The Denver metropolitan area ranked No. 8 of the 20 areas tracked by the closely watched S&P/Case-Shiller Home Price Indices released today. Overall, homes in Denver appreciated by 3.6 percent in the one-year period ending in May, compared with a 5.4 percent gain for homes in the 10-Composite list and 4.6 percent for all 20 of the areas, according to the report.

“I like what I see,” said Peter Niederman, chief executive officer of Kentwood Real Estate.

Niederman noted that some of the California markets shot the lights out in May, according to the index. For example, San Francisco showed a gain of 18.3 percent and San Diego home prices rose by 12.4 percent.

California skews stats

“Those California markets were well into the double digits,” Niederman said. “If you remove those, Denver was right up there. I think Denver is a very sustainable market. Those California markets are really a lot of noise.

They’re very volatile. They have big drops, followed by big gains. Denver does not have these violent swings up or down.”

Niederman, and others, however, cautioned that the May numbers still reflect the impact of the tax-credit buying that took place prior to April 30, so the market should brace for a drop.

Still, sellers are increasingly willing to bargain on prices, especially at the higher-end, and mortgage rates are at historical low, providing an ideal buying opportunity for those financially able to take advantage of what is a buyer’s market, except at the lower-end.

Jobs key to housing

“Only the third-leg of the stool is missing,” Niederman said. “We need to see strengthening in our employment. When we see some improvement in the employment numbers that will bring consumer confidence back. No one buys a home when they lack  confidence.’

On the other hand, he said that consumers could miss the buying opportunity of a lifetime if they wait, because as the economy improves, it is likely that both home prices and interest rates will rise.

“I do understand there are a lot of people out there who realize this is a great buying opportunity, but aren’t willing, or can’t take advantage of it, because of their job situations,” Niederman said. “Or maybe they lost money in the financial markets, and they can’t make a decision to buy now, even though they know it is a great time to be buying. I remain cautiously optimistic about the market.”

Independent broker Gary Bauer also was encouraged by the Case-Shiller report.

“Once again, I think it shows that Denver is a market on to itself,” Bauer said. “This is another example of how relatively strong the Denver market is. I think it is a positive.”

Bauer, however, cautioned that the May numbers still reflect closing activity from the home buying tax credits, which required buyers to place a home under contract by April 30 and close by September 30.

Frenzy gone

“We’re still seeing the frenzy of the tax credits in the May numbers,” Bauer said. “I think the June numbers are likely to be flat.”

Greg Geller, principal of Denver-based Vision Acquisitions, agreed that tax-credit buying drove a lot of the activity in May, and that has to be taken into consideration. Next month, Geller is likely to be named as the president of the Denver Board of Realtors for 2011-2012.

“The tax credits just brought first-time home buyers out in drove,” Geller said. “Without the tax credits, the market might be far worse and not as bloated, and I’m saying that for across the country. Not only did the tax credits bring out more first-time buyers, but it also likely led to more sellers testing the waters. “If you were planning to sell your home next year, you might very well have tried to sell it during the time of the tax credits,” Geller said.

Falling off the earth

John Sullivan, co-owner of RE/MAX of Cherry Creek, said that “while I can believe” the Case-Shiller report was a pretty good indicator of what happened in May in the Denver area, he said he expects the downturn to be quite severe later this year.

“I think the housing market is going to fall off the face of the earth in July or August,” Sullivan said. “I have six or seven listings right now and nobody is making any offers. And some of them are considerably cheaper than they were of the pre-expiration date,” of April 30 for the tax credit deadline.

He even told his son not to rush out and buy a home before the tax credits expired, as he expected that prices would fall when the tax-credits expired.

Not only have home prices softened in many cases, but interest rates fell from an already low level. While that may help existing homeowners that can qualify to refinance, it seems to be doing little to get jump-start the home buying market, he said.

Low interest rate not enough

“I think if they would drop the rate to 3.5 percent it would not make that much difference,” Sullivan said. “Well, a 3.5 percent rate would drive some people to buy a house, but not that many. If 4.5 percent rates aren’t doing it, I don’t know that a lower rate would make that much of a difference. If you don’t have a job, or you are not secure about your job, you’re not going to buy a home no matter how low interest rates are.”

He said that buyers are pickier than they have ever been.

“Everyone wants the good stuff,” Sullivan said. ‘They want the granite and the stainless steel, the location and the ‘Wow’ factor. The prices of the homes that have all of these things, have held up reasonably well. But if you have an average or below-average home, the price might have dropped 10 percent since May 1,” since the tax credits have expired.

The May numbers also broke the streak of consecutive month-to-month improvements in appreciation. November 2009 through April, the appreciation rate had increased from the previous month, topping out at 4.4 percent in April. The market also increased by 3.6 percent in February, from February 2009. Case Shiller uses “paired sales” of homes closing, in an effort to remove the bias of bigger homes closing, thus driving up the overall percentage increases.

National market bouncing along the bottom

Nationally, the overall market, for the most part, appears to have bottomed more than a year ago, but could continue to bounce along the bottom for quite some time.

“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery,” says David

M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level. The two Composites have

improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009. The last seven months have basically been flat…It still looks possible that the housing

market might bounce along the bottom for the foreseeable future, before showing any real improvement that will filter through to the rest of the economy.”

MSA	Change from January 2000	April-May	1-Year Change
Atlanta	7.82%	2.0%	1.1.7%
Boston	55.95%	1.6%	4.8%
Charlotte	16.39%	0.3%	-2.8%
Chicago	21.9%	1.2%	-1.5%
Cleveland	5.85%	1.0%	3.7%
Dallas	19.93%	1.5%	2.9%
DENVER	28.24%	0.6%	3.6%
Detroit	-31.7%	0.7%	-2.5%
Las Vegas	2.35%	-0.5%	-6.5%
Los Angeles	74.67%	1.7%	9.7%
Miami	46.33%	0.9%	1.2%
Minneapolis	22.63%	2.8%	11.6%
New York	70.45%	0.8%	-0.4%
Phoenix	11%	0.9%	7.2%
Portland	47.98%	1.2%	0.7%
San Diego	63.11%	1.1%	12.4%
San Francisco	42.16%	1.7%	18.3%
Seattle	46.82%	1.2%	-1.4%
Tampa	38.29%	0.9%	-1.5%
Washington, D.C.	82.10%	1.5%	2.4%
Composite-10	59.36%	1.2%	5.4%
Composite-20	46.43%	1.3%	4.6%

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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.”

Year	Under Contract	Closed	Single-family Average Price
2010	3,883	4,365	$273,285
2009	5,343	3,628	$262,066
2008	6,338	4,664	$228,500
2007	6,353	5,081	$318,904
2006	6,459	5,010	$315,257
2005	6,735	5,013	$305,730
2004	3,529	5,241	$294,040
2003	2,773	3,914	$275,879
2002	3,247	5,140	$268,952

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

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