Denver - Disturbing and Sad

Over the course of the last few months, housing and its bubble/no bubble/soufflé debate has lost much of its appeal as a subject of discussion in these pages. With the exception of an upcoming critique of an astonishingly inept study published by two Pomona economists in which it is argued that current real estate prices are safe and sane, housing commentary here will be limited in the weeks and months to come.

The reasons?

First, there are many other areas of the economy that are now far more interesting than housing (and profitable, as you'll find out in a few weeks). But, more importantly, housing is beginning to turn into a sad story. What was disconcerting in 2005 is now disturbing. A subject that once seemed to beg for ridicule, now seems more deserving of pity.

Which brings us to Denver, Colorado.


For many years the Denver real estate market has been out of sync with the rest of the country. They were talking about foreclosures there three years ago, but in the last couple years, the local housing market had found new life. That seems to have changed now - rising foreclosure rates and strapped homeowners struggling to make their payments are once again in the news, the wheels perhaps falling off for good this time around.

As this report from the Rocky Mountain News describes, foreclosure rates have now risen to levels that are, well, disturbing.

Rising interest rates, a glut of unsold homes on the market and falling home prices in some submarkets drove up Denver-area real estate foreclosures by more than 30 percent in the first quarter of this year compared with the first three months of 2005.

The jump to 4,764 foreclosures compared with 3,624 in the first three months of 2005 took some experts by surprise. Public trustee offices in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson counties estimated the number of foreclosures they expect to open this month.

"That is disturbing," said economist Patty Silverstein of the soaring number of foreclosures.

"We still expected to see increases in 2006, but this is larger than what I would have expected. At this point in our economic recovery, we would have expected to have seen a smaller increase in foreclosures," said Silverstein, principal of Development Research Partners.

She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments.

"A lot of people have taken out these different types of mortgage products during the past couple of years, and now people are discovering that their payments are starting to ratchet upward with rising interest rates," Silverstein said.

Do 'ya think?

You have to wonder why newspaper reporters even bother asking economists about housing. With a few notable exceptions, their views seem to be so misguided and/or naive that they are almost completely devoid of worth - as genuinely surprised as they seem to be about certain recent events, you get the impression that they never go outside.

Maybe they should spend an afternoon in a sub-prime lender's office and listen in on a few lender-borrower conversations to get a better feel for the situation on the ground.

Have they not noticed the glut of for sale signs? What does a comment or two from an economist add to an article such as this anyway?

Later in the story, pragmatic realtor Sean Healey relates how inventory is growing at 2.5 percent a week (doubling every six months) and how the current market situation is a "blood bath" and a "path of devastation" where, in some areas, real estate values are down more than 15 percent from the levels of just a couple years ago.

Then another economist offers an opinion.

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

"I don't know if they're going to continue to rise by 30 percent, but they are going to continue to rise," Adams said.

She said she recently was a guest on Healey's radio show and received a call from a woman who said she and her husband have good-paying jobs but are in danger of losing their home because they had borrowed all of the equity from the house and their credit cards are maxed out.

She wanted advice from Adams.

"I guess you just have to spend less on everything else" in order to keep the house, Adams said.

Foreclosures as a lagging indicator in that once this economy really takes off again, then everyone will be able to make their payments again and everyone will live happily ever after? According to this economist, the worst of the foreclosures will soon be behind us.

So just spend a little less on gasoline, heating, and medical care and this will all work out.

Do 'ya think?

It almost seems that the reporter is mocking the economists here by forming something of a real estate reality sandwich - two befuddled economists on either side of a gloom-and-doom-spewing realtor who actually drives around neighborhoods and talks to people. But that is not likely the case.

In the off chance that this was the writer's intent, he should be commended for his sly sense of humor and subtle manner, both of which were surely lost on 99.99 percent of his readers.

It's All About Making the Payments

So, back to the subject of the article - there was a 31 percent year-over-year increase in Denver area foreclosures for the first quarter of 2006. A total of 4764 for the three-month period.

Just how significant is that?

In a story from December of last year it was learned that the worst year ever for Denver area foreclosures was in 1988 when a total of 17,122 were recorded, partly a result of a collapsing local energy industry and related job losses.

Naturally, that number should be weighed against a population base which was smaller than today's, but nonetheless, the 4764 first quarter figure does yield an annualized rate of over 19,000, up from over 14,000 for all of 2005.

Given the current outlook from Ben Bernanke and company at the Federal Reserve, there is no interest rate relief anywhere in sight, so whatever happens to those three percent ARMs that seemed like such a good idea a few years ago, the new payment schedule is not going to be well received.

Could the foreclosure rate moderate in the quarters ahead? Anything's possible, but it is as likely to worsen as it is to improve, given current trends. The possibility of the 1988 record being shattered in a very big way is very real - one of the few things that might save the day is if California homeowners cash out and relocate en masse to the Rocky Mountain state where their windfall can help to bid prices back up for a while.

But that's not likely to happen.

One of the problems with the Denver area seems to be that so many homeowners have already borrowed nearly every penny against their homes that lax lending standards will currently allow. Even Ditech.com's offer of borrowing 125 percent of the value of your home does little good if you had purchased with no money down two years ago and home values decline.

Maybe a 150 percent lending program will be initiated. Or, better yet, 200 percent.

The now famous Alan Greenspan "home equity cushion" theory is being put to the test in Denver. As you'll recall, the former Fed Chairman opined last year that things won't get too bad too quickly because so many homeowners have such sizeable "equity cushions".

While that may be true in California and many other coastal areas, it is not true in Colorado. And, that's what's both disturbing and sad. The poor saps in Denver didn't see it coming. The magic elixir, the free lunch, the perpetual motion machine, the asset bubble that kept giving and giving - the housing ATM is faltering and people are dealing with it as best they can.

It's not pretty.

Years ago, they would not have been able to get themselves into a mess like this.

There is little sympathy for real estate speculators having difficulty adjusting to the 2006 realities - they deserve what they get. But, the slightly below average Joe who is just trying to raise a family like his parents did, and was swept up in the easy money, lax lending, real estate craze of the last few years - it just doesn't seem right.

People are not that smart. To some degree, they must be protected from their own bad judgment. That was how real estate lending worked up until a few years ago - then all the rules changed and people are just starting to realize that they really didn't understand what it was they were being allowed to do.

Everyone else was doing it. It worked so well for a while.

Maybe its time to remove The Rocky Mountain News from the list of bookmarks that is already way too long and way too full of disturbing and sad sources of news.