The Denver metro’s housing market ended last year with a 1.2 percent year-over-year gain, the best showing in 2009, according to the closely watched S&P/Case-Shiller Home Price Indices released today.

However, the one-year change  in December was good for only fifth place of the 20 cities tracked in the index, as other cities also showed even larger one-year gains in December. San Francisco was No. 1 with a 4.8 percent gain. Dallas, San Diego, and Washington, D.C., also showed larger gains than Denver.  Las Vegas, by contrast, showed a 20.6 percent one-year drop.

Still, some local real estate officials said the jump is a good sign that the Denver housing market is on the road to recovery.  It was only the second time that Denver was in positive territory in 2009  from the same month in 2008. In November, the one-year change was 0.5%.

“Wow, that is huge,” said Mike Rinner, of the Genesis Group, which tracks housing along the Front Range. “I just stood in front of a crowd of 140 this morning and told them according to Case-Shiller we were up 0.5 percent and I expected that we would end the year at about zero. Boy, was I wrong.”

The Case-Shiller analyzes data from the same homes that have been re-sold, so it eliminates a bias of different homes in the sales mix, which can drive the average and median prices of homes up or down. For example, there have been so many distressed homes sold in Denver in recent years, that it drove the overall market down, while in more normal years, bigger homes entered the market, driving prices up.

Denver-area home market is healing

What the Case-Shiller study reflects the “healing” of prices at the lower-end, Rinner said.

“The greatest volume of home sales are occurring at the lower end,” Rinner said. “The values have been re-set as lower-end foreclosed homes hit the market, and there has been some appreciation from the lowest levels. If you look at the worst foreclosure markets in Adams, Denver and in Arapahoe counties, those markets have healed. Areas along the northeast corridor such as Green Valley Ranch and Montbello used to have the largest supply of unsold homes on the market, but now they have among the lowest,” as investors and owner-occupants have snapped them up at bargain prices.

By contrast, Rinner said not many sales are occurring in the higher price ranges and there is arguably a large over-supply of expensive homes on the market today.

But because of Case-Shiller’s methodology, it does not include the spec home constructed by a builder for $1.2 million, which never sold and is now going through the foreclosure process and likely will eventually be sold for $400,000 or $500,000, Rinner said.

“Also, at the upper end, owners are less inclined to take a hit, so they won’t sell it in today’s market if they don’t have to,” Rinner said. “So they are just sitting there until the market improves.”

Home values, not ranking, important

Rinner said that Denver’s drop in the ranking is not a concern. Because areas such as San Francisco have had such huge drops in the past, he said it is not a surprise that they may jump as they start emerging from the bottom.

Independent broker Gary Bauer said that the Case-Shiller showing reflects the price gains that have occurred in the Denver area during the past six months.

“It’s been a nice, steady upward movement,” Bauer said. “From my perspective, we were the first coming into it, and we will be the first coming out.”

But Bauer said he is a  ”little surprised that we dropped in the ranking. I didn’t realize that San Francisco is starting its recovery.”

Indeed, he is consulting with a person who three years ago bought a house outside of San Francisco for about $650,000. The owner then put another $300,000 into it. Now, he would like to sell it and move to the Dallas area to be closer to family.

But it’s not worth anything close to $1 million.

“Unfortunately, he bought at the wrong time of the real estate cycle,” Bauer said. “It’s worth maybe $650,000, max. I really don’t know what he can do other than just wait.”

Meanwhile, Bauer is working with a first-time buyer who hopes to take advantage of the $8,000 federal tax credit, which requires that the house is placed under contract by April 30.

“It’s a condo in northeast Aurora that the original owner bought for $143,000,” Bauer said. “We have it under contract for $90,000.”

Tax credit play role

But John P. Cochran, the Dean of the School of Business at Metropolitan State College of Denver, wonders if the tax credit for first-time buyers, which was extended in early November, may have skewed the numbers late last year.

“It’s hard for me, right now, to accurately interpret the numbers of November and December,” Cochran said. “People were uncertain whether the $8,000 tax credit was going to be extended, so there may have been some acceleration going on as we moved closer to that date when it might have expired. I’m guessing that may have caused a one-time bump.”

John Skrabec, the broker-owner of Live Urban Real Estate, said he thinks that the tax credit, which now requires a buyer to place a home under contract by April 30, did help the market late last year. Qualified current owners also have a $6,500 tax credit. The homes must be closed by the end of June to get the credits.

“I think that sales might be front-loaded to the first part of this year, because of the credits,” Skrabec said. “I am a little nervous about what is going to happen after they are gone.”

Still, he said the gain in the Case-Shiller report is an “encouraging sign.”

And he said it doesn’t bother him that some other markets jumped past Denver, although he was surprised that cities such as San Francisco and San Diego saw such big percentage gains.

“I think that is just the pattern that Denver has echoed over time,” Skrabec said. ‘We don’t usually have the biggest drops, but we don’t have the biggest increases, either. Our little chart doesn’t go up and down as some other cities.”

Also, he said that certain neighborhoods have shown much greater appreciation, from the bottom of the market, than the 1.2 percent overall gain reflects.

“Prices have gone up a lot in southwest Denver, in neighborhoods like Ruby Hill and Athmar Park,” Skrabec said. “They were beaten up pretty bad, and there has been a lot of investors fixing and flipping homes there. Prices have been going up. Most of the demand has been from the bottom up, and that’s all right. The market is gong to recover from the bottom up, not from the top down.”

And even higher-priced homes are moving in northwest Denver neighborhoods such as West Highland and Berkeley, he said. Neighborhoods such as City Park and Uptown, also are doing well. “But it’s still pretty tough outside of the city neighborhoods in the suburbs,” he said.

Denver housing up for 5 straight months

Chris Mygatt, president of Coldwell Banker Real Estate in Colorado, said that while the Case-Shiller report is a positive sign, he thinks the market is poised to recover even faster than its report shows.

“If you look at the MLS (Metrolist) data from January, it marked five consecutive months of average prices increasing in Denver,” Mygatt said. “We had not seen that in three years. That is in conjunction with the inventory down to 17,000, plus or minus, low interest rates, and the tax credits, we could be in store for a pretty decent rebound.”

Mygatt said he does not think there is much chance that the tax credits will be extended beyond their current expiration dates. But he thinks that will keep the government buying mortgage-backed securities to keep interest rates low.

Jeff Bernard, a broker with RE/MAX Alliance and principal of Bernard Real Estate Analytics, said his “hunch” is that San Francisco home prices rose so much is because wealthy foreigners took advantage of a weak dollar to buy houses there last year.

He said he thinks that Denver’s overall appreciation is probably caused by homes from $90,000 to $350,000, which have bounced from lower levels, which offset homes at the upper end that have been heavily discounted from their original prices. “I would imagine there would be a fairly large standard deviation if you broke the numbers down by price points,” Bernard said.

Still, Cochran said it is good news that home prices in Denver are moving in the right direction.

“Having a positive number is good, but certainly I have to look at it very, very cautiously as an indicator of where we are heading,” Cochran said.

Nationally, home values improve YOY

Overall, the 10-City and 20-City Composites continued to show improvement in their annual rates of return. In fact, all 20 metro areas and the two composites saw improvement in their annual returns compared to November’s data. Only three cities – Detroit, Las Vegas and Tampa – still showed double digit annual rates of decline as of the end of 2009. Miami, Phoenix and Seattle all moved above such rates with December’s report.

But the areas did not fare as well from November to December. Denver lost 0.8 percent, compared to a loss of 0.2 percent for the 20 cities in the index. Only three cities – Chicago, Cleveland and Dallas – showed bigger month-t0-moth declines than Denver.

“As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the  summer of 2009 has not been sustained,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “In the most recent months we are seeing fewer and fewer MSAs reporting monthly gains in prices. Only four cities saw month to month improvements in December over November, when you look at the raw data. We are in a seasonally slow period for home prices, however, so it is not surprising to see better statistics in the seasonally-adjusted data, where 14 of the markets and the two monthly composites all rose in December. Similarly, the National Composite fell by 1.1% in the fourth quarter, but rose by 1.6% on a seasonally-adjusted basis.”

Metropolitan Area	November-December Change	1-Year Change from December
Atlanta	-0.7%	-4.0%
Boston	-0.1%	0.5%
Charlotte	-0.7%	-3.8%
Chicago	-1.6%	-7.2%
Cleveland	-0.8%	-1.2%
Dallas	-0.9%	3.0%
DENVER	-0.8%	1.2%
Detroit	0.0%	-10.3%
Las Vegas	0.2%	-20.6%
Los Angeles	1.0%	0.0%
Miami	-0.3%	-9.9%
Minneapolis	-0.5%	-2.3%
New York	-0.7%	-6.3%
Phoenix	0.5%	-9.2%
Portland	-0.3%	-5.4%
San Diego	0.1%	2.7%
San Francisco	-0.2%	4.8%
Seattle	-0.7%	-7.9%
Tampa	-0.6%	-11.0%
Washington, D.C.	-0.2%	1.9%
Composite-10	-0.2%	-2.4%
Composite-20	-0.2%	-3.1%

Month	1-Year Change	Rank
January	-5.1%	2
February	-5.7%	2
March	-5.5%	1
April	-4.9%	1
May	-4.6%	4
June	-3.6%	3
July	-2.9%	3
August	-1.2%	2
September	-1.2%	1
October	-0.1%	1
November	0.5%	3
December	1.25	5

Source: Standard & Poor’s, Fiserv

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

Related Posts:

• Denver housing market strong in February
• The real estate world changed two years ago
• LIVE Urban plans version of Amazing Race
• Highland vibe electric, eclectic
• Live Urban living large

Following an unexpected drop in the third quarter, metro Denver apartment vacancy rates rose during 2009’s fourth quarter to 7.7 percent, about a 4 percent increase from the 7.4 percent vacancy rate in the third quarter. Average rents also rose.

Still, last quarter’s vacancy rate was about a 2.5 percent  drop from 7.9 percent at the end of 2008, according to a report released today by the Apartment Association of Metro Denver and the Department of Local Affairs’ Division of Housing.

“In general, we expect to see vacancy rates rise from the third quarter to the fourth due to seasonal factors, said Gordon Von Stroh, professor of business at the University of Denver and the report’s author. “But at 7.7 percent, we still see softness in the market.”

However, an analysis by InsideRealEstateNews.com shows that the third-quarter-t0-fourth-quarter increase was the smallest percentage increase since 2005. it was the lowest fourth-quarter vacancy rate since it stood at 6.1 percent in 2007.

Apartment market mending

And Von Stroh and other experts say that there are reasons to believe that Denver’s apartment market, considered one of the healthiest in the country, will show signs of getting even better. Rising unemployment, however, could put the brakes on the apartment market,

“Unemployment went up in the fourth quarter and when you overlay the apartment vacancies with the unemployment rate, there is a pretty strong correlation,” Von Stroh said. (See chart below.)

Still, he said demand will increase for multi-family units because of immigration, “natural population growth,  and because rents are not high enough to justify construction of new apartment communities, he said.

“It’s simple supply and demand,” Von Stroh said. “My only concern is a lack of job growth and rising unemployment. Otherwise, I am quite bullish.”

Unemployment, slow wage growth, concerns

Pat Coyle, head of the Colorado Division of Housing, agrees. “In December, unemployment in the Denver area rose for the first time since August,” and personal income growth has been less than 1 percent, Coyle said.  “This means that many renters will be doubling up and looking for ways to cut costs.”

Also, last year showed a positive absorption of 4,069 units, compared to negative absorption of 3,554 units in 2008. That means, in short, that more units were rented than vacated last year.

Absorption rate key

Terrance Hunt, an apartment broker with Apartment Realty Advisors, said the absorption number in some ways speaks more to the market than the vacancy rate.

“I think the absorption rate is extremely important,” Hunt said. “It shows that last year was a good, solid year, despite the tough economy.”

And much like the housing market, the Denver-area apartment market never became as over-built like other markets, such as Phoenix and Las Vegas, he noted. “One reason is that we never fully recovered from the tech-wreck in 2001,” said Lauren Brockman, principal of Orion Real Estate Services.

Rents steady

The average monthly rental rate was $875.39 in the fourth quarter, down from $888.81 a year earlier and down from $880.99. Brockman said rates typically need to rise about 25 percent before justifying new construction. The highest average rent was reported in Douglas County at $1027.15, and the lowest was reported inArapahoe County at $847.95. Average rents for all counties were: Adams, $809.39; Arapahoe, $847.95; Boulder/Broomfield, $943.23; Denver, $902.66; Douglas, $1027.15; and Jefferson, $848.75. When compared to the fourth quarter of 2008, only Douglas County and Jefferson County reported increases in overall average rents. Adams, Arapahoe, Boulder/Broomfield, and Denver counties all reported decreases in overall average rents.

“I think the public needs to know that they are really getting a good deal, as far as apartment rental rates,” Brockman said. “I think renters sometimes think they are paying too much.” But the reality, he said, is today’s market rates are very close to what you would pay for subsidized, government-backed housing, based on incomes and rents.

Foreclosures not helping apartments

Something else that might surprise many people is that rising home foreclosures are not helping the traditional apartment market. Von Stroh noted that if a family loses their home in a foreclosure, instead of leasing an apartment in a building, they will rent another home. “They need room for their kids and their dog,” he said.

Not only that, they don’t move far from the house that they lost, which Brockman argues is good for society, even if it doesn’t help fill vacant units in apartment buildings.

“The truth is, what happens after a single-family home foreclosure, is the family moves into a rental house down the street,” Brockman said. “That is good for society, because their children can stay in the same school.”

The irony is that they may be moving into a home that itself was a foreclosure, and now is owned by an investor.

Greg Bacheller, franchise  owner of Real Property Management Colorado, manages about 1,000 rental properties in the Denver area. About 50 percent of them are single-family homes.

Reluctant landlords abound

Typically, they are “reluctant landlords,” who can’t sell their home. Rather than take a $2,000 loss each month on their mortgage, they rent it out, absorbing a loss of a couple hundred dollars each month. “None of these people bought their homes with the idea of renting them out,” Bacheller said.

Other homes are foreclosures purchased by investors. “They can’t fix and flip anymore, so they fix and rent,” Bacheller said. However, as more homes are foreclosed, it will increase the size of the pool of home rentals, making it more difficult to raise rents. “The supply of (home) rentals will be increased by foreclosures,” he said. “But I do think that 2010 will be the year that supply and demand become very close to being balanced.”

Hunt said that the other thing to consider is that even with the extension of the federal tax credit until April 30 for first-time home buyers, it is harder to quality than ever, which means that home-buying will not rocket. That means that not only will more people be forced to rent, but fewer renters will become buyers.

“A couple of years ago, during the subprime craze, the main reason people left apartments was to buy a home,” Hunt said. “Now my mortgage broker friends tell me, “We have these federal tax credits and great interest rates, but no one can qualify.”

The highest vacancy rates were found in Denver County where rates rose year-over-year to 8.8 percent, and were lowest in Douglas County where vacancies fell year-over-year to 5.5 percent. During the same period, vacancy rates rose in Denver and Arapahoe Counties, and fell in Adams County, Douglas County, and in the Boulder/Broomfield area. Jefferson County reported no change.  Fourth quarter vacancy rates by county were Adams, 6.3; Arapahoe, 8.6; Boulder/Broomfield, 5.8; Denver, 8.8; Douglas, 5.5; Jefferson, 7.3.

In general, a vacancy rate of 5 percent is considered the “equilibrium” rate. Rates below 5 percent indicate tight markets.

DU Professor Gordon Von Stroh notes that unemployment and apartment vacancy rates

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

Related Posts:

• Apartment vacancy rate falls to 6.1 percent
• $8,000 tax credit may be non-event for Denver apartments
• Boulder apartment vacancy rates soar
• Denver-area home rental vacancies hit 3-year high
• Bullish outlook for Colorado’s apartment markets