Real Estate Questions Answered Here
by Art Santellen, REALTOR®
Q: So why do you think the real estate market in Colorado Springs is going to crash?
A: Actually, what I said was that I thought the real estate market in Colorado Springs was going to level off by next Spring. Really smart economists use "indicators to determine if a given economy is healthy and expanding or ill and declining. An economic indicator, for example, may be the unemployment rate or the sales tax revenues. Usually, we hear in the news about the state of the nation's economic health. Economists will point to the stock market, or the national employment rate, or the number of new home sales to justify their opinion on this state of the nation's health.
You can do the same for your family. A quick look at the balance of your checking account is a good indicator of the economic health of your family. Another indicator would be the cost of gasoline at the pump. As the price of gasoline rises, either your driving habits must change or money used for other things must be channeled toward the purchase of higher-price gasoline.
Real estate also has it's own set of indicators. The ones I like to look at do not include the price of homes. The price of homes is the RESULT of certain real estate indicators. The trick is to use those indicators to predict what will happen in the future. In a way it's sort of like calling that lady on cable TV that reads Tarot cards. Here are my set of Tarot cards: commercial real estate vacancy rate, apartment vacancy rate, the business health of our community, foreclosure rates, and finally, my "secret" real estate indicator.
You'll note that one famous missing indicator is the prevailing mortgage interest rate. That's because the real estate market is not affected by the mortgage interest rate until it is prohibitively high or ridiculously low. For the last 7 years the mortgage interest rate has stayed within 2 percentage points: 7% to 9%, more or less. During this time period, some people with horrible credit were still buying homes and eagerly paying in excess Of 12%. At the other end of the spectrum, the mortgage interest rates would have to drop to 3% for a person earning $7 per hour (yes, I'm talking about you McDonalds, Burger King, K-Mart, and Walmart) at their full-time job to be able to get a home loan sufficiently large enough to find safe, secure, affordable homes to buy.
Let's summarize. There are some real estate indicators that I use and others that I don't use. Home prices is not an indicator we can use to predict the real estate market because home prices is what we're trying to forecast. Second, mortgage interest rates is not a good indicator unless it's really high or really low.
So, local economic indicators I use to forecast the strength of the real estate market are the following:
1. Commercial vacancy rate. Most commercial brokers I've talked to (who are not being interviewed by the media and who do not want their names used) tell me that the health of the local economy is not considered in trouble until the office vacancy rate in town reaches 10%. The last time I looked, the commercial vacancy rate was approaching 9% and same parts of town (down town, for example) ware above 10%. The trend over the last 6 months has been for office and retail vacancy rates to creep up toward double digits. Luckily for us there's an easy way for us to check this. All we have to do is drive around shopping malls and the downtown area and look for real estate signs that offer space for rent. Yep, I saw them.
2. Apartment vacancy rates in Colorado Springs have been wonderful for landlords and terrible for people locking for an affordable apartment. The vacancy rate has been between 2% to 3% for many years. Last week, the latest data shows an apartment vacancy rate of 4.9%. That's the highest it's been for the last 8 or 9 years. Once again, the trend during the last 6 months is for a higher vacancy rate. Unlike commercial real estate that uses 10% as the "its time to worry" vacancy rate, apartment vacancy rates are more sensitive. A "time to worry~ vacancy rate for a landlord is closer to 7%.
Why, Art, how in the worried did you come to that number?
I'm glad you asked. In the world of high finance and real estate investments (you know, where you play Monopoly with real money) a crucial term for investors is capitalization rate". Basically, it's the return on money spent for a particular investment. In real estate, an admirable capitalization rate is about 10%. In other words, it would be worth my time and trouble to but an apartment building if I could be assured of a 10% return on my investment. Besides, in a healthy real estate market, my investment would also increase in value. In Colorado Springs, that increase in value is about 12% depending on location.
But wait There's more. Since anyone, even a dummy like me, can put money into a bank and earn 3% in savings account, that capitalization rate of 10% becomes worthless if the vacancy rate in my apartment building approaches 7%. Get it? Well, I could go on and on but I think you get the point.
3. The business health of Colorado Springs, while not in a free-fall, is slowing down from the heady days of the 1990's. Our local economy is based on two ma}or industries: computers and the military. Everyone knows that the high tech sector has been hit hard. Rising costs and declining sales is the formula for tough times in the computer industry. Workers affected by plant closings and lay-offs are the same people who bought two things a decade ago: that computer skills and training was the wave of the future and they bought houses. Houses whose mortgage payments are tougher and tougher to make as the months go by. These are people who are not only NOT buying homes, they are getting ready to sell their homes.
Remember the scare about 6 years ago that Fort Carson was closing? Guess what? In an effort to pay the high cost of developing and deploying a space-based missile defense system, the President's advisors are looking for ways to save money. You know, save money as in closing military bases. I don't know if Fort Carson will be closed, but l'm sure it will be considered. If it does close, not only will we not have the benefit of soldier home owners, we'll have a lot of soldier home sellers. And lest we forget, we will have the benefit of about 3,000 units of newly built military housing which will also help drive up the apartment vacancy rate.
My editor tells me it's time to wrap it up. So here's your homework. As you drive around town look at the number of commercial real estate signs offering office and retail space for rent. Also look at the signs in front of apartment complexes offering move-in specials and free cable TV. Talk to your friends and family to determine the impact of the recent layoffs in the computer industry. Finally, drive down Highway 115 and take a peek at all those new military housing town homes on Fort Carson.
To be continued.
Next week: more on the coming real estate market decline. The following week: the beginning of a 5-part series on how to sell your home.
NOTE: As you can see, I really do get questions from the public. To add your question to this list, please send them to me at the address listed below. Thanks.
The answers to these, and other fascinating real estate questions will be answered here, in Hispania News, next week.
When you're ready to buy or sell a home, see a REALTOR®
Art is a REALTOR® with Heritage Realtors in Colorado Springs.
If you have a real estate question you’d like answered, please send them to:
Art Santellen, care of Hispania News
PO Box 15116
Colorado Springs, CO 80935
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