Denver Now 3rd for Year over Year Price Appreciation. Sustainable?

The most recent Case-Shiller Index for Metro Denver shows continued strength in our market which is now at #3 behind Seattle and Portland for price appreciation. Within the last year the price appreciation for Denver has been 7.9%, which is very, very healthy (nationally the increase was 5.6%). Even more interesting is the following statistic from the report: “Denver’s Case-Shiller home price index in May rose to a new record of 198.32. That means that local home resale prices averaged 98.32 percent higher than they were in the benchmark month of January 2000, based on non-seasonally-adjusted data.”

Yes as a broker I should be celebrating. However I have been curious about business and real estate cycles as I have learned over the year’s lessons from history should be respected.

Case in point a charming house on a nice corner lot in one of Central Denver’s most desirable neighborhoods recently came in the market. The house is of a desirable size with 2,000 SF above grade and a fully finished basement with 1,300 SF. In addition the home is located within a most in-demand public elementary school which is within walking distance.

I decided to do a title search to see the activity on this house as it relates to the Case-Shiller index. Fortunately I could go as far back as 1992. Here is the history based on public records, please note the information reads as follows

Transaction/Date/ Price/Gain/Loss over Prior Transaction in $/%/ From 1992/ % Int. Rate:

  • Sold June 1992 – $225,000 Average 30 Yr. Mortgage Rate = 8.51%
  • Sold Nov 1993 – $238,500 + $13,500 or +6% gain/ 30 Yr. = 7.16%
  • Sold Aug 1999 – $480,000 + 241,500 or +101% / 113% gain from 1992/ 30 Yr. 7.94%
  • Sold Oct 2003 – $690,000 + $200,000 or +43% / 206% gain from 1992/ 30 yr. 5.95%
  • Sold Sep 2007 – $825,000 + $135,000 or +20%/ 260% gain from 1992 / 30 yr. 6.38%
  • Foreclosed Nov 2010/ 30yr. 4.3%
  • Sold Aug 2011 for $625,000 (- $200,000) or (-24%)/ 170% gain from 1992/30 yr. 4.27%

Placed on market July 2017 for $1,950,000/ 30 Yr. 3.88%

Assuming a sale for $1,900,000 + $1,275,000 or 204% Gain/ 740% gain from 2002

Thus from 1992 to 2007 which many consider the pinnacle of the last market upturn before the Great Recession, the gain over the 15 years equaled $600,000 or 73%.

In the three years from the pinnacle of the market to subsequent foreclosure in 2010 and sale the following year in 2011 the home lost $200,000 or 24% in value in 4 years. Yet from 1992 the increase still equals $400,000 or a 200%+ gain over 19 years.

If this home sells for close to asking in the 6 years of most recent ownership, looking at a $1,275,000 gain or $204% over their purchase and 700+% over the 1992 sales price.

Again I assume there have been renovations. Of note I am not factoring inflation as the $225,000 in June 1992 would equate to $393,000 in 2017.

However if one were to graph the history of this home it is unique as it shows true cycles in the market. In 1994 Denver and all of Colorado was experiencing a similar economic boom as we are enjoying at present. Granted the present expansion cycle is exacerbated coming off the Great Recession however I continue to argue fundamental business cycles have not ended.

Yes we are in a Goldilocks fiscal environment with historically low interest rates. I purposely included the average interest rates at the time of each transaction based on the 30 yr. fixed rate. Also with unemployment at record lows eventually we should see inflation tick up. During times of inflation housing generally increases in value HOWEVER when mortgage interest rates increase there is historically an inverse relationship i.e. rates go up on mortgages prices can come down concerning housing as more of the monthly is debt service.

Thus one may conclude the phenomenal increases in values may be attributable to the influx of capital and population to Denver, attractive pricing when compared to coastal cities and all coupled with cheap borrowing costs. However is this growth sustainable?

Ask me in the next 12-18 months.

Personally I would be a seller at present and only a buyer assuming a longer-term hold i.e. over 3-5 years at minimum while locking in the low-interest rates. Just my humble opinion.

 

 

 

Where the Chinese are Buying Real Estate Beyond China

When I was living in a rowhouse in Cherry Creek North, a late 20’s Chinese couple purchased the rowhouse bordering my south wall (presently for sale again). Both had been educated in the southern United States and were presently working in Denver. They purchased the residence I assume in cash while I was away on an extended business trip as I came home and met the new neighbors.

Within one year the rowhouse was put up for sale. Selling for a healthy 9.3% gain yet considering commissions and closing costs the couple broke even. I asked why they were selling? The answer; their visas were not approved for permanent residency.

As a licensed real estate broker in Colorado and New York I was curious where the Chinese are purchasing. Hong Kong has become a major market for Mainland Chinese pushing prices to record levels (a parking space just sold for in excess of US $600,000) and angering the local populace as prices continue to rise in a market that has been considered the most expensive in the world. Anecdotally I know New York is a favored place to park Yuan as well. Also, if in the market for a parking space I can fix you up with a nice space in Vail Village for $200,000.

As outbound Chinese tourism continues to increase worldwide, real estate purchases usually do not lag too far behind. In a report titled Immigration and the Chinese High Net Worth Individuals 2017, 300 plus individuals with net worth ranging from US$1.5M to $30M were interviewed.

The top destinations for these individuals concerning immigration in order of preference were the United States, Canada, the United Kingdom, Australia, Malta, Portugal, Ireland, Spain, Antigua, and Dominica. Of note, 2017 was the first time Antigua and Dominica have made the top ten list. Having been to Antigua; its UK heritage may be an attraction for Mainland Chinese of which many are fluent in English.

For the United States, the top destinations in descending order were Los Angeles (4th year at the top of the list), Seattle, San Francisco (which was 2nd last year) and New York. The location demand is partially due to geography as air-lift to Mainland China is most plentiful from the West Coast (Vancouver in British Columbia is very popular) yet also cost is a factor as San Francisco has become prohibitively expensive when compared to Seattle or Los Angeles.

Of note activity has slowed with the election of President Trump. Prior to the election per this article from Forbes titled Chinese Investments in U.S Real Estate Is Going Strong, this is not a new phenomenon.

Additional interesting findings from the study:

  • Education opportunities was the top concerning for 76% of the respondents
  • Living Environment came in second at 64% of the responses

Concerning Economics:

  • 84% of responses were concerned about the devaluation of the Yuan
  • 50% were concerned about their housing market yet many feel values will continue to rise

In speaking with brokers familiar with the Mainland Chinese purchasers a few general themes came about concerning their real estate purchases in the United States including but not limited to:

  • Education opportunities for their children and grandchildren.
  • Stability of the investment i.e. bricks and mortar coupled with the US Dollar.
  • Quality of Life i.e. concerns about pollution and environmental challenges in Mainland China.
  • The sheltering and protection of their assets into what is considered safety i.e. housing and real estate in general.

In the worldwide market with some exceptions capital is fluid. During times of instability jewelry and precious commodities are in demand as a hedge against inflation and offering portability i.e. jewelry, gold, precious stones. Yet in this era of modern economics and worldwide interconnectivity housing and real estate have now become the preferred asset class for stability and protection.

 

 

 

Denver’s Luxury Real Estate Market Continues to Break Records

As the upper-end of the Denver real estate market continues to set records have we reached the pinnacle?

In May 2017 according to The Denver Metro Association of Realtors (DMAR) 179 homes priced over $1M sold and closed. This number was 21% above April 2017 closings and 38% over the May 2016. The record-breaking number of sales is coupled with a 1% reduction in overall inventory during a month when inventory surges i.e. summer selling season with at present a 5.8 month supply of inventory.

Yes the luxury market ($1M and above) continues to be active yet headwinds seem to be evident.

In May 2017 the highest priced single-family home sold was $5,850,000 (1991 E. Alameda #6, Denver) representing five bedrooms, nine bathrooms and 7,358 above ground square feet in Denver.

The highest priced condo sold was $1,837,500 (105 Fillmore St #103, Denver) representing two bedrooms, three bathrooms and 2,338 above ground square feet in Denver.

In the $750K-$999K price range there was a 19% increase in home sales month over month and a whopping 50.7% gain year over year.

Yet within the hottest luxury neighborhoods of Central Denver while inventory is historically low buyers are advising pricing by their actions or inaction. A few listings in particular may be showing the upper-end of the market is being challenged. Out of respect for the sellers and their listing brokers I will not be providing exact addresses.

House I: Is a lovely brick Cape Cod style home with 3,600+ total square feet (3,150 SF Finished) on a quiet corner lot measuring 6,250 SF with a 2-car detached garage including loft area. The home is in one of central neighborhoods most coveted historic districts. The home came on the market in March at $1,100,000. At present the listing after three price adjustments is now listed below $950,000.

House II: In hot markets homes located on major arterials or other challenging streets i.e. one-ways and similar seem to come on the market en masse taking advantage of the additional demand in the marketplace. House #II i(located 4 blocks south of House #I is one such listing.

The home like Home #I is located within Central Denver and a Historic District, a neighborhood which commands the highest PSF in the area. The 3,600 SF Finished home sits on a large lot of over 10,000 SF. Built in 1960 the home has more of a suburban design including a 2-car attached garage, a rarity in the historic neighborhood yet attractive to prospective buyers who desire a post-war design and construction within the historic neighborhood. Of issue the home is adjacent to a busy roadway however the lot is surrounded by a 6’masonry sound wall and mature landscaping.

The home first came on the market in April of 2016 at $1,350,000. The listing expired in October of 2016 sans buyer. The listing reappeared on MLS with a new broker in March of 2017 at $1,300,000. In June there was a slight adjustment to the asking to $1,280,000. As of July 1 the home remains on the market.

Home III: A true mansion located on a historic residential street with a landscaped medium has been interesting to watch. Located 4 blocks east of House #II it was last purchased when Denver was showing some life post The Great Recession. The buyers were pretty astute. The 6,600+ SF Finished home sits on 12,800+ SF cornet lot. Again adjacent to a throughfare yet a sound wall and mature landscaping minimize the impact.

Concerning transaction history, this mansion may be a market bellweather (please note I cannot opine on interior renovations or other improvements as that information was not readily available):

  • The mansion first sold in March of 2004 for $1,030,000.
  • The mansion then sold again in March of 2006 for $1,650,000.
  • The last resale was in June 2013 for $1,275,000

After the sale in June 2013 the mansion was placed on the market in March of 2015 for $2,995,000.

Three months later the asking was reduced to $2,595,000. The listing expired in August 2016 sans sale.

In September 2016 the mansion was placed back on the market with a new broker for $2,445,000. Within 45 days the asking was adjusted downward to $2,295,000.

In January of 2017 another downward price adjustment brought the asking to $2,195,000. In March an additional adjustment brought the asking down to $2,095,000. The mansion went under contract as of 3 weeks ago.

The most recent buyers of the Mansion if they sell at close to asking i.e. $2,095,000 will have done quite well as their purchase 4 years prior was $1,275,000 or a gain of $820,000 before commissions and closing costs assuming again sold at close to the present asking price.

However here is a Mansion that in a 2 year span between March 2004 and 2006 appreciated in price by $620,000 yet when sold in June of 2013 LOST $375,000.

Even its most recent listing history, which began in March of 2015 at $2,995,000 and as of June 2017 was listed at $2,095,000 or a $900,000 reduction of the initial asking price.

One can infer their own interpretation concerning this Mansion and pricing as some would argue the sellers were initially too aggressive concerning pricing, the market for 6,000+ SF mansions is finite, the adjacent roadway is a challenge and so forth.

However looking back over the 13 years history of this Mansion’s activity i.e. massive appreciation over a 2-year span between 2004 and 2006 and subsequent equity loss, purchased at a fire-sale i.e. $193 PSF Finished and now on the market asking $317 PSF Finished or a 60%+ return in 4 years somewhat mirroring the overall gain the Denver market during that time period.

Let’s see if House/Mansion III closes and what happens to Houses I and II. I will keep you all posted.