Experts differ on price effect of foreclosures

There's little disputing El Paso County's dramatic rise in foreclosures.

More than 3,500 foreclosures - a legal action in which a lender acts to reclaim property for nonpayment of a loan - were filed in the county last year, which broke a 19-year-old record. Foreclosed properties that later were sold after their owners couldn't resolve financial troubles nearly doubled in 2007 from five years earlier.

Foreclosures in the first two months of 2008 have exceeded the annual total for several years in the 1990s, putting the county on pace to again surpass the 3,000 mark this year, some economists have said.

Whether thousands of financially distressed properties are having an effect on home prices is a matter of debate.

Lenders who gain control of foreclosed homes and put them back on the market for sale haven't discounted prices enough to drive down values for nearby properties, some real estate experts say.

"Most of the sellers, and institutional sellers (lenders), are still attempting to get true value for the property," said Bill Hurt, owner of ERA Shields Real Estate in Colorado Springs. "They're not ‘firesaling.' And the value is still there."

That's wishful thinking, others say.

Many home sellers already have lowered their asking prices because of competition from foreclosed properties being sold at a discount by lenders trying to get them off their books, some real estate appraisers say.

Moreover, homeowners who are trying to refinance are finding they can't borrow as much because nearby, comparable homes are worth less, the appraisers say.

"We're already seeing an impact, especially (for homes) under $300,000," said Terry Pixley, owner of T.G. Pixley Inc. and a longtime Springs appraiser. "I'm sure it won't be long that (homes) above $300,000 will be showing up . . . It is driving down prices, there's no question about that."

Another appraiser, who spoke on condition of anonymity because of concern that lenders who employ him might frown on his comments, said he recently was hired to determine the value of a home in the Fountain area for a refinancing.

Using nearby distressed properties as part of his research to compare prices, he determined the home was worth nearly $14,000 - or 8 percent - less than it would have been a year earlier.

"They're killing us," he said of foreclosed properties.

Who's right? The answer might not be known until after 2008, which will serve as a yardstick by which to measure the effect on prices of the nation's foreclosure mess.

"We truly won't know how these get absorbed and balanced out until 2009," said Jay Garten, president of Peoples Mortgage Corp. in Colorado Springs. He said he's seen foreclosures lengthen the time it takes to sell homes, but not yet result in lower prices.

But there's more at stake than just lower prices on resales, said Fred Crowley, a senior economist with the University of Colorado at Colorado Springs. Foreclosed homes coming back on the market compete with new homes, which could prompt some builders to slash construction, he said.

And for every home that's not built, the local economy loses four jobs, Crowley estimates.

"When we don't build a new home, now we're losing wealth in the community," Crowley said. "That is the real loss to the community, and we'll never be able to recapture it."

El Paso County's foreclosure woes, like those elsewhere in the nation, have their roots in the mortgage industry's troubles, experts say.

Across the country, millions of borrowers with risky credit histories obtained so-called subprime mortgages, some of which carried adjustable rates of interest. When those rates increased, or when those borrowers ran into financial trouble because of a layoff, illness or divorce, they fell behind on their mortgage payments and went into foreclosure.

Foreclosure woes don't affect subprime borrowers alone. Borrowers with solid credit histories also fell into foreclosure when their adjustable-rate loans increased.

Foreclosures aren't the only potential effect on property values. Short sales - in which a lender doesn't foreclose, but instead accepts a home sale and negotiated payoff for less than what's owed on a mortgage - are showing up in neighborhoods, too. Homes put back on the market after a short sale could carry discount prices.

County Assessor Mark Lowderman, whose office estimates real estate values for tax purposes, said the Springs area is in the early stages of its foreclosure problem and there has not been a "huge impact" on prices up to now.

Also, today's foreclosures don't compare with the late 1980s, Lowderman said. That's when savings and loan failures and too much construction by home builders led to thousands of foreclosures. The national news media dubbed Colorado Springs the nation's foreclosure capital.

Moreover, real estate-industry members have pointed out that today's foreclosure rate isn't as bad as 20 years ago, when roughly the same number of foreclosures occurred among thousands fewer homes.

The effects of distressed properties will vary from neighborhood to neighborhood and won't be countywide, Lowderman said. Hardest-hit neighborhoods will have tightly bunched areas of foreclosures, he said.

In 2007, an analysis by the Assessor's Office showed that the heaviest concentrations of foreclosures that resulted in the sale of a home showed up on Colorado Springs' south and southeast sides - generally lower-income neighborhoods. Problem areas also extended south to unincorporated Security and Widefield, where neighborhoods serve Fort Carson soldiers.

A Gazette analysis of 2007 housing prices using Assessor's Office data shows that some of those same south and southeast-side neighborhoods saw relatively low increases in home values or reductions in prices when compared with 2006. However, the pattern of lower prices wasn't universal in those neighborhoods, and none was among the worst performing areas when it came to appreciation rates, according to The Gazette's study.

The extent of the foreclosure problem on individual neighborhoods will be affected by the health of the local economy and comings and goings at Fort Carson, said Stuart Scott, owner of Stuart Scott Ltd., a Springs residential brokerage.

Since heavy concentrations of foreclosures already exist on the Springs' south side and in the Security-Widefield area, an influx of thousands of soldiers coming to Fort Carson could absorb many of those properties, Scott said.

CONTACT THE WRITER: 636-0228 or rich.laden@gazette.com