Real Estate, Stocks and Geography

I recently came across the most interesting commentary concerning housing and investments via The Denver Post and NerdWallet site titled Are You Buying a House or a Lottery Ticket.

The author mentions Warren Buffet placing his Laguna Beach residence up for sale. The following is directly from the column:

Buffett bought his Laguna Beach place in 1971 for $150,000 and is asking $11 million. My friend’s parents bought their home for $24,500 in 1965 and just sold it for $104,000. Put another way: If Buffett gets his asking price, his house will have appreciated at an annual rate of 9.79 percent. The Cleveland house eked out a 2.82 percent annual return. Neither buyer could have predicted what their homes would be worth now. One could score a healthy return, while the other didn’t even keep up with inflation. (If she had, her home would have been worth about $190,000.)”

While the author mentions inflation (and how the house in Cleveland did not keep up). Let me take a step back. The $150,000 Mr. Buffet paid in 1971 has the buying power of $902,000+ in 2017 dollars. The $24,500 paid in 1965 would have the buying power of $189,000+ on 2017 dollars. Thus the Cleveland residence was and continues to be a starter home based on price. The Laguna Beach residence in real dollars was expensive in 1971 and in the top 0.01% of prices today for real estate.

The author goes on to suggest if that same $150,000 Buffet paid for the house was invested in the S&P 500, it would be worth $14,5M today (and if invested in Berkshire Hathaway Class A that same investment would be worth $800M).

This brings up one of my sayings of “Could Have, Should Have and Didn’t”.

Granted I am the first to advise never to consider a house as a capital investment. First and foremost it is shelter. Yes there are financial advantages i.e. tax write-offs and related yet maintenance and upkeep probably cancel out the benefits over time. Also, the vast majority of homeowners are buying and selling in 5-7 year cycles based on lifestyle changes.

It is true certain markets i.e. New York, San Francisco, Los Angeles and similar if your real estate was held long enough it may feel like hitting the lottery. In other markets keeping up with inflation is the norm and this accounts for the vast majority of the United States.

This brings up the debate about Denver. Yes I have been considered a pessimist as I have been through 3+ business cycles since Denver became my primary residence in 1989. Looking at the sale of my house which I purchased in 1989 for $140,000 ($275,000 in 2017 Dollars) did beat inflation, however if I factor in maintenance, upkeep and so forth, the returns are far less impressive.

Even more enlightening, when I purchased the house in 1989, the seller had to come to the table with cash as he had paid $200,000 ($469,000 in 2017 Dollars) for the residence in 1984 and sold it in 1989 for $140,000 yet with a mortgage balance of $160,000 plus real estate broker commissions. Not the worry, the seller had a nice loss and I believe is presently a physician in the Bay Area thus most likely financially whole.

If the seller had held onto the residence and sold today i.e. in 2017 he too would have basically kept up with inflation.

The point is we have seen spectacular run-ups in the Denver market since the Great Recession. Even today due to lack of inventory prices continue to rise while incomes are not keeping up with prices. This is not sustainable in the long run. While I have had peers newer to the business advise Denver is the next LA, San Francisco, New York and so forth, I tend to disagree.

First we are inland. We are not geographically challenged i.e by bodies of water lapping at our borders. Thus the Denver metro area can easily expand into the hinterlands where prices are generally lower (and yes I know Boulder has growth controls, however when I first moved to Colorado in the early 80’s the land between I-25 and Superior/Louisville was farm land. Second, in Denver proper revised zoning has allowed for increases in density in many central neighborhoods. I have mixed opinions on this, however in general increased density provides additional affordability in the market i.e. multi-family, slot housing and related as the dirt can accommodate more than a single-family home. Of note, one of the reasons San Francisco is so expensive is the limitation on density and height in the city proper.

I suggest we should look at Denver in similarity to Chicago, Salt Lake, Dallas and similar inland cities. Yes we have a diversity economy, a young and well-educated population and of course lifestyle which cannot be replicated including 300 days of sunshine/year, more days than parts of Hawaii. Yet we are not on a coast, we do not have a port and we have ample land on which to expand even beyond the E/C-470 ring road.

I do believe Denver metro will generally outpace inflation. However my personal residence is the perfect example our its lifespan i.e. if when purchased new in 1984 and sold today, the residence would have mirrored inflation. However due to timing and some good luck, the residence was purchased during a severe downturn in the market and is being sold during an upturn coupled with being within an “in-demand” neighborhood.

Thus, when purchasing a home in Denver, look at what you can afford keeping in mind maintenance and upkeep and understanding your home is shelter foremost and gains beyond inflation will be the icing on the cake. With that said, I plan to buy a MegaMillions ticket later today.

Of note, there seems to be some ambiguities concerning the Buffet house as it seems the house was sold in 2005 for $5.45M. Was then listed in 2011 for $6.495M before a price reduction to $4,995M. Thus did Mr. Buffet repurchase, hold paper or what? Unfortunately I am not an investigative journalist yet I assume the same house? Just goes to show, timing and market conditions can be most influential concerning house values i.e. double the asking in 6 years, now that is hitting the lottery not to mention water views!

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Is a certain residence in Denver indicative of the market we are experiencing

On my daily commute downtown I pass a large single-family home that has been for sale for the past year (been through two brokers during that time). This home is gorgeous offering over 6,500 SF of finished space, renovated interior including a chef’s kitchen, well water for the expansive yard, a carriage house all designed by a storied design firm and located within a designated Historic District. Taxes are reasonable considering the neighborhood the residence is located in. It is a corner lot, not to everyone’s liking and does have some traffic impact mitigated by a 6′ masonry sound/privacy wall. Throughout central Denver traffic impacts are not to be unexpected.

At my club last week a fellow member asked me about this particular listing advising she passes it daily, as do I and how it seems to have been on the market for a long time. I knew the residence and while I do not believe it is over-priced at present asking $317psf finished/ $434psf above grade (on a PSF basis actually on the low-end for its neighborhood). This member asked me why it has not sold; I advised in my opinion multiple factors including size as 6,000+ SF is not for most buyers a starter home, the corner lot on a thoroughfare and the design; historic  which for some prospective buyers signals increased upkeep and maintenance.

Thus I decided to review the pricing and sales history; what an awakening as it seems this particular residence has mirrored the Denver market and may forecast what is to come:

  • March 2004: Sold for $1,030,000
  • March 2006: Sold for $1,650,000 (+$620,000) 61% Gain
  • June 2013: Sold for $1,275,000 (-$375,000) 23% Loss
  • March 2016: Placed on Market for $2,995,000 Potential 230% Gain Unrealized
  • March 2017: Price Adjustment now $2,095,000 Potential 160% Gain Unrealized

Please note between March 2004 and March 2006, there may have been a renovation, I have no idea; however a 61% gain is just not a sustainable increase in a rational market. The loss between June 2006 which was close to the pinnacle of the boom and the sale in June 2013 when the market started to again accelerate out of the great recession to the upside shows the house had some resiliency i.e. a 23% loss, far from the losses seen in other markets.

The most recent asking price would still generate a very healthy 160% gain in 4 years. Granted I am not including carrying costs, commissions and so forth. Yet in my opinion a 160% gain in 48 months is a bit optimistic yet not unheard of.

The house continues to sit on the market. A buyer will eventually purchase as the size and neighborhood will eventually negate the issue of the location adjacent to a thoroughfare which I believe is the biggest factor impacting the property. I just thought the activity over the past 13 years was indicative of the Denver market and now being on the market for one year with price reductions, granted from lofty unrealistic heights may be a precursor of what the foreseeable future may be for the luxury market in Denver.

 

 

To Buy or Rent that is the Dilemma

As a practicing real estate broker you would assume I would be an evangelical advocate for purchase. In general I am HOWEVER as a seasoned real estate broker I am a bit concerned about the existing market conditions in the Denver Metro area. In some neighborhoods I have witnessed prices and sales volume up 50% in 3 years and some 100% gains since the depths of the Great Recession. Of note Denver was NOT as hard hit as Las Vegas and Phoenix where such gains after an over-sold condition may be warranted.

Thus the following are the 5 questions I usually ask of prospective buyers and not only 1st time buyers. Of note I personally am going through a similar exercise as I am under contract to sell my residence, which I have called home for 28+ years. Due to the inflated (in my humble opinion) market and lack of inventory; the 5 questions are hitting me personally. Here you go and I must advise please be honest as the questions are also a self-assessment of sorts:

How long are you planning to stay in the Home/Neighborhood/Area?

The reality; it is unlikely we will witness the gains we have had during the past three years. Simple economics would argue median incomes cannot match the gain in housing prices especially in the upper-tier of the market. Thus I advise clients unless they plan to stay in their residence a minimum 3-5 years (assuming this is not a fix and flip situation), may wish to reassess purchases.

The purchase and selling of a residence is not only time consuming, it is also capital intensive. Costs usually associated on both sides include brokers fees (usually paid by the seller in Denver), mortgage applications/origination, appraisals, title insurance (usually paid by seller) and so forth.

In general the longer you retain your residence the more time you have to recoup costs and based on dollar cost averaging (yes values can decrease), the more opportunity you have to enjoy an overall increase in value. Of note for those who retain a house for less than two years and if there is an increase in value, must factor in capital gains taxes (sometimes can be offset by expenses incurred concerning the divesting of the residence).

In the question I mention neighborhood and area. Do you have young children or planning on having children? School districts are a major motivator concerning one’s residential address. When childless; the gentrifying neighborhood may be the hip choice yet when the children come into the picture and Kindergarten is around the corner all of a sudden the school district and distance to school is of paramount concern.

My opinion, if planning to stay 3 years or less, consider renting.

House Prices Always Go Up, Right?

How we have short memories. While the market slide beginning in 2007 may be recent memory and quite severe, it was not an anomaly. When I purchased in 1989, the seller had purchased the home in 1984. Five years later he sold it for 30% less than the purchase price 60 months earlier (not accounting for inflation). The seller brought cash to the closing table to satisfy the mortgage and compensate the brokers. This was an era before the term short sale and “jingle-mail” entered the popular lexicon.

More recently, the median home price in the United States dropped nearly 13% between 2007 and 2009, falling from $247,900 to $216,700. In some overheated markets, such as Las Vegas prices declined as much as 62% from their peak.

Before buying a home, consider how your personal finances would fare if your house’s value increased slowly or not at all. With 3% annual price appreciation, a $250,000 (considered a starter in Metro Denver) house would be worth more than $337,000 in 10 years. With a 1% annual price increase, the same house’s value would grow to just $276,000 over the same time period. Barring a recession, nominal inflation of 2% would keep up however due to the added expenses concerning home ownership; one could envision a scenario of flat and potential decrease of value. For my economic pundit peers, yes during inflationary times, houses in general increase in value HOWEVER with high interest rates associated with the taming of inflation, transactions become muted as affordability becomes more challenging).

I provide the above scenario as I have witnessed some buyers placing all their eggs in the housing basket assuming the gains will outpace other investments. Trust me I am the first to argue a home is a place to sleep at night; the brokerage firm holding your stocks or the bank holding your CD’s are not leaving the light on for your arrival to bed down for the night.

Shelter is needed I agree. However one should not look at their house as their sole investment or worse an ATM i.e. Home Equity Lines of Credit. I view a residence as shelter and if there is an increase in value an added bonus.

If I Rent I am 1) Throwing Away Money and 2) Making my Landlord Rich?

On the surface such an argument does have some merit. Also I will avoid getting into the issues concerning home ownership restricting mobility concerning employment opportunities. I understand the line of most brokers i.e. owners are building equity in a valuable asset that can boost their long-term net worth whereas renting is spending not saving.

Home ownership has additional costs beyond the Principal and Interest on a loan.

Taxes: While metro Denver has in general low property taxes, it is still a recurring monthly expense. In the upper-tier of the market i.e. $500K and above, one can easily allocate $500/month just on real estate taxes.

Insurance: Home Owners Insurance in Colorado can be costly due to our climate i.e. hail, wind, heavy snow and other perils. While we do not have to worry about earthquakes; insurance rates in Colorado continue to escalate due to weather, cost of labor, materials and related factors; such rates rarely go down over time.

Basic Maintenance: I tell my clients to consider budgeting at minimum 1%-2% of their homes value towards maintenance and upkeep. This does not necessarily factor in unforeseen costs i.e. new hot water heater, roof repairs, HVAC and so forth. Condo owners you are not exempt, this is what monthly HOA fees are for.

In a rental such costs are borne by the landlord. However I will advise if renting do consider “Renters Insurance”, usually inexpensive and offers piece of mind. While you may have budgeted for your Principal, Interest, Taxes and Insurance, there are always other costs that can be budgeted for as well as surprises.

If I rent am I missing out on the tax benefits?

To be honest many homeowners do not realize the mortgage interest deduction is oriented towards larger mortgages and financial outlays. First as a homeowner you must itemize your deductions when claiming the mortgage interest deduction.

With the existing low-interest rate environment (and yes rates are still at historic lows) your itemized deductions should exceed the $12,600 standard deduction for married couples? This is OK if you have an upper-tier house with a large mortgage. Yet the reality is each year that goes by your deduction decreases as a larger portion of your monthly payment is allocated towards principal. Thus the deduction over time will decrease. (Of note, there are interest only mortgage instruments, unless truly financially savvy or blessed by your CFP or similar, I suggest avoiding).

When Does Buying Truly Makes Sense?

I always look at a rent versus buy scenario and run numbers accordingly usually in conjunction with a client’s financial and/or tax advisor. Yet sometimes I take the simple approach, which is basically, is it cheaper to purchase than to rent?

Beyond the down-payment (and please note I am not trivializing this, however when loans are available with 5% or less down, saving for a down payment is not as onerous as when I purchased my primary residence in 1989 and had to come up with 20%+) I look at basic monthly outlay after answering the prior questions.

Let us assume in metro Denver you are interested in a home that after the down payment the monthly PITI/Mortgage is $3,200. Now what if you could rent a similar property, apples to apples for $2,850/month?

One could argue for $350/month extra or $4,200/year you can have the security (and expenses) associated with home ownership.

Yet one could also argue that $4,200/yr. can be invested after taxes into a Roth IRA or similar instrument. For the uber conservative that person could buy bonds and secure a safe 2% return. For the more aggressive; there is the potential to be investing with returns of 5% or higher annually over a longer period; not unheard of (coupled with dollar cost averaging) and with a Roth monies going in post tax, comes out tax free. There are also options to use the monies for a down payment, however there are some tax implications, which are best, discussed with a tax advisor.

I also advise clients at the beginning of their home search consider using a price-to-rent ratio calculation. Price-to-rent ratio is calculated by dividing the home value by the annual rent amount. Generally speaking, if the price-to- rent ratio is less than 20, buying might be a better option. However, if the ratio is greater than 20, renting might be better. Needless to say, any ratio or comparison is meaningful only if you are comparing similar properties.

In closing I am just throwing our scenarios and “food for thought”. I am in a similar situation. As mentioned I am in the process of selling the residence I have been in for 28+ years and have enjoyed immensely. However due to the physical design and other factors it is time to move on. Assuming I close, I will be, guess what living in a rental! Yes I will be paying rent.

My personal view at present; I am more comfortable having the proceeds from the sale liquid and when the correct residence comes available for purchase at a price I feel is appropriate, I can proceed sans the restraints of trying to sell my residence and/or using a contingency clause which is never popular. In the interim, the money from the sale of my residence post taxes will be invested in short-term bonds throwing off income while retaining a margin of safety of the underlying principal.

Millennials Understand Opportunity Truly Knocks Beyond Central Denver

We seem to be in a unique environment concerning the national housing market as both buyers and sellers are excited. For sellers, record high prices are becoming the norm even in the rising interest rate environment. Buyers even though confronted with the challenging lack of inventory are strengthening the market due to confidence and the desire to lock in still historically attractive interest rates.

The above is based on the monthly Fannie Mae Home Purchase Sentiment Index® (HPSI)increased by 2 percentage points in January to 82.7, ending a five-month decline. Some of the highlights from the report include:

  • The net share of Americans who say it is a good time to buy a house fell by 3 percentage points to 29%, matching the survey low from May and September 2016.
  • The net percentage of those who say it is a good time to sell rose by 2 percentage points to 15%.
  • The net share of Americans who say that home prices will go up increased by 7 percentage points in January to 42%.
  • The net share of those who say mortgage rates will go down over the next 12 months remained constant this month at -55%.
  • The net share of Americans who say they are not concerned about losing their job rose 1 percentage point to 69%.
  • The net share of Americans who say their household income is significantly higher than it was 12 months ago rose 5 percentage points to 15% in January, reversing the drop in December.

Now concerning millennials, according to Fannie Mae research, more are purchasing and starting new households. While the Great Recession may have delayed purchases; millennials are now more confident concerning job security translating to an increased in marriages and parenthood (common during stronger economic cycles, nothing new there).

Yet of interest due to the expensive reality of city-centric residences some millennials are exploring and purchasing in the suburbs where values are generally more affordable. I have witnessed this myself concerning millennial clients looking beyond central Denver. Neighborhoods of interest include:

Southmoor Park: Lots of home and land for the spend. Also close enough to Light Rail Station at Hampden and I-25 allowing easy access to downtown and easy drive to DTC. With Whole Foods and new restaurants options on the Hampden Corridor, becoming popular.

North Englewood: Just south of the Denver border clients are looking at Englewood (north of Hampden Avenue) as a substitute for Platte Park especially adjacent to S. Broadway which continues to diversity businesses now catering to clients within their immediate neighborhood versus the traditional commuter traffic. Also a few good options for fans of Mid Century Modern who may not wish to pay the prices associated with Krisana Park.

Arvada: With neighborhoods close to the light rail line and with a new urbanism orientation, millennials are finding Olde Town Arvada has urban qualities found in areas such as Old SouthPearl, Old South Gaylord and other urban enclaves. With the easy commute to Denver via rail or car and lower prices, demand will soon outstrip supply.

Westminster: As with Arvada, the new rail line is opening up opportunities for those who desire more affordable housing, an ongoing renovation/development of a town center and easy access to the Broomfield office parks.

Edgewater: For those who have been priced out of Sloans Lake, Edgewater offers a respite within a stone’s throw geographically. With a charming commercial street, small town feel yet within easy viewing distance of the downtown skyline and a nice diverse housing stock, do not be surprised if this hidden enclaves demographics see a dramatic shift in years to come skewing towards younger buyers and families.

With this millennial flight to the suburbs what is going to happen to the inner-city? In essence the millennials are basically skipping a step i.e. usually starting in the inner-city and then moving to the suburbs for access to additional square footage, suburban schools and so forth. While these areas were once car-dependent, the expansion of RTD’s rail lines are making these suburbs once considered commuter oriented into their own attractive and thriving towns.

Yet I am far from concerned about the City of Denver. While I have some personal issues with the desire to increase density in some neighborhoods; Denver will always remain in demand due to geography, diversity of housing stock and varied amenities from cultural to financial i.e. lower water bills, low-taxes, municipal services and so forth.

My one concern for Denver is this rush to increase density. Full disclosure I am a native New Yorker thus I understand density having been raised in within an apartment building on the 20th floor and taking the subway to and from school. I am also educated as an urban planner. I view the cranes on the skyline of Cherry Creek, west of the Denver Country Club and other areas and I have three questions:

1) Is there truly longer-term demand for all the new multi-family buildings?

2) If in fact there is demand and zoning is keeping up with this demand, will our infrastructure follow suit i.e. roads, mass-transit, pedestrian corridors, dedicated bike lanes?

3) Are we remaking the inner-city of Denver unaffordable akin to San Francisco, New York, Paris, London and other cities in which the income gap is severely pronounced. These were cities which used to have a true diversity of cultures, incomes and employment and now have become playgrounds of the wealthy or long-time owners.

 

 

Bubble Probably Not. Am I Still Concerned Yes

Between reading The Denver Post article concerning record low inventories, visiting listings and chatter at open houses we seem to be in a Goldilocks period for home sellers and a Draconian period for buyers.

I will be the first to admit there is a severe lack of inventory at all price levels which based on the laws of supply and demand will raise prices. Thus why should I be concerned? As a broker I should be thrilled! Let me preface the following with the disclosure that my market niche is deluxe and luxury.

Irrational Pricing and Exuberance: Last week I went to look at a listing in a very in-demand neighborhood in Denver where average prices are triple of the average of the Metro area.The house I felt was priced on the upper-end of the Per Square Foot for the neighborhood. Granted great location, well-kept yet some design issues and so forth (yes no house is perfect). Within 2 days of my visit I received a note from the listing broker advising the sellers recieved a strong offer and if my client were interested, they needed to get an offer in ASAP. My client and I both felt the house was not for them and it was in our humble opinion overpriced. 5 days later I receive a notification from our MLS service that the house which received a strong offer suddenly had a price reduction.

Even earlier today I went to a public open house. The house was not correct for my client i.e. larger lot than they desired; however there was the appeal of some unique features including a carriage house and the perfect 1st level of entertaining. As assumed the house was not for my client. The 2nd level was two bedrooms with a shared jack and jill bathroom. Thus realistically a two bedroom house. Basement was OK, nothing out of the ordinary. The carriage house, while a rare amenity was basically a dated studio sized apartment and advertised as the 3rd legal bedroom (I saw income rental potential both long-term and transient) .

The Open House was packed. I heard one of the brokers mention the listing already had 15+ scheduled showings before the open-house . Yet across the street were two houses which sold last summer, comparable size, more conventional bedroom layouts, slightly smaller lots and more traditional design. Both sold for almost half of what the listing price on this listing. Now I am not suggesting the larger lot and carriage house would not increase the value, yet by double? Coupled with limited bedrooms, unconventional design and double the price in one year, sustainable? Probably not.

Are Stock Market Paper Gains Sustainable? It is no secret the stock market has been hitting new records and the market usually looks to the future; thus we may believe the overall economy will continue to expand. The Federal Reserve believes so i.e. advising a rise in interest rates is forthcoming. However is a sell-off in the immediate future?  Most real estate brokers know a downturn in the market also challenges confidence concerning real estate purchases as the wealth effect is psychologically proven.

Interest Rates Will Continue to Rise: Interest rates can only go up assuming no major shock to the overall economy i.e. war, terrorist-attack. Granted we have been within a historically low interest-rate environment for way too long. The low-interest rates naturally raised housing prices as many buyers were purchasing a payment and not necessarily underlying equity. Yet this is a dangerous precedent. Except in markets with rampant inflation; in general higher interest rates translate to lower housing prices as the cost to borrow money increases.

This is worrisome; as interest rate hikes usually impact the first-time home buyers, yet the ripple effects can impact all facets of the market as move-up and move-down buyers are also impacted concerning the distribution/inventory within the overall system.

A healthy housing market is usually considered fluid corresponding with life and circumstance changes. When supply and demand is disrupted and housing becomes challenging to either acquire or sell, the ripple effects are felt within all aspects of the local economy. Few may remember the late 1980’s in Denver when the HUD Foreclosures insert in the Rocky Mountain News was literally as thick as the newspaper it was included in. More recently between 2007 and 2009 For-Sale signs dominated the landscape during the “Great Recession”. Those buyers will eventually be sellers, sooner than later?

Investors Having Realized Gains Begin Selling: One of the reasons we have such low inventory is from past investor activity plowing cash into the housing market during the tail-end of the Great Recession. However with recent gains in the stock market, higher interest rate yields in fixed-income markets and weakness in some rental markets do not be surprised if those investors having enjoyed equity appreciation and now having owned long enough to just pay ordinary capital gains on appreciation we may see investors begin to relinquish their inventory sooner that later.

Reduced Equity Can Happen: For buyers who purchase at the top or pinnacle of the market cycle the ramifications can be challenging. One of the hallmarks of the Great Recession was the Negative Equity associated with many purchases made at the top of the market assuming housing prices do not go down. Granted I am advising clients if they plan to stay in residence for 5 years or more they usually can ride out a cycle. However if one is purchasing investment property at present, my more experienced clients are literally selling or sitting on the sidelines and looking at alternative investments.

Fix and Flips Less Common: With the boost in prices, fix and flippers are having challenges fining acceptable inventory and foreclosures. While this may be a sign of a healthier market the ripple/multiplier effect can be worrisome i.e. general/sub contractors, building material suppliers, retailers such as Home Depot and Lowe’s and so forth may be challenges ahead. While the service economy may continue to hum along, blue-collar trades and related industry may be challenged.

The Next 12-18 Months: While I do not have a crystal ball and I have been told I am a pessimist I do have the luxury of the knowledge of history having been in the real estate trade since the late 1980’s in Metro Denver. I do not believe business cycles have ended and while at present demand outstrips supply, I do not believe this market is sustainable. What I feel we need to look out for is as follows:

Challenges to the Luxury Market i.e. $600K and Above: The luxury market is usually the first markets to show weakness. Due to the uniqueness of the market i.e. cash buyers, not necessarily dependent on income ratios, experienced buyers and sellers, this is where I would watch for issues pending. If we suddenly see an influx of luxury listings hitting the market and absorption slows, this to see is a signal that astute and more experienced buyers are sitting on the sidelines waiting for prices to correct somewhat.

Glut of Deluxe and Luxury Condominiums: Based on underlying ground prices new condominium construction is usually oriented to the deluxe and luxury buyer.  However what are the depths of this market? Seeing the skyline of Cherry Creek and Downtown leads me to be a bit concerned. Denver for the most part has been a home market. Yes the aging population may desire condos for the ease of maintenance and younger buyers may desire condos for the same reason. However younger buyers may begin having families; will they remain in the condos or eventually sell or place on the rental market. With the majority of new construction in the one and two bedroom range, these condos are not oriented towards emerging families or longer-term retention.

Rent Prices Coming Down Incentives Increase: Part of the downturn in rental rates is due to the glut of luxury rentals. Cherry Creek is a perfect example (just look at the east-side of the Steele Street and 1st Avenue intersection); the same trend is happening in Downtown. Is our influx of millennial and others with disposable incomes sustainable?  Are these renters now suddenly purchasing? Yet with low inventory it’s a challenge.

We shall see what the traditional Spring Selling Season brings to market. Will there be a controlled flow of inventory hitting the market or will we witness a glut or continued tightness i.e. lack of inventory.

If I were considering selling, I would be placing on the market immediately to take advantage of the low supply and high demand. With interest rates on the rise future prices will be challenged. While interested rates on borrowing money continues to be attractive, lower rates will not last forever (when I purchased my residence in 1989, I paid 12% interest on a 15 yr. mortgage with 20%+ down-payment!).

If I am a buyer and I had the option I would probably sit on the sidelines and consider renting for the immediate future. Granted if one’s dream home hits the market, go ahead and purchase it. However if settling or to purchase just to purchase, I would suggest take a step back and reassess and take the emotion out of the process.