by John Rebchook, Inside Real Estate News

As we enter the new year, the Denver-area housing market continues to show signs that the worst is over.

A report released late this afternoon by the HBA of Metro Denver shows that there were 3,271 permits pulled for new homes in the Denver area in the first 11 months of the year, a 4.2 percent increase from the 3,139 during the same period if 2010. November itself was an especially strong month for permits, which indicates future construction, with 311 permits being pulled, a 28 percent increase from the 243 in November 2010.

The new home market has been benefitting from a lack of competition from resale homes, where the inventory is 30 percent below where it was a year ago. Buyers of new homes also can take advantage of historically low mortgage rates of below 4 percent for a 30-year, fixed-rate loan.

“This is a sign that the recovery is happening, slowly but surely,” S. Robert August, a local housing consultant said. “This is a trend we are going to see increasing over the next several months. There is very little inventory out there. Even the foreclosures have been picked over. There will be more foreclosures coming on the market, but the good news is that those will be snapped up by investors who will quickly turn them into rentals.”

Meanwhile, other segments of the market are doing even better.

The Denver-area, like most of the country, is experiencing a big increase in apartment construction activity. Through November, developers pulled 1,417 permits for apartment units, a 41.4 percent increase from the 1,002 in the first 11 months of 2011. Denver is leading the charge, with 760 multifamily permits pulled so far this year. In November, 158 apartment permits were pulled – 118 of them in Denver, and the remaining 40 in Douglas County – compared with no permits in November 2011.

Long-term, August said more renters – including those living in their parents’ basements, or parents living in their children’s basements – will return to the American dream of homeownership when their financial situation improves.

“As the economy improves and more people find jobs, we will see a boost in home buying,” August said. “I do think the worst is over, although as we have experienced in recent months, a lot has to do with what is happening overseas.”

Attached homes, such as condos and townhomes, have shown an 8.8 percent year-over-year increase, with 785 permits issued in the first 11 months of this year, compared with 721 during the same period of 2010.

“Breaking it down, if you look at the for-sale side, for single-family attached and single-family detached, we have been up every month, on a year-over-year basis, since April,” said Jeff Whiton, President and CEO of the HBA of Metro Denver. “The trend is positive and very encouraging. We’ve had seven months of it now. We’re seeing a bit of improvement over a very bad 2010.”

For seasonal reasons, November is often a strong month for permit activity. “Builders like to get more foundations in before the snow flies, but that doesn’t explain why we would be up on a year-over-year basis,” Whiton said. “What I am hearing from our builder-members is that traffic has been pretty good and people are buying homes.”

He said he expects more of the same in 2012.

“I think we will continue to see year-over-year improvements,” Whiton said. “I don’t know what the magnitude of the improvements will be. But 2012 should be better than this year.”

Richmond American Homes of Colorado, the building subsidiary of Denver-based MDC Holdings Inc., continues to be the largest builder in the metro area, even though it has been much less aggressive this year than in 2010. Last year, it pulled 726 permits, while it has pulled only 397 through November. Shea Homes, however, the second most active builder in the Denver area, pulled 282 permits through November, compared with 150 in 2010.

Shea builds homes in Highlands Ranch and Reunion in Commerce City. The base price of its homes range from about $180,000 to more than $1 million.

The HBA report tracks building activity in the counties of Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, Elbert and Jefferson, as well as more than 20 communities in those counties.

Dennis Huspeni, Reporter – Denver Business Journal.

The inventory level of metro Denver single-family homes and condominiums continued to fall in December, holding a trend that has grown pronounced in the last couple of months, according to a report Tuesday drawing on Metrolist Inc. data.

The 12,531 homes on the market in December represented a 12 percent drop from November, and a 34 percent drop from December 2010, the report states. That number marked a 24 percent drop from December 2009’s 16,456 homes on the market.

“Prospective home sellers are still sitting on the fence,” said Gary Bauer, an independent, Littleton-based real estate broker and Metrolist analyst.

The continuing decline in inventory started in July and led Bauer to predict last month the level could hit 10,000 soon.

“We’ll have to look forward to 2012 and hope the available inventory increases,” he said.

The small spike in the number of units sold in December — 3,156 — represented the traditional end-of-the-year rush to close deals, Bauer said. That number was up 3 percent from November, and up 4 percent year-over-year.

The number of units placed under contract stood at 2,832 in December, down 16 percent from the previous month but up 5 percent from December 2010.

Prices largely held steady, as the average sales price stood at $253,986, up slightly from November’s $252,009 and basically flat from the $253,168 average sales price posted in December 2010.

“I do believe that 2012 is going to be better than 2011, but I don’t believe it’s going to be a dramatic rebound,” Bauer said. “There’s going to be steady progress on transactions and prices, but not big increases. Everyone’s going to keep focused on the economy and that’s going to cause several prospective home-buyers to sit on the fence.”

The report also included year-end numbers. Here are some year-end highlights and trends.

• The average days on the market for homes for sale ended at 108 for 2011, up from 2010’s level of 92 and 2009’s 98.

• The average sales price dropped slightly from 2010’s 257,000 to $255,492 last year. That average, however, was up 5.4 percent from 2009’s $242,413.

• There were 47,373 homes placed under contract in 2011, down 3.9 percent from the 49,313 placed under contract in 2010.

• There were 39,387 closings in 2011, up 1.5 percent from the 38,818 closings in 2010.

Metrolist Inc. of Greenwood Village is metro Denver’s Multiple Listing Service, a database of home sales activity for real estate professionals.

Lawrence Yun, the chief economist of the National Association of Realtors, captivated and educated almost 800 Denver-area Realtors and other housing officials during a presentation on a wide-range of housing and economic topics.

He also confirmed that the Denver-area housing market is in better shape than most places, and is poised to recover at a faster clip.

Overall, he said in the Denver area on Wednesday, that the housing market is likely to trade a “vicious cycle” for a “virtuous cycle,” in which supply and demand are much more in balance.

“Right now, the market is trying to get back to normal,” Yun said.

Topics he discussed during a 90-minute talk at the Ramada Plaza Hotel in Northglenn, included:

Life after the expired tax credits
Foreclosures
The government’s $600 bond buying spree
Risks of inflation and deflation
Preserving the home mortgage deduction
The shadow market
Fannie Mae and Freddie Mac
Timelines for a housing recovery

Yun also was bullish on the Denver area and Colorado.

“A long-term trend is that people want to move to Colorado,” Yun said at one point.

Yun was brought to Denver by the Denver Board of Realtors, the Jefferson County Association of Realtors and the North Metro Denver Realtors Association. Additional sponsors were Land Title Guarantee, Metrolist and Bank of America. Yun also granted a 30-minute private interview to InsideRealEstateNews and independent Realtor, Gary Bauer.

“It’s hard to imagine today, but as early as 2011, we could see some degree of a housing shortage,” Yun told InsideRealEstateNews. “I know it does not feel that way. We are out of the recession, but consumers don’t buy it. What is different this time, is that people are losing their belief in the future.”

But he noted that home-building in the Denver area, as well as from Boulder to Fort Collins, is at a 40-year low, at a time when the population continues to grow.

“Construction also has come to a halt in places like Detroit and Cleveland, but I would say they are going to be facing housing shortages, because those are out-migration states,” Yun said. “That is, people are leaving. The Rocky Mountain states, such as Utah and Colorado, tend to be in-migration states – that is people continue to move here, in addition to the normal growth rate and people graduating from high school.”

Still, there are challenges, he noted. In a typical year, there are about 400,000 foreclosures a year because of people losing their jobs, divorces, and health problems. The last few years, the county has suffered from about two million distressed properties entering the market annually.

“That is five times the normal amount,” Yun said. But he said that Denver, where the foreclosure cycle began earlier that most places of the country, is not seeing the foreclosure rates as many other spots.

Denver dodged over-building

“Denver’s foreclosure rate is about half the nation’s,” Yun said. “The other thing is that Denver is one of the few cities where over-building

occurred before the housing boom and bust. You did not see the huge overbuilding at a time when other markets such as Phoenix and Las Vegas were expanding rapidly.”

And homes in the Denver area are more affordable, because of softer prices and near historic low mortgage rates. A typical monthly mortgage in Denver has dropped $257 a month to $935 from $1,922 in 2005, he said. In San Diego, the difference is even more dramatic, dropping to $1,564 from $2,833.

Nationally, about a million jobs have been added to the economy, following two years of losing five million jobs each year. If the economy would add 400,000 jobs a month, it would take slightly more than two years for the housing market to return to a more normal one, he said. However, he said he expects more modest gains of 1.5 million jobs next year.

Tax credits did their job

And although home sales in Denver dropped off following the end of the tax credits, Yun said that occurred nationwide, and was expected.

“The tax credits worked,” Yun said. “Nationally, it brought about one million buyers into the market, who would have not bought otherwise. Now, about 4 million people bought, who would have bought in any case, and for them it was an $8,000 bonus. We knew that housing sales would fall off when they ended, and they had to end. After all, who would buy a home in May, when they could get $8,000 back by buying in April? Consumers are smart and rational.”

The tax credits also helped reduce the supply of homes on the market, and helped stabilize prices, especially at the lower-end, he said.

Robo-signings to be resolved

Meanwhile, he thinks the banking industries problems revolving around faulty foreclosure paperwork will be resolved within the next couple of months.

“The banks were sloppy with paperwork and with things such as robo-signings, but they are remedying it,” Yun said. “At the end of the day, I do not think we are going to find too many homeowners who were facing losing their homes who are actually current on their mortgages. I was concerned at first that the government was going to force a moratorium on foreclosures on banks, which would have created an overhang of distressed homes on the market and slowed the recovery. But I don’t think that is going to happen.”

He also doesn’t think the homeowners who may not have made a payment in 18 months or so, but still haven’t lost their home to the banks, will be able to keep them because of problems with the paperwork.

“I don’t think many people think you should be able to stay in your home when you haven’t made a mortgage payment for 12 months or 18 months,” Yun said in the interview with InsideRealEstateNews. “A home is too valuable of an asset for banks to let that happen. I think they will work out all of the title and ownership issues. It would be utter chaos if people could keep their homes under those circumstances.”

However, he said that distressed homeowners are facing confusing choices when they are seeking a loan modification, and are being encouraged to let their home slip into foreclosure, to facilitate that. And if they do not get the lower payment, they may lose the home.

In addition, there is a certain “moral hazard” of rewarding people with lower rates who defaulted on mortgage payments, while others continue to pay their mortgages, he said. In some government-backed mortgage reduction programs, as many as 50 percent of the borrowers still end up defaulting on their loans, which also is troubling, he said.

Also, while mortgage rates are still hovering near records lows, a big part of that appears to be that banks are only lending to the best customers – those that have great credit scores and have almost zero risk of default. He said that FHA-loans made this year have the lowest default rates on record and “vintage 2009″ and “vintage 2010″ loans purchased by Fannie Mae and Freddie Mac have lower default rates than loans made in 2002, prior to the housing boom and bust. “Bad loans are almost always made in good times,” Yun said. He said that banks, accruing huge stockpiles of cash, must loosen underwriting. Lending was too loose during the go-go days that led to the crash, “and now the pendulum has swung too far,” he said.

Also, Fannie Mae and Freddie Mac have to return to their knitting, but should not be eliminated, as some have demanded, he said. They play an important role of providing a steady source of mortgage money. Before they were taken over by the government, they were acting like hedge funds, making risky bets on the housing market, he said.

No fan of $800 billion buying spree

But he is not a fan of the government’s plan to spend $800 billion in bonds, which was expected to drive down interest rates, but at least initially is causing them to rise.

“I was not really in favor in what they call quantitative easing, or QE2,” Yun said. “The government thinks it can just turn on the printing press and get a free lunch. But there are consequences.”

One of the potential consequences is inflation, he said. Consumers are not feeling it, but there has been rising inflation at the production side, as well as at the commodity level, as everyone has seen with gold seemingly hitting new highs almost daily.

“If cotton prices keep rising, at some point Wal-Mart will have to charge more for shirts,” Yun said. He said the government embraced QE2 was because of concerns about deflation, in which prices fall. That leads to consumers to wait for even lower prices, which causes prices to fall even more. Deflation has kept the standard of living in Japan at basically the same level for 20 years, he said.

Mortgage deduction safe

But one thing Yun does not see happening is the elimination of the mortgage deduction as a way to reduce the federal deficit. The chairman of a bipartisan White House committee recently raised that as a possibility.

“I’m not surprised that it was put on the table,” Yun said. “But the mortgage deduction has been embedded in American culture for generations. It has a great deal of support from taxpayers.The U.S. economy cannot recover if the housing economy does not recover. If the mortgage deduction is removed, it not only hurts people who own homes, but those who have paid off their mortgages and own their homes free and clear.”

He estimated that would lower the value of homes, even those without mortgages, by 15 percent. Although it may not be obvious at first blush that people without mortgages would be hurt, they will find that their homes are worth less if they try to sell or pass the mortgage-free homes to their children, he noted. Thew 15 percent drop is irrespective of other market forces, he added.

“I can’t see any politician supporting the destruction of wealth at the scale,” Yun said.

And while there may be as many as 1.5 million homes waiting to hit the market – the so-called shadow market – he said there has been plenty of investor appetite for those properties. The shadow market is typically described as properties owned by banks, or soon to be owned by banks, that are not yet on the market.

American Dream alive

But despite the recent turmoil in the market, he said he still thinks owning a home is the American Dream.

“When we survey renters, the vast majority of them still say they want to buy a home at some point,” Yun said. “Now, some young people might not want to buy at this time. They want to remain flexible in finding a job, they may not have married and started a family yet, or their careers are not yet where they want them to be.”

He also noted that the net wealth of most renters is a fraction of most homeowners, even after the housing crash. During the presentation, he suggested to Realtors that they show the graph he was displaying comparing the meager wealth of renters to owners to prospective buyers on the fence.

Not only has the American Dream of owning a home not gone away, but it is returning to its roots. Buyers today and in the future are signing on the dotted line because they want to be near work, or near schools, or a place to raise their families.

“The great thing about owning a home, as you pay down your mortgage, it usually goes up in value and over time, you build wealth,” Yun said. “But people will not be buying homes with the idea they will be $10,000 wealthier (on paper) next year. Appreciation will be a side benefit.”

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Previously, it required a 3.5 percent downpayment. The $100 downpayment policy kicked off last Friday.

The new rule should boost the sale of homes owned by the U.S. Department of Housing and Urban Development, local experts said.

“I think it is going to have a huge impact,” said Jason Peck, of Coldwell Banker. He said the $100 downpayment had been previously offered, but HUD took it away about a year ago in the Denver area. The new program is in effect for the next 12 months, according to Denver’s HUD Homeownership Center.

Peck said he suspects one reason the $100 down payment is back is because nationally, HUD is bracing for another 40,000 homes to come on the market. A portion of those homes are distressed properties that were taken over by Bank of America when it purchased Countrywide Mortgage, he said. While he didn’t know how many more HUD homes will be available in the Denver area, one rule of thumb is that the Denver area has about 2 percent of the overall housing market. In that case, it could mean another 800 HUD homes could hit the market locally.

Not only will the new program be good for buyers who are cash-strapped, or don’t want to spend the money, but it also will help HUD liquidate its portfolio quicker, he said.

The program is available to owner-occupants only, not investors. Buyers using this program must get FHA-insured loans and must pay the full asking price for the home.

Peck said he also suspects that HUD felt it was selling too many of its foreclosures to investors, and this will help it return to its core mission of selling to owner-occupants.

“I think this is going to be a win-win for HUD and for buyers,” said Steve Scheer of Denver Realty Partners. “It’s going to help people who are short on cash and it is going to be good for HUD.This is really going to help first-time home buyers. I’ve been in a lot of HUD homes, while they often need some work, a lot of them are pretty nice.”

Katherine Jolliffe, a broker with 8z Real Estate, said most of the HUD foreclosures she sell are priced from about $60,000 to about $240,000.

“I’ve been doing HUD homes forever,” Jolliffe said. “I love selling HUD homes. I do a lot of them. It’s funny, we’ve been hearing for the past couple of years that we are going to see this huge increase in inventory. But our biggest problem right now is the lack of inventory.”

Janet Frederick, of Aspen Real Estate, also sells a lot of HUD homes. She typically is working on 15 to 20 HUD deals each months. The $100 downpayment already is sparking more interest from buyers, she said.

“I’ve had about 10 phone calls today,” Frederick said. “I suspect this is going to help quite a bit.”

Jocelyn Predovich, president and CEO of Limetree Lending Group, also said that she is seeing interest in the program, and it will only grow as more people become aware of it.

“Already today, I’ve had a number of Realtors call me and send me emails about the program,” she said. “I’ve also had another five or six consumers contact me today. I think people are going to start to look at their data bases and contact people who might have had problems coming up with a 3.5 percent downpayment. I do think it is going to stimulate activity with buyers. Who can’t come up with $100, right?”

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