released a corrected narrative report late Monday to InsideRealEstateNews, after it sought clarification of the data..

In other words, if you bought a home in 1999 for $100 on the Western Slope, in 2009 it would be worth $168.50. If you bought a home in the Denver area – which includes Adams, Arapahoe, Broomfield, Denver, Douglas and Jefferson counties for $100 in 1999, it would only be worth $107.10 a decade later.

During that period, the inflation rate was 28.8 percent. If the findings are on target, overall, homes in the Denver area did not come close to keeping up with inflation.

“That does not make any logical sense,” said Chris Mygatt, president of Coldwell Banker Colorado. “What they are saying is that homes rose less than 1 percent a year. You might be able to find a bank-owned property that in 2009 sold for about the same as in 1999. But when you think this area includes everything from Washington Park, Highlands Ranch, Golden, Littleton, Broomfield, and a lot of other areas, it just doesn’t make sense.” He noted that a home he bought in Washington Park in the general time frame, has since been re-sold for 47 percent more than what he paid.

He applauded CAR for taking the report down from its Web-site, after questions were raised by InsideRealEstateNews.

“It it remained up there, consumers could look at it and get the wrong impression on the market,” Mygatt said. He said it reminded him of the Forbes.com flap earlier this year, when it said the Denver area had the second worst housing market in the U.S. “But at least with Forbes.com, those are people sitting in Manhattan looking at a variety of data they have gathered from various sources. It’s different when you have organizations like the Everitt Real Estate school up in Fort Collins, which is very well-respected, and the Colorado Association of Realtors, releasing a report about what happened in their backyard. Wow!”

Douglas County No. 1 for appreciation

When the report broke down the change in home values for individual counties, it found a 28.3 percent in Douglas County; 24.5 percent in Broomfield; 19 percent, Jefferson; 4.2 percent, Denver; 0.5 percent Arapahoe County; and a negative 2.7 percent for Adams.

Gerhard explained the study uses a weighted repeat-sale method, which measures the price change for the same home. That way it is not influenced by the type of homes selling at a given time, as is a median or average price.

Methodology not skewed by home size

“This methodology is one of the most accurate measures of appreciation or depreciation, and doesn’t allow for the size drift …. because it’s the same home,” Gerhard wrote in an e-mail. “However, if the home was extensively remodeled or upgraded between sales than drift would become a factor. Unfortunately, it is extremely difficult to identify or quantify remodeling that has been done to an existing home, albeit to say that minor remodeling is not uncommon when marketing a home for sale.”

However, real estate experts were dumbfounded that whatever methodology used, the report only showed 7.1 percent appreciation. A spokesman for CAR said that he will need to have members of the state-wide trade group discuss the findings with CSU, before it comments. As of Tuesday afternoon, InsideRealEstateNews had not received a response from CAR regarding the criticism being generated by the study’s findings. (Steve Laposa responded to InsideRealEstateNews late Wednesday. To read his response, please visit CSU stands by study.)

“Black-mark on CAR”

“I think this study is really is a black-mark on the Colorado Association of Real Estate,” said independent broker Gary Bauer, who every month releases a housing report based on Metrolist data. He will release his analysis of Metrolist data for July on Tuesday.

Bauer, like Mygatt of Coldwell Banker, said the study reminds him of the Forbes.com report released earlier this year, which painted the Denver housing market as the second-worst in the country. Forbes.com later admitted that it incorrectly used data to reach that conclusion, which was widely regarded as bogus by those familiar with the market. Even Denver Mayor John Hickenlooper criticized that report. (For more on that subject, please visit Forbes takes a second look at Denver.)

Every statistical report has some shortcoming, whether it is by Metrolist, Case-Shiller, or the government, Bauer said.

Trend is your friend

“But the value of any report that has a proven track record, which consistently tracks the market over a period of time, is that it identifies trends, even if you might quibble with some exact numbers,” Bauer said. “To the best of my knowledge, this is the first time this report has come out, and right off the bat, they admit some mistakes were made and other numbers don’t seem to be accurate. That brings into question whether the entire report has any validity and you should put any value into it at all.”

Peter Niederman, CEO of the Kentwood Cos., also said the report is somewhat suspect.

“You found one mistake that they’ve made,” Niederman said. “What I’m saying is maybe we need to look at it closely, to see if there are any other problems. Maybe there are not. But I think it is something that should be looked at.”

Regardless, Niederman said it is incomprehensible that homes in the six-county area overall have only gained 7.1 percent from 1999 to 2009.

Not making sense

“From 1999 to 2006, we were off to the races,” Niederman said. “That was a pretty good six or seven-year run. After that, even if the market lost 20 percent or 30 percent, when you look at the compounded numbers of the preceding years, if you just use logic, there is no way you would get down to a 7.1 percent appreciation over 10 or 11 years. It just does not make sense.”