As I make calls daily to friends, past clients, other Realtors, other participants in this segment of the macroeconomy, I get the same question without fail. It takes on different variations, but it usually looks something like this:
What Will Happen When This is All Over / How Will We Know If This is Over?
First things first, I am one who subscribes to the theory: we as a country and civilization won’t go back to the normal that we knew February 1, 2020. If that was the baseline for “normal” – economically, culturally, spiritually, emotionally, globally, chronologically, historically – that moment will not be repeated. To be clear, when that question is asked of me, fresh in the minds of the citizenry 75-some days removed from that window in time are a couple no-longer-true barometers:
- 3.5% unemployment
- The DOW Jones Industrials around 29,000
Both pieces of significant economic data are now in the rearview mirror of history.
I know that. You know that. But what do we do with that? Well, maybe the best thing to do with that is see more what other information there is lying around. It’s very true much of the success seen in the real estate arena in the last 8 years in Colorado came from Wall Street Wealth and strong employment. But that Wall Street Wealth and strong employment did some particularly wondrous things to the Colorado Real Estate Landscape. So while I have been known to espouse my theories about the future, the honest to goodness truth is that I am no oracle. I have nothing to pin my credentials on for positing a forecast on the present climate. No one does. By the same token, the people that are making a stand-out difference in this time of quarantine look like:
- Scrappy Restauranteurs that convert their neighborhood hang out into a grocery
- Colleges that use 3-D printers to rapidly make deployable personal protection equipment
- Carefree Instagrammers that see it as their mission to be the in-person joy bomb ordinance in your daily feed
None of these outfits are doing this to increase their brand’s future. They are bringing dignity, service and need-fulfillment to the now.
Right now, it’s the now that is all we got.
First Quarter Data Reviewed
The First Quarter of 2020 had the highest average sales price in local history; the $390,721 was 12.7% higher than the same time 12 months prior.
The First Quarter of 2020 saw the most single-family units sell in the first 90 days of any year in history.
The First Quarter of 2020 ended with the smallest available inventory for purchase on April 1 in recorded history. A balanced market is 6 months of supply for most of the market and around 9 months of supply over $1 million in asking price. With only 1029 for sale and 1169 selling in March, the local market had 26.4 days of inventory on April 1st, a date 2 weeks into the crisis.
Thirty-year mortgages just saw their lowest rate in history in March and also their highest rates in over a year after capping their most volatile month in history. The Federal Reserve has resumed Quantitative Easing which was last used during the end of the Great Recession to stabilize the mortgage market and guarantee fund liquidity. This has reduced some (not all) of the rate volatility and rates have inched lower, recently. At the end of last week, April 9, 2020, the Freddie Mac rate was a 3.33%.
First Two Weeks of April Reviewed
In Colorado, Realtors cannot show property in-person to buyers. As an example of what that means, I track the showing activity weekly from $300K to $1.5 million. From March 9 to March 16, there were 3313 showings. From April 6 to April 13, there were 365 showings. That’s why you see this from me in my social media feed:
Homes are still selling, and each of the last three weeks have seen new contracts out-number new active listings by a number that’s close to 3 new contracts for 2 new listings. Those 365 showings last week yielded 183 contracts.
Homes are still coming on the market. Not many, but some are coming on the market: 142 new listings have come on the market in the last 7 days.
There have only been two recessions in the last 20 years and it’s not editorializing to say that both were traumatizing events: one a terrorist attack, the other a deep recession that was the worst suffered by The United States since the Great Depression. There is talk about a deep recession happening again and nearly 17 million Americans have filed for unemployment in the last month. Using that as a backdrop, what happened to local real estate in the last two recessions?
The 2001 Recession and the Pikes Peak Region
The Colorado Economy suffered badly after the 9/11 Terrorist Attacks because there were significant job losses, and real estate prices lost most of their annual gains in Fourth Quarter 2001, with the 2001 sales year finishing up only 0.1% higher than the 2000 sales year. But at the end of First Quarter 2002 prices had risen 8%, and the 2002 sales average sales price gain finished up more than 5% on 2001. The 2002 sales year also saw more units sell than any previous year. It is fair to say that that the real estate market had a terrible fourth quarter in 2001 at the onset of the recession, but the real estate segment spent the entire next year recovering, and was performing “normally” by the end of the year 2002. A quick coda on 2001: August 2001 saw 1147 homes sell in a single month against 3215 single-family homes for sale. The 1147 homes was at that point, the largest number of sales in a single month in the PPAR MLS history. Additionally, the 2.8 months of inventory was the tightest measurement of supply in at least 10 years of PPAR online data, and therefore, possibly the most seller-friendly market in the history of the Pikes Peak Region. The prevalence of sub-prime financing, adjustable rates, interest-only loans, and no-document loans had yet to be seen; but bank-statement loans and high loan-to-value mortgages were more a part of the market then, than they are today. There were aspects of the pre-2001 Recession that look strikingly familiar to the scene in April 2020; perhaps the biggest difference is that in April 2020, the market’s supply of homes was 1/3rd as large as the supply of homes in August 2001 (3215 in 2001; 1029 in 2020), with basically the same number of unit sales in August 2001 as March 2020 (1147 sales in 2001; 1169 sales in 2020). Additionally, the 30-year fixed rate mortgage on September 14, 2001 was at 6.86%. The 30-year fixed rate on April 9, 2020 was at 3.33%. It would be accurate to say that the pre-crisis 2020 market was more seller-friendly than the pre-crisis 2001 market.
The 2008 Recession and the Pikes Peak Region
The Colorado Economy suffered badly in the Great Recession as well. September 2008 saw prices just 1.8% higher than September 2007, and that month was an outlier; by the end of 2008, prices were down 7.9% compared to the end of 2007. The next year saw another 9% average-price loss. In 2010, average values rose 5.3% over 2009, and then values went backwards again in 2011, losing on average 4.9%. The number recognized by FHFA.gov, the quasi-governmental body that oversees Fannie Mae & Freddie Mac and has access to all loan appraisals including refinances is that the Colorado Springs Metro Area (MSA) lost 17% in the Great Recession. The 2008 sales year saw a poor third quarter followed by a terrible fourth quarter. This could be measured in several categories: prices eroding, few units sold, foreclosures-filed or even new building permits issued. The trend continued into 2009; while 2009 saw a 6% increase in units sell, it also saw prices drop. The 2010 sales year saw the fewest units sell in 13 years, but prices went up. Finally, 2011 saw banks sensing a willing buying audience in Colorado, and our state and especially the Pikes Peak Region saw thousands of units of “shadow inventory” saturate the market as banks liquidated their repossessed holdings where they figured they could get them sold. This liquidation did lead to more sales, but also lower prices. It is fair to day that like 2001, the real estate market had a terrible fourth quarter in 2008; but what followed was not a one-year recovery, but the better part of a decade recovery. It was not until 2013 that sales volume came close to 2006, and it took the addition of 75,000 more people to the metro area and ten full years for a sales year to eclipse the record volume of 2005 (2015 saw 13,250 sales in the PPAR MLS, just nosing out 2005’s 13,124). Perhaps most telling, it took eight years for prices to fully come-back to their pre-Recession highs: June 2007 had set “the record” for the highest average sales price. That value would not be eclipsed in any single-month until May 2015.
Analytically, it took a long-time for the Colorado Springs Real Estate Market to recover from The Great Recession.
New Data/Old Data
The 2001 Recession and the 2008 Recession had very different origins. A geopolitical terrorist event on the sovereignty of the United States that lead to a series of wars still on-going today triggered the 2001 Recession. Real Estate itself and numerous other finance-based maladies brought about the 2008 Recession. Both recessions are engrained in the memory like few other recessions in history. Quite clearly, the sudden and significant contraction of the local, national and global economies due to COVID-19 has created another traumatizing recession. Without venturing guesses as to how it all plays out, it does bear pointing out how things are different right now in the world of residential real estate, especially when compared against the more economically dire 2008 Recession. What follows is a comparison of 2020 data to 2008 data I like to call New Data, Old Data.
New Data: Foreclosure Filings in February 2020 were at their lowest number in history; that number applied in El Paso County and across the United States. Old Data: Colorado began seeing an alarming rise of mortgage delinquencies starting in 2004 that did not peak until 2009.
New Data: Remember Supply and Demand that is at 26 days of inventory (0.87 months) on April 1, 2020? Old Data: On April 1, 2008, Supply and Demand locally was at 243 days of inventory, or 8.1 months.
Just playing around with these numbers and saying the same thing but with different words for sake of perspective: New Data: Our present market is under-supplied by 85%. Old Data: The market in March 2008 was over-supplied by 25%.
There were 722 sales in March 2008 and 5849 homes for-sale. Playing with those numbers, based on the number of homes being purchased each month, for our market to have the same 8.1 months of inventory heading into the crisis would require locally 8335 homes for sale. Instead, there are 1029 homes for sale. Playing with those numbers, based on the number of homes actively listed right now, for our market to have the same 8.1 months of inventory heading into the crisis would require sales receding to 144 units closed in a single month. Instead, there were 1029 homes available for sale on April 1, and the month of March 2020 had 1169 single-family homes sell (144 units closed basically represents two days worth of end-of-month closings; there were 148 closings over March 30 and March 31, 2020).
New Data: Thirty-year interest rates are at 3.35% on April 9, 2020. Old Data: Thirty-year interest rates were at 5.88% on April 4, 2008 as well. Data Anytime: Every 1% difference in interest rate relates to 10% in buying power gained or lost for a buyer. That means today’s buyer’s dollar goes 25% further than the buyer in March 2008. That means if a buyer could afford $400,000 in 2008 based on 30-year payment, that same payment would buy $500,000 in 2020.
New Data: Coming into 2020, the United States had the largest amount of residential real estate home equity in history at $6.3 trillion during fourth quarter, 2019. This was the largest amount in history and the largest per household amount ever recorded. What does that look like? “The average owner with tappable equity has $140,000 available to borrow against” before they reached a loan-to-value ratio of 80%. The biggest driver of the Great Recession were crummy loans with little skin in the game from the borrowers. In 2008, over 861,000 American households lost their home to foreclosure. In 2019, just under 144,000 homes were repossessed nationwide. That’s a 600% difference.
Three things that are important about equity, and how that inter-relates to the compressed supply and demand in the Pikes Peak Region:
1.) Home Equity growth is a significant savings account for homeowners. In Colorado Springs, 60.6% of all residents own their own home.
2.) Home Equity did not erode between 2006 and 2008 due to home value losses, but due to the relaxed loan standards and too-large access to credit for most consumers. Two years prior to the actual crisis, homeowners began tapping that credit (Oddly enough, in the two weeks before the crisis, home owners started doing exactly that in 2020. Rates hit an all-time low of 3.29% on March 5, 2020. Of course, it was the week after that which recorded a 55% increase in new refinance applications… fear of missing out at it’s very best). Correspondingly with lots of seller competition and not a lot of equity to protect, 2008 Homeowners with thin equity margins in their residence facing literally thousands of other homes on the market differentiated their home with the only tool they had: price. This began a mad race to the bottom and that fueled two years of price drops.
3.) Home Equity in 2020 is substantial due to superior quality loans and depending on the state or region, 5 to 10 years of consecutive appreciation (8 years consecutively in the Pikes Peak Region). Correspondingly with low seller competition and a lot of equity to protect, sellers entering the market from today forward will be less likely to quickly drop price. Even if they refinanced in the last year, today’s sellers did so under significantly more stringent guidelines than the 2006-2008 market cycle, they likely still have 20% or more equity in their home, and they have a handful of homes that they will be competing with in the open market.
The Big-Big-Question: Who Will be Left to Buy a House After The Crisis?
There is no reassuring and easy answer to this question. Based on showing activity, showings last week in the Pikes Peak Region were 89% lower than the weekend ending March 13, 2020 (what our industry is typically using as the threshold for pre-crisis/crisis origin point). On the surface, that looks like the total evaporation of a marketplace. But the Colorado Stay-At-Home Order was issued effective March 26, 2020 and Attorney General-directed mandates that in-person real estate showings should not happen were issued Tuesday April 7th and clarified on Thursday April 9th. While hardly robust, just the previous week, showings under the first week of the stay-at-home order were still at 43% of their pre-crisis number. The week ending April 6 had 1410 showings for properties priced $300,000 to $1.5 million and that resulted in 198 new contracts in that price range. Yes, sales activity is slowing significantly; but ending where I began, that same ShowingTime data showed 365 showings last week for homes in the Pikes Peak Region from $300,000 to $1.5 million… and in that price range, there were 183 new contracts. Two showings per accepted contract.
All projections and predictions are guaranteed wrong so ending on any note of certitude or false promise shall be avoided. But what is known is shared above. Fellow Consumer, your data…