Washington Park

$875,000

The Canon Colorado Team at Your Castle Real Estate sold 752 South Williams Street for $875,000 after only 58 days on the market. This was accomplished through a comprehensive marketing plan that included a direct mail campaign to 3000 addresses in the Washington Park and surrounding neighborhoods, the distribution of flyers announcing open houses on every Saturday to every house in Washington Park, a stand-alone website, a virtual tour, and a strong network building campaign.

The results are impressive. 324 open house visitors and 52 broker showings and a sale for $875,000 in 58 days.ﾠ

Is an article about a seemingly mundane topic such as “a zoning code” ever going to be sexy enough to merit the time to read? Probably not, unless you are concerned about the future value of your home, or real estate investment opportunities that may arise because of changes in the code, or the destruction or preservation of the character of the neighborhood in which you live. Then its attractiveness may become magnetic.

Denver is undergoing a zoning code change. What does that mean?

A city’s zoning code is intended to regulate the use of the land so that all property owners have equally protected rights. Denver’s first zoning code was adopted in 1923. It was 25 pages long and contained 13 zone district classifications. The current format of the Denver Zoning Code was adopted in 1956, which was the last time the entire code was revised.  At the time of its adoption, the code was 172 pages long and contained 16 separate zone district classifications.  The current Denver Code is 639 pages long and contains 44 basic zone district classifications and 14 sub-districts, totaling 58. (Source: Denver Community Planning Department).

Do you want to read that document?

Obviously, there is a need to simplify the code. If you have attempted to build a new home or significantly modify an existing structure you understand the Kafkaesque nature of the code and the need to revise and simplify it.

The Zoning Code Update underway in the Community Planning Department (CPD) seeks to bridge the gap that exists between current zoning and Blueprint Denver.

Denver citizens called for reform of the City’s Zoning Code in the 1989 Comprehensive Plan. This message was repeated in the Denver Comprehensive Plan 2000.  Blueprint Denver (2002) provided the vision and initial strategy to begin this effort.

Denver has chosen to adopt a “form-based” code that “addresses the relationship between building facades and the public realm, the form and mass of buildings in relation to one another, and the scale and types of streets and blocks. It is a method of regulating development to achieve a specific urban form.” The Form-Based Code Institute describes the approach:

The regulations and standards in form-based codes, presented in both diagrams and words, are keyed to a regulating plan that designates the appropriate form and scale (and therefore, character) of development rather than only distinctions in land-use types. This is in contrast to conventional zoning’s focus on the segregation of land-use types, permissible property uses, and the control of development intensity through simple numerical parameters (e.g., FAR, dwellings per acre, height limits, setbacks, parking ratios).

Blueprint Denver requires areas of stability and areas of change. The large majority of Denver has been designated as areas of stability. The goal for the areas of stability is to identify and maintain the character of an area while accommodating some new development and redevelopment. (Source: Blueprint Denver). One of the “Starting Policies” states that areas of stability will “respect context.”

Denver’s CPD and its consultants have determined that Denver’s zoning code will regulate land use with base zone districts, typologies and form-based standards.

Of primary area of concern to many who have attended the CPD’s public meetings and who have read the presentations is the operational definitions to be used to determine what is a neighborhood “context.” Throughout all public presentations and in their internal documents the CPD and the consultants refer to “context” as the determining factor for what will be allowed in areas of stability.

In their “Overall Preferred Approach” they state that the “major substantive changes” will include “Context-based standards (that) respect existing and desired (emphasis added) neighborhood character (emphasis added).” This immediately raises many questions:

• Who will determine desired character?
• What operational definitions will they use?
• What type of flexibility will be allowed?
• How will Registered Neighborhood Organizations’ (RNO) input be considered?
• Who, in the final analysis, will be the ultimate decision-maker?

In the section entitled “Zone District” they say that zone map changes will come from the “neighborhood or developer proposal” or a “city proposal.”

• Which one rules?
• What will be the process for determining how zone map changes are decided?

Under “Neighborhood Typology” they refer to the “context” and “framework character.” They then list the A1 to A5 “Urban Resident Typologies.”

• How will the classification occur; against what rules?
• Who will participate in the decision

Washington Park has 58% original architecture, 22% scrapes with 10% of all new sales over the last year being infill. There are 5% duplexes, and 20% of the homes have been either popped or added to out the back. These data show an eclectic mix of homes, architectural styles and values.

• What is the typology?
• What is the “context?’

Under “Building Form” they cite “envelope (height, width, depth)” and “character elements (massing shape, roof form)” as being critical in determining context.

• If a neighborhood RNO presents a plan in which it would like to see a change to the envelope and character elements of a neighborhood block, will that be allowed?
• If so, what are the rules of engagement?

Finally, they say “the typology and building form standards do facilitate change that is compatible with existing building forms (emphasis added) in a neighborhood.”

• What if the neighborhood, or a homeowner, or a builder wants to deviate from the “existing building forms?”
• Will that be allowed?
• What will be the rules?

If a surrounding neighborhood has successful infill development and the result is rapidly appreciating real estate values in that neighborhood and an adjacent neighborhood has different typology, context, and building form, will it be able to change its standards to take advantage of the economic opportunity?

Perhaps most disturbing in the entire process is what has not been done or included. The CPD has not performed an economic analysis of the impact of these proposed changes on real estate values.

This is one of those government declarations: “trust us; we know best.

Do you think they know best? Do you trust them with the value of your home?

Finally, the Denver Board of Realtors expressed its concern in a recent letter to the Zoning Code Task Force:

At this point, it is unclear whether the overall direction of the ZCTF towards form-based zoning will simplify the code, or make it more complicated.  While the ideas of form-based zoning sound simple, patterns and rules could vary greatly from neighborhood to neighborhood, or even block to block.  Without an effective implementation process with certainty and clarity, this approach may make it difficult for citizens, homeowners, real estate professionals, developers, and even city employees to have a solid grasp of zoning code as it varies within the city.

Now is the time to get involved. Contact your neighborhood association. Read the CPD presentation at www.Denvergov.org. Decide for yourself. Make this issue sexy.

We believe that prices will still decline as the entry of the last of the foreclosed sub-prime mortgages, combined with the continued slowdown in sales of +$500,000 homes make for a lower average sales price.

We expect unit sales volume to decline by 2.5%.

What is interesting in their presentations is the mortgage forecast. Now is the time to buy and/or refinance. Because of the deficit spending we are about to experience they are forecasting increased inflation and higher interest rates. They estimate 30-year fixed rate mortgages to be at 4.8% for 2009, 7-8%% for 2010.

Don’t worry about buying “at the bottom” of the cycle. If you want to get into market with great rates, it’s time to do it now. If prices for homes drop another 10%, but mortgage rates go up 1%, you actually end up behind.  Smart buyers will buy ASAP.

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The Importance of Managing Your Credit Score

Is it critical to be a proactive manager of your credit information? The answer is a most emphatic “Yes!”

Managing your credit information provides you and your family with security. Identity theft has become a serious problem in our society. If your identity is stolen it is usually for nefarious purposes. Some of the objectives of these thieves include to use your good name to purchase goods on credit, to obtain loans in your name, to sign contracts which they never intend to fulfill. Managing your credit information will enable you to protect yourself from the headaches and stress that arise after these thieves have invaded your private life.

The most obvious impact of identity theft is in your credit score. If you open a line of credit, or get new credit cards, or obtain loans and you do not repay them then your credit score is negatively impacted. When you are in need of a mortgage, for example, this negative impact will make the cost of your loan higher, in the best case, and in the worst case, it could prevent you from being approved for a mortgage.

Your credit score is called FICO. The FICO score is a credit scoring system developed by Fair, Isaac & Co. and which the 3 credit bureaus use to report to mortgage lenders. Credit scores can range from 450 to 850 and the higher the better. If you want to know what your credit score is go to http://www.annualcreditreport.com. You should at least order a copy of your credit report annually. There are 3 credit reporting bureaus: Experian, Equifax, and Trans Union. Your score is not likely to be the same in all three. This is because not all creditors report to all 3 bureaus.

A recent client had not needed credit for years and had ignored her credit score. When she decided to sell her current home and buy a new one she discovered that someone else had used her identity for over 10 years. The result? Her FICO score was under 600. If you are a victim of identity theft and credit fraud report it immediately to the credit bureaus, your credit card companies and the Federal trade Commission at http://www.ftc.gov.

There are some basic things you should be doing to manage your credit score.

First, monitor it regularly and make sure you address any errors with the creditor. Sometimes this is very difficult to accomplish, but you must be persistent. I had a recent client that fell for the “Open an account today and get 10% off your purchase” gambit that department stores often use. The salesmen took her information and input the data into the computer at the store. Her credit application was rejected because the clerk had input incorrect data. Her credit score took an immediate hit. After many phone calls, and exchange of rancorous communication, the issue was resolved, but it took 6 months to do so.

Second, keep your credit card balances below 30% of the limits and this means the total for all credit cards. Use the card and pay it off and never let the balance exceed 30%.

Third, pay your bills on time, especially your mortgage. A late mortgage payment can reduce your score by 100 points.

Fourth, don’t close credit accounts just prior to seeking a mortgage. This will have a negative impact on that 30% ratio. For example, if you have 3 credit cards with $3000 limits on each one and you have a balance of $2000 on one and no balance on the other two, your ratio of balance to credit limit will be 22%. If you pay close the two that have zero balances your ratio jumps to 67%!

Fifth, don’t go seeking new credit just prior to applying for a mortgage. A new account will lower the average age of your accounts. The longer your credit history with each account, the better the impact is on your score.

Sixth, any collection account or negative public records, like a bankruptcy or a court judgment against you will have a negative impact.

Remember, a credit score is a measure of how well a lender thinks you will repay your loan. Treat it with great care. It is a relatively simple process to monitor your credit information. Do yourself a favor. Monitor it regularly.

Check out the ‘Featured’ tab for more info.

But how did we get here? A primary source of our problems is the changes in the financing of homes. What changed in our society that moved families from financing their home purchases with traditional 30-year fixed rate mortgages to new, riskier loan products issued to borrowers who, traditionally, would have never qualified during the “good old times?”

It’s a complicated story with many players. The cast is long and diverse involving the government, mortgage lenders, and, most importantly the homebuyers.

Until 1970 banks that issued the mortgages kept them on their books. They managed their own portfolio of loans. In 1970 investment bankers created mortgage backed securities (MBS). These debt instruments were created to free up mortgage lenders’ capital by selling the mortgages in their portfolios to investors.

In 1977 the Carter Administration, in response to allegations of banks “redlining” sub-prime zip codes, asked Congress to pass the Community Reinvestment Act (CRA). The CRA encouraged banks to meet the credit needs of low- and moderate-income areas. This was the beginning of the weakening of risk management within lenders.

In 1980 Congress passed legislation that eliminated the states’ limits on interest rates. Banks began to charge interest rates that reflected the risk of the borrower. The number of denials of mortgages was greatly reduced, as banks were glad to charge more for riskier customers. Banks became more profitable; more families stretched to buy homes.

Mortgages expanded to more and more of the population. With higher rates for riskier borrowers more houses were bought. Banks understood that the monthly payment amount was the key factor for housing affordability. In 1982 mortgage rates reached 18%. Demand fell. Banks then created adjustable rate mortgages to lower the first few years’ rates and thus reached a broader swath of the population.

In 1983 Fannie Mae asked Salomon Brothers and First Boston to create Collateralized Mortgage Obligations (CMO’s). This new debt instrument allowed the GSE’s (Government Sponsored Entities) to spread the risk of prepayment¹ among several classes of instruments. This assured investors who had purchased the debt that the prepayment risk on their investments would be minimized. In effect, it broadened the liquidity of these instruments.

Ronald Reagan’s 1986 Tax Reform Act eliminated all interest deductions except for home mortgages. The same law created Real Estate Mortgage Investment Conduit (REMIC), the most common form of CMOs.² Since mortgages became the only deductible interest expense families began to take out second mortgages to finance their life style. Debt level increased.

When automated underwriting was implemented in 1990 it simplified and made more efficient the underwriting process. Recent studies have shown that automated underwriting better predicts creditworthiness of marginal buyers than does human analysis. . However, it also removed the human analytical influence on mortgage decisions. Looking the borrower in the eye as a decision-making tool was gone.

In an expansion of the use of the principals behind the 1977 CRA, in 1992 Congress created specific mortgage purchase goals for the GSEs. This initiative raised the probability of delinquency to a statistically significant level. This was reported to Congress, but they moved forward with the proposal anyway. In the next year HUD began suing banks with lower minority mortgage approval rates than for whites. In response to this pressure, lenders began to relax down payment and income requirements. At this time there were still no sub-prime mortgages.

In 1994 the lenders created what came to be known as subprime mortgages. Lenders responded more forcefully to Congressional and Federal regulatory pressure by making mortgages more affordable. The primary vehicle was hybrid, or teaser rate loans, in which borrowers paid a lower teaser rate during the first two-years of their mortgage and then adjusted to market rates. In addition, it was clear that these other recent developments such as automated underwriting, securitization (CMOs, REMICS), the use of pre-payment penalties and the entry of unregulated lenders into the market would make the growth of the subprime market more aggressive.  Seeing this opportunity, hedge funds entered as investors.

In 1995 Congress amended CRA to force banks into lending to riskier borrowers. Banks began to lend to non-creditworthy borrowers in response to community pressure groups such as ACORN. Credit Default Swaps (CDS) were invented to free up lending capital for banks. These were used as an insurance policy to help manage the credit risk of the borrowers. The next year HUD gave the mortgage banks a specific target of 42% of all mortgages for low-income borrowers.

In response to 9/11 the Federal Reserve began to lower interest rates to stimulate the economy. As the money supply expanded economic activity picked up. Foreign countries were flush with dollars as a result of their export success and saw the American market as the place to invest. There were huge influxes of cheap capital looking for larger and larger returns. Non-prime borrowers (subprime and ALT-A) at that time represented less than 10% of all existing mortgages. ARMS represented 20%.

The St. Louis Fed began to elucidate the risk associated with the GSE’s. Their portfolio had grown to $5 trillion. The interconnectedness of the GSE’s with the global financial players  was noted. Further, the St. Louis Fed said, “And, most importantly, there is no effective regulator.”

By 2003 there was a real negative Fed Funds rate. Most mortgages were GSE backed, thus creating an implied guaranty of the US Government. The rate of appreciation of home prices exploded to 16% per year. Real estate loan originations were growing at 10-17% rate while the growth of goods and services was at 5-7%.

This resulted in the creation of the demand bubble. This pushed up prices of existing houses and created demand for new houses on vacant land.

One-year teaser rates became significantly cheaper than 30 year fixed rate mortgages (+-2%). The subprime and ALT-A borrowers were given convincing arguments by lenders. They primarily focused on the exit strategies of refinancing at lower rates as the house value appreciated, or selling the highly appreciated asset if times got tough. “As long as prices continue to appreciate, you can refinance into a 30-year fixed rate mortgage.”

William Poole, President of St. Louis Fed warned Congress that Freddie and Fannie had insufficient capital to withstand adverse conditions. He advised Congress to explicitly remove Federal backing of their CMOs so that the GSE’s would face market discipline.

By the next year, 2004, ARMs represented 40% of all loan originations. FHA required only a 3% down payment. In 2005 HUD required that 52% of all mortgages go to families with income below the area median. HUD also placed requirements on the GSEs’ purchases. 28% of all purchases had to be from mortgages with families with income less than 60% of the area median. Investors were under the impression that the Federal government would guarantee these loans.

Subprime mortgage totals grew to $625 billion, which is a 23% annual rate of increase since 1993. 12 million new poor and minority homeowners were created. The percentage of households that owned their own homes moved from 64% to 69%. The mix of loan originators looked like this:

· 20% of subprime mortgages were made by regulated institutions

· 30% are made by affiliates of these institutions.

· 50% are made by state-chartered, but not federally regulated mortgage brokers.

· Almost all prime loans are made by regulated banks.

By 2006 over one-half of mortgages issued did not meet conforming criteria. Subprime and ALT-A mortgages began to dominate. The traditional “20% Down” mortgage became a relic of the past.

From 2002 until 2006 home prices appreciated at an annual rate of 16%. For the previous 55 years the rate was 3%. As the values skyrocketed fewer and fewer families could afford the monthly payments associated with the traditional, conforming 30-year fixed rate mortgage. The problem moved from subprime zip codes to most price points. Builders saw their buyers combined loan to value ratio move to 95%.

By 2007 the credit default swap write-down begins. A chill moves through the spine of the financial industry as they realized no one knew the value of the CDS issued. The subprime mortgage volume had reached $1 trillion. In June, the Fed issues regulations for subprime lending. The default rate for new subprime mortgages reaches 20%; however, for all subprime mortgages the default rate was 12%. This means that 88% of the 12 million new homeowners were making their payments. The subprime products were not a total disaster.

Summary and Conclusions

During the rapid growth of the sub-prime market from 2001-to 2007 the quality of the market deteriorated dramatically. High LTV borrowers became increasingly risky. Mortgage rates became more sensitive to the LTV ratio of borrowers. Securitizers were aware of the problem. The sub-prime mark up over the prime rate should have increased over time as the riskiness of the borrowers increased. It did not. A combination of rapid market growth, loosening underwriting standards, deteriorating loan performance, and decreasing risk premiums created the crash. Rapid appreciation in house appreciation masked the problem. When house prices stopped appreciating the problem became apparent.

If you are in favor, or against the idea, if you have an opinion, you should investigate what is going on in the neighborhood discussions.

I attended one in College View at which Community Planning and Development presented their case and I found them to be very accessible and solicitous.

It is not all doom and gloom.

Speak up.

The real estate industry in the Denver market might be a case study through which interested folks might learn about the opportunity presented by the real estate crisis.

Perhaps the government should just let the private sector move us out of this crisis. It seems to be proceeding nicely and with great aplomb in Denver.  Despite the positive impact investors are having in the revitalization of neighborhoods with a high percentage of foreclosures, the Federal Government, through HUD’s Neighborhood Revitalization Program, has offered the City and County of Denver $6 million to do exactly what the private sector is doing.

Your Castle Real Estate has used GIS software to map real estate transactions by the ~450 neighborhoods in the Denver Metropolitan area. We have then used some analytics to determine where there is a high foreclosure rate, whether it is increasing or decreasing, what prices are doing, the correlation among those factors and with days-on-market, which our analysis shows is a leading indicator of price changes.

We then looked at all transactions over the last 36 months and filtered them by those homes that had sold twice within any 12-month period. We filtered further by those with a difference between the first and second sale of greater than $25,000, the gross margin. There were roughly 3600 transactions that met our criteria. Our thesis was that those houses would be fix and flips. To test the theory, we took a random sample of 100 and checked the descriptions for both transactions. What we found for 99 out of the 100 were descriptions of the first transactions that typically looked like this: “Bank sale. Sold as is. Bring your tool belt. Needs TLC.” For the second transaction we typically found descriptions that described the house as “A complete remodel. Slab granite, travertine tile, cherry kitchen cabinets. Bring your pickiest buyers.”

Our conclusions?

· The low-end neighborhoods that historically have had high foreclosure rates today have a significantly lower percentage of bank sales and more remodeled sales.

· It is becoming more and more difficult to buy properties in these neighborhoods at bargain prices.

· Really good deals attract multiple offers and contracts are written within days of the listing, with premiums being paid over the asking prices.

· The gross margins for fix and flips (the difference between the first sales price and the second sales price) are steadily increasing and for all of Denver now average more than $80,000.

· Using our data analyses it is possible to identify which neighborhoods have considerable price decline still to pass through, which ones are at the bottom, and which ones are on the rise.

· Below sales price of $325,000 is a seller’s market, above it is a buyer’s market.

The City and County of Denver’s Office of Economic Development that is charged with developing a plan to use the $6 million mentioned earlier.

The neighborhoods where they had planned to spend the monies were some of the neighborhoods with the greatest fix and flip activity, where the bottom had been reached and where prices were on the rise. Their plan was to compete with the private sector. In effect, they would take the private sector’s money to do a chore not needed and in so doing, compete with the private sector, driving up prices further and making housing more unaffordable for those who need affordable housing the most.

Further conclusions:

· Not all low-end homebuyers have bad credit. There is significant pent up demand that can be met by competent fix and flip activity.

· Real estate investors are not all ravenous heartless pigs. There are many who are providing a needed service to their communities: making nice, ready-to-move-in properties available to the first-time homebuyer.

· The Office of Economic Development of the City and County of Denver has a $6 million pile of cash burning a hole in its pocket and it does not know where to invest it. Can they give it back?

Our point is this. The private sector can fix this problem. Keep the government out of it. If there is an opportunity to buy low (first year of business school) and to sell high (second year) the private sector will find it.

Your mission, dear reader, if you chose to accept it, is to inform the world that there are opportunities in the real estate market that we have not seen since the great depression. If you have moved cash into your 401K, move to investing in real estate.

And some localities are ready for buyers.

The local and national media have taken averages of home sales numbers, the volume of foreclosures, net price appreciation or depreciation and pronounced we are in a real estate crisis.

Admittedly, this headline-grabbing emotional outcry has had a chilling effect on real estate sales. The market is stumbling downward, in some areas, in a self-perpetuating cycle.

“The market is falling. Now is not a good time to buy.”

“Since people stopped buying, price appreciation has stopped.”

“Since price appreciation has stopped, I have some time to buy.”

“I am going to wait until it hits bottom.”

But the consumer and the investor are smarter than the media. And the consumer is telling us a different story. His story goes like this:

“Some people have more mortgage than they can handle and they will have to sell at a discount. I have cash and a good credit history. For me cheap financing is still available. I am going to buy deals.”

“Many neighborhoods are undergoing transitions. In these neighborhoods prices are being pulled up by the infill development. Average price appreciation in many neighborhoods has exceeded 10%. Before all the opportunity is gone, I am going to buy.”

“ I know of a neighborhood that has suffered with the foreclosure crisis. Over 70% of all sales have been bank foreclosure sales. However, nearby a recent significant investment has brought in investors. The price decline has stopped, inventory levels are down, and the days-on-market for homes is at an all-time low. I am buying now.”

Contrary to the hype, real estate sales have not stopped. Great deals are being closed every day. But how does one find them? What analytical tools does one use? How can you be certain?

Let’s look at a couple of examples.

First, let’s examine Washington Park. Washington Park is certainly one of the most desirable places to live in Denver. It is centrally located, has its own park, has a unique character of its own, and has very few foreclosures (4% rate). The 2^nd quarter 2007 data show that the average price of a home sold in Washington Park rose 14% to $641,000 with 184 sales. Within these numbers were 17 sales (9.2% of all sales) to infill developers (price range of $450,000 to $500,000) and 18 sales (9.8% of all sales) of homes that sold for more than $1 million (from $1 million to $2.280 million).

Roughly 22% of all lots in Washington Park already have infill homes.

The data show that 10% of all immediate future home sales will be over $1 million. So price appreciation will continue. If you want to live in Washington Park, buy now.

In North Aurora there is a subdivision of 1950’s ranches called Hoffman Heights. All homes are similar: 1500-1600 square foot ranches, 3 bedrooms, 2 baths. Since January 2006 71% of the 194 sales (source: MLS data, Canon Colorado team analyses) have either been foreclosures or short sales. This is the type of neighborhood that has been the focus of the media attention.

If we look at the sales data by semesters the average sales price dropped from $146,000 (47 sales), to $130,000 (66 sales) to $120,000 (74 sales). There are two obvious trends: sales are increasing and prices are dropping.

However, over the last month the average sales price has increased to $143,000, a 19% price increase over the last 6 months! Further, over the last 3 months prices have stabilized.

It used to take 120 days to sell a home in Hoffman Heights and the inventory levels of unsold homes was at over 9 months. Now there is 4.5 months of inventory and days-on-market is at 72, a 40% decrease.

Conclusion? Something is happening to change the market dynamics of this one neighborhood. Why is demand increasing? Why are people buying now at a faster rate? Why are prices ticking upward?

The Fitzsimons project may have something to do with it. I don’t have the answer, but lots of investors think they do.

So, is the market bad? Well, the answer is, “It depends.” It is bad for some and good for others. It is bad in some areas, hot in others and moving from bad to good in still others.

Don’t be a lemming. The cliff is just over the horizon. Make an informed decision based upon data analysis. We are here to help you.