Will our local housing bubble pop? Fred Crowley doesn’t think so.
In his quarterly economic update, released Monday, the University of Colorado at Colorado Springs economist makes the point that, compared to national averages for home appreciation, Colorado Springs never really had a housing bubble to begin with.
Citing national statistics, Crowley compares our pokey, frozen little city with 314 other MSAs.
The top 25 appreciated by an average of 103.8 percent during the last five years, led by Miami (which, you may remember, Colorado Congressman Tom Tancredo described as a “third world city”), where single family residences increased in value by 137.8 percent.
The bottom 25 didn’t fare quite as well, appreciating only 15 percent during the same period, led (if that’s the word) by Anderson, Ind., at 7.6 percent. Only one Colorado MSA made the List of Shame — Tancredo’s hometown of Greeley at 17.5 percent.
And what about us? We’re not at the head of the class at just under 6 percent annually, for a five-year gain of 29.3 percent — in fact, we’re in the bottom quartile. Think of us, at least as far as real estate appreciation is concerned, as a C-minus city.
Crowley believes that, since our markets have been relatively sluggish during the worldwide real estate boom, we may be protected from the worst of the downturn. As he says, “If disequilibrium exists in the local housing market, it is more likely to take place in the top appreciation markets than in markets which have not kept up with the national average for housing appreciation.”
Crowley’s at least partially right, since we’re already seeing the unwinding of certain overheated coastal markets. Consider, for example, a recent post in “The Contrarian,” a market newsletter whose author, Bill Fleckenstein, believes that a general housing crash is imminent. He quotes a source identified as a former executive with a major subprime lender, who said:
“We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built … in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant — worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.”
Noting that permits for single-family residences fell by nearly a thousand units between 2005 and 2006, Crowley ascribes part of the decline to “rising foreclosures.”
Foreclosures rose despite local income growth, which seems counterintuitive.
While we think of foreclosures as being symptomatic of a depressed economy coupled with declining home values, there may be another factor in play — the changing nature of the mortgage market.
Consider the mortgage products that lenders and brokers have made available during the last few years: negative amortization loans, interest-only adjustables, no-doc, “stated income” loans, and the like. Coupled with historically low interest rates, such products enabled almost anyone to qualify for a home loan, regardless of credit history, employment or liquid assets.
Since mortgage brokers (unregulated in Colorado) are only paid when they do a deal, the incentive for fraud could scarcely be greater.
And you can be pretty sure that the victims of the fraudsters were people with marginal credit, lousy jobs and a hundred bucks in the bank — first-time homebuyers.
How many such loans were made in the Pikes Peak region? And how many are likely to be foreclosed on?
There’s no way of knowing, but one thing that we do know is that the subprime lending business, virtually nonexistent a few years ago, is big business today.
Because subprime lenders accounted for nearly a trillion dollars in home loans, 25 percent of the total, it’s reasonable to assume that many of these loans will go into default. It could be that the problem might be even worse in markets like Colorado Springs than in overheated coastal markets, where equity run-ups have bailed out overextended borrowers.
And if foreclosures continue to mount, we may see a repeat of the disasters of the late 1980s — a local economic slowdown combined with a glut of housing inventory — which, if history’s any guide, means a Wal-Mart moment … Watch for Falling Prices!
Meanwhile, Sen. Wayne Allard’s decision to retire from the Senate in 2008, thereby putting his seat in play, ought to ignite furious maneuvering among Colorado senatorial wannabes.
So far, Democratic Congressman Mark Udall is the only declared candidate for the Donksters. He’s serious — so much so that he moved from Boulder to El Dorado Springs a year ago, realizing that “Boulder Congressman Mark Udall” just wouldn’t fly statewide — a little too lib’rul!
On the GOPster side, former Congressman Scott McGinnis is running, apparently hoping that the voters still remember him. Scott, speaking from experience, there’s no one quite as forgettable as a former elected official.
Don’t think so? Go ahead, ask the voters to name three former congressmen.
Let’s see … there’s the guy with the money in the freezer, what’s-his-name, and Newt-somebody who didn’t like Clinton, and — wait, wait, don’t tell me — and Cher’s husband!! Right?
Almost. Newt still thinks he ought to be president, Sonny’s still dead and the guy with the money in the freezer is still in office … and with his salary, and all those (frozen) liquid assets, at least he can qualify for a home loan.
John Hazlehurst can be reached at John.Hazlehurst@csbj.com or 227-5861.