Mortgage Rates Tumble Due to Equity Market Volatility

Late Friday (August 28th, 2015) the average rate on a 30-year fixed conventional mortgage dropped to 3.84%. Of note conventional in Denver concerns mortgages below approx $417K.

The drop in large measure was due to the instability within the equity markets and thus the capital flight to safety via treasury bonds. Thus the underlying mortgage rates subsequently dropped.

Will the drop in rates assist those properties on the market at present? I am not sure. While August has historically been a challenging month for home sales in Denver Metro i.e. primary schools begin their year in August, families have already settled in their new homes and the early weeks of the month are the last opportunity for summer vacation. Those factors coupled with more homes on the market for longer periods of time.

From the neighborhoods I review i.e. central and southeast Denver I am seeing 1) houses staying on the market for longer periods of time, 2) some residences going under contract quickly only to be back on the market within a few weeks (and usually with a slight downward price revision and 3) if not priced correctly within the view of prospective buyers, resistance concerning showings.

Over the weekend I reviewed a few listings; all in “active” status and having last transferred ownership in 2012 and 2013. While far from a meaningful statistical sample, many of the listings are asking 30% above their last transaction 2012 – 2103. These were not fix and flips as those usually sell within 6 months of previous transfer.

When adding closing costs and commissions, the net profit would be closer to 22-25%. However even 20% is quite a strong gain within real estate in such a short period. From what I hear from peer brokers and listing clients; many of their client’s read the news headlines i.e. Denver one of the strongest housing markets in the country and thus price their homes at those levels assuming statistics will justify their asking price.

As a broker with two plus decades of experience I am slightly concerned as 1) such an increase in value i.e. 20-30% over 24 – 36 months  is not sustainable, 2) appraisals may still lag i.e. takes into account values from 6 months prior, not forward and 3) some buyers are basing their purchase on a monthly payment and not overall value.

Full disclosure, I too am in the market to “trade-up” i.e. selling my primary residence and an investment condo and rolling the proceeds into a new primary residence. However I too am starting to be concerned. My wife and I found a residence we have truly fallen in love with. One that regardless of price we would desire to purchase as it ticks off all our boxes i.e. location, size, design, functionality and so forth. Yet I too must take emotion out of the mix and realize 1) we have to sell our residence and investment condo first, 2) the home we wish to purchase is probably somewhat overpriced i.e. asking 30% above what it sold for in 2012 and 3) while inventory is limited we do NOT have to move nor other external pressures to do the transaction.

Thus, I am heeding the advice I share with clients; I am replacing emotion with logic as I too plan to wait until Spring 2016 to pull the trigger on the transactions. Will our dream house sell by then? Most likely. Will we find another house that checks all our boxes? Doubtful. Will mortgage interest rates be higher in Spring 2016? Most likely regardless of the Federal Reserves lack of clarity.

Yet I also believe by Spring 2016, prices will either stabilize or even drop slightly, usually to the inverse of interest rates. I believe there will be additional inventory on the market at that time as well. While I do not have a crystal ball, I plan to take my chances and hang out on the sidelines for a bit and while I may miss a great opportunity concerning interest rates, being conservative has historically worked for me.

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Mad Men Personified in Hilltop Listing

I am always on the look out for the unique, interesting and overall conversation worthy. While mid-century modern has been in vogue for the last 5-10 years and of course the Krishna Park neighborhood of Denver is full of mid-century gems, I recently ran across a listing in the Hilltop neighborhood, another repository for mid-century modern homes.

280 S. Grape Street would easily be transplanted to the Hollywood Hills. With its open floor plan, geometric design, large plate glass windows and sprawling land area, the home was and continues to evoke the ethos of the blending of the indoor/outdoor lifestyle.

With over 4,000 finished SF and a large 9,000+ SF lot, some lucky buyer will truly enjoy what is definitely one of the finest examples of a mid-century designed home within the Hilltop neighborhood. From the beamed ceilings and kitchen layout,  one could easily see Julius Shulman and his box camera shooting the interior and exterior.

Granted the location just north of Alameda Avenue may be a deterrent to some prospective purchasers. However from experience (and having an Arquitectoncia designed residence backing to Colorado Boulevard), there are always tradeoffs. While Alameda does carry traffic with well designed plantings along the south property line coupled with the north oriented yard, the next owner will be the envy of many mid-century modern fans.

Bring the high-ball glasses, the bar cart, some narrow lapeled jackets and blast some Etta James on vinyl via some  AR speakers and I will bring the appropriate cocktail snacks.

Broker Disclosure of Adverse Material Facts

The Colorado Real Estate Commission is the watchdog for the real estate industry in Colorado in terms of consumer protections. The Commission in addition to providing guidance for brokers, pre-printed approved forms concerning contracts and transactions, a code of ethics and so forth also comes out with position statements throughout the year.

Most recently the Colorado Real Estate Commission put out the following notice to agents:

At the most recent Colorado Real Estate Commission meeting held on August 4, 2015, the Commission adopted Commission Position CP-46– regarding brokers disclosure of known adverse material facts. The Commission believes it is in the public’s best interest for brokers to disclose all known adverse material facts to the parties to a real estate transaction because this disclosure increases each party’s awareness of those facts prior to completion of the transaction, it reduces the potential for creating a unfair transaction, and it otherwise protects the overall integrity of the transaction.

In its most basic definition, an “Adverse Material Fact” can be defined as the following:

An adverse material fact is defined as “a fact related to the property not reasonably ascertainable or known to a party which negatively affects the value of the property.

If you have been through a purchase or sale of real estate in Colorado you may have reviewed (buyer) or executed (seller) as Sellers Property Disclosure form which is approximately 7 pages in which the seller based on their knowledge discloses of any and all issues concerning the residence (please note not used in commercial transactions). Granted the form is only as valuable as the accurate and truthful information provided.

I believe the Commission Position CP-46 is excellent guidance mandating brokers to disclose material facts. As brokers in the vast majority of transactions we have a fiduciary duty to our clients i.e. buyer or seller and even as a transaction broker, the legal and ethical obligation to treat all parties fairly. While I believe the vast majority of brokers are honest and ethical, the disclosure of Adverse Material Facts could be an area of confusion concerning fiduciary duty to clients. The Commission Position also clarifies issues concerning stigmatized property issues as well. Thus CP-46 clears up any confusion.

The following is the full position statement:

CP-46 Commission Position on Broker Disclosure of Adverse Material Facts

Brokers must disclose known adverse material facts.

In all real estate transactions, brokers are obligated to disclose known adverse material facts to all of the parties involved in the transaction. §§ 12-61-804(1)(c)(III), -804(3)(a), -805(1)(c)(III), -805(3)(a), – 807(2)(b)(VI), & -807(2)(b)(VII), C.R.S. (2014). While clients have certain disclosure obligations, they are not addressed in this Position Statement. Brokers should refrain from advising clients about clients’ disclosure duties, which may be different.

What is an adverse material fact?

During the course of a real estate transaction, a broker for either side of the transaction may become aware of certain information pertaining to the property. For example, a broker may become aware that the roof of the property was recently repaired, or that the property was hit by lightning several times, or that one of the owners of the home for sale is a smoker. Brokers may have difficulty in ascertaining whether to disclose such facts.

In order to answer these types of questions, brokers first should consider whether the information is material. Factual information is material when a reasonable person would have ascribed actual significance to the information. Moye White LLP v. Beren, 320 P.3d 373, 378 (Colo. App. 2013). Examples of material facts include facts affecting title, facts affecting the physical condition of the property and environmental hazards affecting the property.

Next, brokers should consider whether that material information is adverse to a party’s interest in the transaction. See In re Fisher, 202 P.3d 1186, 1196 (Colo. 2009); Black’s Law Dictionary 62 (9th ed. 2009) (defining “adverse”). A broker must consider how that material information affects each of the parties in the transaction, not just the individual party they are representing. If that material information is contrary (i.e. “adverse”) to the interest of one of the parties, then the broker must disclose it to all the parties.

An “adverse material fact” includes but is not limited to a fact that affects the structural integrity of the real property, presents a documented health risk to occupants of the property including environmental hazards and facts that have a material effect on title or occupancy of the property. Examples of adverse material facts include building or zoning violations, water damage to the flooring of property caused by marijuana plants, structural damage to a home caused by insect infestations or expansive soils or any type of lien filed against the property.

Brokers need only disclose known adverse material facts.
A broker need only disclose facts of which the broker has actual knowledge. See Baumgarten v. Coppage, 15 P.3d 304, 307 (Colo. App. 2000). For example, if a property owner knows that the foundation is crumbling but never tells his broker, the broker has no duty to disclose that fact because the broker has no knowledge. Because a broker must actually know the adverse material fact, a broker does not violate Commission rules if he or she did not know the adverse material fact but only should have known the fact.

The Commission believes that disclosure of known adverse material facts is an important requirement that brokers must undertake in order to protect Colorado buyers and sellers. Accordingly, real estate brokers must disclose those facts they actually know, that a reasonable person would ascribe actual significance to and are contrary to the interests of a party in a real estate transaction. To the extent a broker is unclear

about whether a known fact that affects the physical property is adverse or material, the broker should err on the side of disclosing the fact.

Brokers must not disclose circumstances that may psychologically impact or stigmatize real property.
Understanding a broker’s obligation to disclose known adverse material facts is as important as a broker’s duty not to disclose information that may psychologically impact or stigmatize real property. Without the informed consent of the client, brokers must not disclose facts or suspicions regarding circumstances which may psychologically impact or stigmatize real property. §§ 12-61-804(2)(e), -805(2)(e), – 807(3)(e). The law states that:

[f]acts or suspicions regarding circumstances occurring on a parcel of property which could psychologically impact or stigmatize such property are not material facts subject to a disclosure requirement in a real estate transaction.

§ 38-35.5-101(1), C.R.S. (2014).

There is minimal guidance in Colorado as to what equates to a psychological impact or stigmatization of a property. However, Colorado statute identifies two specific circumstances that brokers are prohibited from disclosing due to the potential stigmatization of that property to potential buyers.

The first circumstance that cannot be disclosed is when an occupant of real property was suspected to be or was infected with the human immunodeficiency virus (HIV) or diagnosed with acquired immune deficiency syndrome, or any other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place. § 38-35.5-101(1)(a), C.R.S. (2014).

The second circumstance that a broker cannot disclose is when “the property was the site of a homicide or other felony or of a suicide.” § 38-35.5-101(1)(b), C.R.S. (2014). Colorado courts have not provided any greater guidance concerning the types of felony crimes that fall under its definition.

Brokers must disclose all known adverse material facts, unless it is one of the circumstances set forth in section 38-35.5-101(1).
The Commission’s primary purpose is to protect the public. Albright v. McDermond, 14 P.3d 318, 322 (Colo. 2000). The Commission believes it is in the public’s best interest for brokers to disclose all known adverse material facts to the parties to a real estate transaction because this disclosure increases each party’s awareness of those facts prior to completion of the transaction, it reduces the potential for creating an unfair transaction, and it otherwise protects the overall integrity of the transaction.

A broker’s obligation to avoid disclosure of circumstances which may psychologically impact or stigmatize real property should not impede a party’s right to be informed about all known adverse material facts. Accordingly, the Commission interprets a broker’s obligation not to disclose facts or suspicions regarding circumstances which may psychologically impact or stigmatize real property to the two examples set forth by law previously discussed: (1) regarding a disease highly unlikely to be transmitted through the occupancy of a dwelling; and (2) when a homicide or other felony, or a suicide occurred on the premises.

The Commission suggests that brokers have robust conversations with their clients about broker disclosures, with an eye towards full and complete disclosure. Brokers who are aware of either of the two

factual scenarios set forth in section 38-35.5-101, C.R.S. are encouraged to obtain their clients’ consent to permit disclosure of these facts.

Monaco Place The Bargain of Southeast Denver

As a broker I am continually fascinated by the articles and discussions concerning the lack of affordable options within the City and County of Denver. It is a fact, prices have risen since 2012 and demand is exceeding supply. Coupled with stagnation of inventory i.e. move-up and move down buyers are staying in their homes due to lack of inventory placing additional pressure concerning the lack of inventory.

Yet as an exercise I look through the MLS and other sources for residences which provide a value regardless of market conditions. Monaco Place, a condominium complex located just northeast of the Interstate-25 and Hampden Avenue interchange is one of those developments.

Built in the 1970’s the complex is expansive, spanning a large lot between Locust Street and Monaco Street Parkway just north of Hampden Avenue. While prices took a hit during the most recent downturn coupled with past deferred maintenance issues, the complex now offers what I believe is rare value in a most desirable location.

While prices have risen since the depths of the downturn, one bedrooms can still be purchased for $80K and two bedrooms with two bathrooms are running in the $120K range.  On a per square foot basis, prices on average are still below $100 PSF. The complex has excellent amenities including expansive open-space, indoor pool, workout area, covered deeded carport spaces and a financially sound HOA.

The complex has a diverse collection of floor plans. Top floor units have vaulted ceilings. Most units have wood burning fireplaces (a rarity for condo complexes) and private outdoor space i.e. deck, terrace or patio. Some units have installed washer and dryer and there are laundry facilities throughout the development.

While HOA dues are on the higher-side for the amount of square footage, the fees include heat and air conditioning as well as standard features including common area maintenance and the pool/workout facilities. In addition taxes are below average, thus the actual monthly outlay is within neighborhood averages.

Concerning the neighborhood, easy walk to the many commercial businesses at the I-25/Hampden Avenue intersection including restaurants, a King Soopers and walking distance to the Southmoor Park-n-Ride and Light Rail Station. The Denver Tech Center is literally minutes door-to-door and downtown even during weekday morning traffic runs about 20 minutes.

A few caveats: 1) There is no FHA financing, thus buyers may have to come up with a higher downpayment. 2) The HOA requests all sales are to owner-occupants. 3) While many of the buildings have had their exteriors renovated, others have not. 4) Many units are accessed via stairs, thus not ADA accessible. 5) Lower level units may be below grade and thus dark.

Yet when compared to the immediate surrounding market, Monaco Place is a bargain. While prices for units still lag from the peaks in 2007, I believe there is inherent underlying value and potential equity appreciation. At asking prices running between $80K and $120K, for those able to secure a 20% downpayment, the underlying mortgage, HOA and taxes will still be less than comparable rent in the area for similar units.

Weekly Mortgage Applications rose 4.7% for Week ending July 31, 2015

As brokers we look at various indicators concerning the overall marketplace. For the week ending June 31, 2015 we witnessed a spike in mortgage applications of 4.7% overall with refinancing jumping 6% for the week. Part of the activity can be attributed to lower rates for the week as rates on a conforming loan i.e. $417K or less was at 4.13% for a 30-yr,  the lowest rate since May of 2015. Concerning re-fi, again low rates spur activity.

Related many banks reported the easing of lending standards which in turn facilitates additional mortgages into the marketplace.

While clients are watching the financial markets (and the actions and forecasts of the Federal Reserve) a rate increase is somewhat inevitable baring a severe economic downturn the reality is even if rates tick up 50 basis points, rates will still be at historic lows.

When I purchased in Cherry Creek North back in 1989 not only did I have to come up with 20% down (attached row house considered more risk), but I was also at a mortgage rate of 8%+ on a 15 yr mortgage. Thus for those considering a mortgage at present, rates in the 4-5% are historically low and should be taken advantage of.

One caveat, historically when rates rise, prices stabilize and can fall. I am hearing from peers many buyers are “taking a breather” and waiting for rates to tick upward anticipating that prices will retreat. While I am not a forecaster, I am somewhat agreeable to the scenario as well.