Another Luxury Listing Shows Stress on the Upper End of Market

OK, I am the first to admit on occasion I drive down 7th Avenue from Cherry Creek to Corona Street so I can access the Safeway at 6th Avenue and Corona Street easily (yes I am still mourning the loss of my neighborhood Safeway). I drive at a leisurely pace taking in the majesty and prestige of one of Denver’s finest parkways. West of Williams Street when the Avenue becomes a standard width roadway the houses still continue to impress.

That is why I have been intrigued with 1433 East 7th Avenue. A home, which exudes gravitas. A nice corner lot, raised from the sidewalk coupled with mature landscaping can easily be at home in a many pre-war cities in the Northeast of for those who have relocated from the Bay Area, think Pacific Heights lite or if from Los Angeles, Beverly Grove.

With just shy of 6,000 SF finished including the basement and a manageable 7,250 SF lot (honestly I have mixed opinions concerning corners) larger than what I was and continue to search for but as mentioned from the exterior, gravitas. The stately yet manageable interior is perfect for many prospective buyers in this broker’s opinion from the center-hall plan to the upscale kitchen to the preservation of design details including wood beams and so forth. Updated yet respectful of its history.

I have kept my eye on this house since I first watched it come on the market in April 2011 as the Denver market was finally awakening from the reckoning of the Great Recession. At the time up-market listings continued to struggle to find a buyer however if priced correctly, they sold and some very astute buyers have probably done quite well on paper to date.

  • In April 2011 the home sold for $1,655,450 off an asking of $1,750,000.
  • In 2018 Dollars: $1,824,189

 

  • In August 2015 the home sold for $2,195,000, its asking price after being on the market for approximately two weeks and no seller concession! Many would argue that summer was the beginning of the major ascent of the market from realistic pricing to exuberant listing prices.
  • In 2018 Dollars: $2,295,481

Thus in a span of 4 years the sellers pre-commission made $539,550 not accounting for inflation. Even considering broker commissions (assume $130,000 at 6%), the sellers most likely netted approximately $400,000 of $100,000/yr concerning their residence.

I do not know if the sellers renovated or did other improvements, as I have not toured the home in years. However based on images and broker comments I am assuming any updates made were minimal.

Let’s fast forward to May 2017, just shy of 2 years later the home reappears on the market asking $2,500,000. Of note the home was purchased for $2,195,000 two years prior or asking for a $300,000 gain in 2 years of $150,000/year. In August the home is re-priced at $2,395,000 and the listing eventually expired.

As of January 2018 the house is back on the market with a revised asking price of $2,299,000, $96,000 less than the previous ask.

Let’s assume the seller does indeed get $2,299,000 for the sale price. When factoring a 6% commission ($137,940), their net is approximately $2,161,060.

 In my analysis a few issues arise as follows:

Seller paid $2,195,000 in August 2015. Assuming it sells for asking (doubtful as already 52 days on market), after commission their net is below their purchase price 2.5 years prior; a recap:

  • August 2015: Paid $2,195,000
  • January 2018: Asking $2,299,000
  • Commission 6% ($137,940)
  • Net at Asking: $2,161,060
  • Thus seller would walk away with a $34,000 Gain!

 Yet the gain of $34,000 assumes an at asking closing price. Again after almost two months on the market, doubtful but it could happen.

Now two additional issues:

Inflation: When purchased on 2015 for $2,195,000 based on 2018 Dollars that would translate to $2,295,481, thus based on inflation, already a real-dollar value loss even if sold at asking.

Real Estate Taxes: When the home first came on the market in 2011 the taxes on the house were listed at $8,127 or $677/month. At present the taxes in the house are listed at $13,779 or $1,148.25/month, a difference of $471.25/month. Granted at this price-point should not be an issue for the buyer (except the issue concerning tax deductibility of real estate taxes but will not go there in this blog post).

One of my friends from the East Coast is a stock trader and refuses to purchase a home in his suburban New York City community. His rationale; he can earn more money in the market versus his primary residence which he views as a money-losing proposition or at best matching inflation over the long-term and coupled with exorbant real estates taxes,he prefers to rent. So I asked him the following:

If one bought $2,195,000 of the Dow Jones ETF (basically a vehicle that tracks the DOW which I understand is not the best gauge of the stock market but is one of the most recognized) in August 2015 what would it be worth today?

  • In August 2015 the DJ ETF was trading at $166.35 / 13,195 Shares
  • On February 27th, 2018 the DJ ETF was trading at $255.33
  • The 13,195 Shares today would be worth $3,369,097
  • Total Gain: $1,174,097 or close to $42,000/average per month increase. Yes we are all aware of the gains over the past 12 months skewing the valuations.

My analysis tells me the follows:

  • The upper-end of the market is showing weakness and fatigue and thus slowing.
  • The belief that housing values can only increase is a fallacy as the upper-end is usually the first market segment to show signs of impending weakness.
  • The pinnacle of housing market values is behind us.

Now for my peer brokers who will advise but one needs a residence to live in; I cannot agree more both as a broker and one who is actively looking for a residence to purchase HOWEVER, let’s do the math:

The gain of $42,000 month is commendable yet most likely an anomaly as many argue the market is overheated and a respected wealth manager I know advises: “Trees do not grow in the sky” thus such oversized gains should be viewed within context.

However, that $42,000/monthly gain if generating 4.5% would equate to approximately $1,900 month. While one could not rent 1433 East 7th Avenue for $1,900/month. Yet when generating $42,000/month in gains, I assume one could dip into the monthly for a similar home in the $5,000-$7,500/month range and still have a nice return on investment.

Please know I am NOT a pessimist. However I have personally been through three (3) business cycles during my time in Denver and have watched real estate values rise and fall. While I do not except an across the board dramatic downtown of valuations; with the potential for rising interest rates for both mortgages and bonds, realignment of equity valuations to more traditional patterns, potential inflation and out-migration of population from Colorado, a 10%-20% downward valuation concerning housing valuations may not be out of the norm, it has happened before and history can repeat itself. Again, just one humble brokers opinion.

 

 

 

 

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Is it Just Me or are the Optimistic Headlines Pointing to Concerns

Ok, I am a pessimist! Well not really but I have been accused of being too conservative concerning finance and investment. Granted most recently some of my portfolio was stopped out during the flash crash only to come roaring back within two weeks. And yes housing in Denver is still in-demand with limited supply and it seems overly eager buyers. However today’s headlines concerned me as follows:

US housing starts total 1.326 million in Jan, vs 1.234 million starts expected

  • New home construction increased to more than a one-year high in January.
  • The market was boosted by a rebound in the construction of single-family housing units.
  • Building permits soared to their highest level since 2007.

On the surface I should be thrilled as housing starts are beginning to mirror our economy which continues to defy conventional cycles and this expansion looks never-ending HOWEVER review last line of the bullet points:

Building permits soared to their highest levels since 2007” Yet just around the corner in 2009 we were in the depths of The Great Recession teetering on the edge of a Depression.

Concerning housing, most would agree our low-interest rate environment has been somewhat responsible for consumer demand i.e. many purchasing based on the amount of their monthly payment versus equity basis. If planning for the long-term hold this is not necessarily an issue as housing usually exceeds inflation. Granted the buyers from 2004-2006 who sold between 2009 and 2011 may have a different opinion. Yet, what happens if interest rates rise another 65 basis point to 5% which is still a low mortgage rate when looking at a historical chart.

According to Redfin: A 5 percent rate would cause more than a quarter of today’s homebuyers to slow their plans and housing affordability is starting to take a hit. The report goes on to advise buyers will still be house hunting however if one’s PITI increases will wages match? At present we have the signs of inflation yet wages remain stagnant.

Concerning employment and wages the good news is we are at a 17-year low concerning unemployment. The bad news the unemployment rate before the great recession was only 0.5% higher than it is today.

January 2018:          Unemployment Rate at 4.1%

January 2007:           Unemployment Rate at 4.6%

Of note the Recession officially started in December 2007 with unemployment rising to 5% that month and at its worst during The Great Recession, unemployment was at 9.5%

On to consumer sentiment i.e. how the average consumer feels about the economy:

January 2018:           Consumer Sentiment 95.7

January 2007:           Consumer Sentiment 96.9

For the remainder of 2007 the Consumer Sentiment stayed relatively strong hovering in the 80’s and 90’s yet by November and December of that year the Sentiment Index dropped into the mid 70’s as the recession began.

And finally an interesting article quoting an apartment developer:

Major apartment developer: ‘There is an acute crisis headed our way’

  • The luxury market is largely overbuilt, while there is a shortage of affordable rental housing.
  • Lower and middle-income households are spending proportionally more on their rent, says apartment developer Toby Bozzuto.
  • Nearly half of all renter households pay more than 30 percent of their income for housing.

As you have probably noticed in downtown and Cherry Creek the crane has again become the “official bird” of the Front Range. Yet many experts are cautioning the cranes are associated with the building of luxury apartments. Of note, multifamily construction is now at a 40-year high; the trouble is, developers are putting up the wrong kinds of buildings. The luxury market is largely overbuilt, while there is a shortage of affordable rental housing, and developers are hamstrung by the now record-high cost of construction.

The statistics are suggesting a potential for an overbuilt/supply coming soon as apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.

I am not necessarily sounding the alarm but as a real estate broker with a few decades under my belt AND one who has a good memory of business cycles I remain concerned. My gut feeling is we will begin to encounter inflation which while necessary I believe will exceed the Federal Reserves 2%. Couple this with rising interest rates yet wage increases being stagnant we can run into serious complications leading to a recession. If it is a soft landing or a violent correction, that remains to be seen.

Again based on a traffic signal my light is Yellow and the countdown to Red is fast approaching, thus speed up and if conservative brake now and wait for the light to change and maybe avoid a potential collison.

 

 

Gyrations can Happen in the Housing Market as Well

The whipsawing of the equities market over the past few days has been challenging for many with the assumption the market will continue to rise. When the equity markets settle the forensics will probably blame a combination of leverage and obscure volatility index trades as the culprit.

Yet what about our Denver housing market?

Earlier this week I posted an article from CNBC concerning a home in Denver listed at $500K, which generated 100+ showings over the weekend. The issue haunted me as 1) at $500K still above the average cost of a home in the metro area, 2) with such interest are prospective buyers chasing a commodity versus a home i.e. low inventory, high-demand and 3) hindsight can be most appreciated.

Concerning hindsight; I take evening walks. Lately I have been keeping an eye on a home close to my residence. In the interest of privacy I will not disclose the address however I will share the following:

Neighborhood: Strong, desirable for families within the City and Country of Denver, well-respected public elementary and middle schools as well as a popular private school.

Street: Literally on the border of the neighborhood, on a minor arterial i.e. two-way, but one-lane in each direction. The street dead-ends about a mile north so not a major arterial mostly neighborhood oriented traffic. Within two blocks of a neighborhood oriented commercial low-scale retail development and within 4 blocks of a neighborhood park, all amenities.

The Residence (From Public Remarks): Amazing home in _________ under $600K!! Don’t miss out on this incredible opportunity to live in desirable ________. This beautiful brick bungalow has an updated kitchen with breakfast bar, seating area, and stainless steel appliances. Bright living room with wood burning fireplace and coved ceilings on the main floor and another large family room in the basement. Home has fabulous refinished hardwoods and a large master bedroom. Large backyard with deck and covered front porch. Ample amounts of storage in the laundry area as well as the garage and attached shed. Walking distance to great restaurants, amazing parks, and one of the top-rated elementary schools in Denver. 4th Bedroom in basement is non-conforming.

Style: Bungalow, pre-WWII Construction

Size: Approx 1,100+ SF Main Level, 1,100+ SF Fully Finished Basement

Configuration: 4 Bedrooms/2 Bathrooms

Garage: 2-Car

Lot: 6,750 SF

Now the Pricing History: Please note I am just using month and year to retain some privacy. Of note during its history dating to July 2012 from the images associated with the listing there was no major exterior or interior renovation that I could ascertain.

  • Jul. 2012:       Placed on market for $450,000 / 30-Yr Interest Rate: 3.55%
  • Sep. 2012:      Price reduction $450,000 – $425,000 / 30-Yr Interest Rate: 3.5%
  • Dec. 2012:      Expired, taken off market NO SALE

——————————————————–

  • Jun. 2015:      Placed on market for $492,000 / 30-Yr Interest Rate: 4.05%
  • Jun. 2015:      Taken off market NO SALE

———————————————————-

  • Jul. 2015:       Placed on market $519,000 / 30-Yr Interest Rate: 4.05%
  • Aug. 2015:     Price reduction $519,000 – $498,000 / 30-Yr Interest Rate: 3.91%
  • Sep. 2015:      Price reduction $498,000 – $475,000 / 30-Yr Interest Rate: 3.89%
  • Jan. 2016:      Sold and Closed: $445,000 / 30-Yr Interest Rate: 3.88%

__________________________________________

  • Jan. 2018:      Placed on market for $600,000
  • Jan. 2018:      Price reduction $600,000 – $585,000
  • Jan. 2018:      Price reduction $585,000 – $575,000
  • Feb. 2018:      Price reduction $575,000 – $565,000 / 30-Yr Interest Rate: 4.38%
  • Feb. 2018:      Goes Under Contract

In the above example between 2012 and 2016 one could argue the value did not change. While our collective memories can be subjective; in 2012 we were finally seeing viable sprouts post Great Recession yet it was not until 3.5 years later that the original asking price of $450,000 ($483.182 in 2018) from July 2012 was realized i.e. sold and closed Jan 2016 for $445,000 ($457,000 in 2018).

Now the home is back on the market. From Jan 2016 when the house sold for $445,000 and was placed back on the market last month for $600,000 or basically a 35% gain in two (2) years.

Now granted at the last asking i.e. $565,000 the potential gain is 22%. Yet from July 2012 to January 2016 one could argue there was no gain or most likely the market gained yet the listing was overpriced to when listed in 2012.

Now for some history. Going back to the days before the great recession:

  • 6/1993:         Closed for $120,000 ($204,725 in 2018) / 30-Yr Interest Rate: 7.21%
  • 10/1995:       Closed for $156,000 ($252,347 in 2018) /30-Yr Interest Rate: 7.64%

In the two year period noted above the house appreciated by 30%

The sellers of the house I believe desire to repeat history i.e. within a 2 year period asking for a 22% gain.

The following is added on Feb 7, 2018: In reviewing MLS this morning a classic Mid-Century Modern listing expired. Asking is $1.5M. A beautiful renovation/update as I remember viewing the residence when it was for sale in 2009 sold for $610,000 ($700,949 in 2018). Even more to my surprised I pulled the Chain of Title, the same home sold in 2004 for $629,000 ($820,876 in 2018). Thus in 9 years the home lost $19,000  (during which time  the local economy went from exuberance to recession). That same house was most recently listed at $1.5M. Considering the renovation and factoring for inflation $1.5M while high is not necessarily irrational yet the market has spoken i.e. 85 days on market and no sale. The prior sale in 2009 the home was on the market for 562 days or over 1.5 years! As a wise professor once said off the cuff “History does repeat itself

The question is are such gains sustainable or are we on the verge of irrational exuberance concerning housing prices?

The average price of a single-family home sold in 2017 reached $480,140, an increase of 8.7 percent from 2016. The median sold price, the point where half the homes sell for more and half for less, was $410,000, an increase of 7.9 percent.

Condo prices rose even more on a year-to-date basis, hitting an average sales price of $318,904 in 2017, up 10 percent from 2016, with a median sales price of $270,000, up 12.15 percent from 2016. This is not to be unexpected i.e. affordability both in sales price and overall upkeep.

Yet concerning incomes, the average salary in Denver, Colorado is $60,370. As of Q4 2017, the trend in wages is down 0.3 percent. The cost of living in Denver is 12.1% higher than the national average.

And why am I concerned?

  • Average salaries are not keeping up with housing costs.
  • Building permit activity has been most active in rental housing a market many believe had peaked in 2017 and with new construction continuing a potential glut coupled with lessening demand.
  • Lower interest rates may be permitting more leveraging. Yes borrowing standards have tightened YET there are still loans with just 3% to 5% down. Thus if the housing market cools there is the possibility of residences with negative equity.
  • Real Estate Taxes may increase. As assessor data is complied every two years the increase in underlying valuations will translate to higher tax bills.
  • The Goldilocks Economy: We came out of a deep recession with some caution, which seems to have dissipated as the economy continues to expand. Yet with expansion comes higher interest rates (as the Federal Reserve hopes to keep inflation in check) and partially what spooked the equity markets.

Equities are liquid and thus volatility with such liquidity can be expected. 5% moves in the Dow Average were not uncommon over the past 20 years. While housing values in general do not fluctuate I would argue the uptrend is flattening and to proceed with caution.

As the example above illustrates timing can be important. If one is purchasing today for the long term i.e. 5-7 plus years or longer I would not necessarily be concerned especially if able to lock in an attractive interest rate.

However if one assumes the market will only continue to go up, continue to exceed inflation and generate oversized returns year after year…..just remember negative equity, short sales and foreclosures are in the rear-view mirror and could be accelerating.

Remember Goldilocks needed a nap as well.

Your Budget is $1M to $2M. Here is What You Can Purchase in Denver and Beyond

It is no secret among my peer brokers the upper-level of our local Denver metro market is starting to show signs of stress. I am the first to admit inventory continues to be historically low and in the most desirable neighborhoods; a residence if priced correctly  will indeed go under contract in a matter of days.

However there have been some luxury properties that have sold at a loss including within the hot Denver Country Club neighborhood. 575 Circle Drive which sold in February 2013 for $6.8M ($7.15M in 2017 inflation adjusted dollars) was recently resold in December 2017 for $6.5M excluding broker commissions. In tony Cherry Hills 5500 E. Quincy just hit the market asking $4.97M. The seller purchased the property in 2002 for $4.5M or $6.16M in 2018 inflation adjusted dollars thus based on asking factoring in inflation, a loss.

Now luxury and price-point can vary widely. Around the world, a single square foot in a luxury home varies dramatically — from $200 in Monterrey, Mexico, to $4,500 in Monaco. The highest price paid for a home in 2015 was $194 million for the Barker Road Estate in Hong Kong purchased by Jack Ma founder of Alibaba and it needed work!

Recently I have been researching what one can purchase for $1M to $2M in various cities keeping in mind similar neighborhoods based on location to downtown, prestige, history and so forth. Not surprisingly even at the high-end Denver in both a square-foot basis and quality of life show a better value. Yet when average income for the neighborhood is factored in the value proposition erodes. In laymen terms the upper-end of Denver’s housing market is more costly when factoring in average incomes for the neighborhood. In addition percentage gain may be somewhat irrational even accounting for the Great Recession and continued low inflation and historically low-interest rates.

Please note I did not use average metro area household incomes instead opting for neighborhood specific as metropolitan demographics vary wildly. In addition both New York City and San Francisco have “rent-control” laws, which many economists argue inflates the value of free-market residences i.e. sans rental rate constraints.

Below at the findings:

Denver: 446 Lafayette St/ Denver Country Club Neighborhood

  • Size: Single-Family 3BD/2.5BA / 2,646 SF including a small basement
  • Asking: $1,200,000 (last sold in June 2013 for $875,000)
  • Median Income: West Country Club $54,417

A charming turn of the 20th Century Victorian including an expansion designed by locally well-respected architect David Tryba. A pretty block north of the Country Club Gates the block is mostly single-family homes of moderate size. A strong stable neighborhood demand is strong even during times of recession. Easy access to downtown to the northwest and Cherry Creek North to the east.

New York: 2 Beekman Place/ Beekman Neighborhood

  • Size: Cooperative Apartment 2BD/2BA / approx. 1,200 SF
  • Asking; $1.395,000 (last sold in January 2013 for $1,165,000)
  • Parking: available off-site at an additional charge
  • Median Income: Beekman/Sutton $136,300

Designed by one of the foremost pre-WWII architects in New York Rosario Candela buildings are in-demand as the apartments feature gracious proportions not usually found in more contemporary structures. Located in prestigious Beekman Place this enclave of a neighborhood is literally 3 square blocks dominated by pre-WWII apartments buildings and townhouses including a well-known Paul Rudolph creation all adjacent to the East River. Just north of the United Nations and an easy 4 crosstown block walk to Midtown Manhattan.

San Francisco: 2055 Bush Street/ Lower Pacific Heights

  • Size: Condominium Apartment 3BD/3BA / 2,532 SF
  • Asking: $1,198,000 (last sold in June 2001 for $747,000)
  • Parking: available off-site at an additional charge
  • Median Income: Pacific Heights $130,900

Considered one of San Francisco’s premier neighborhoods Lower Pacific Heights has easy access to the Central Business District as well as Fillmore Street, Japantown and neighborhood parks. A two-level condo this expansive unit, one of 4 in a 1904 building brings together classic design and spaciousness within a condominium yet feeling like a single-family home.

Los Angeles: 6747 Gill Way/ Hollywood Hills

  • Size: Townhouse 3BD/3.5 BA /1,718 SF
  • Asking: $1,225,000 (last sold in Nov 2016 for $1,125,000)
  • Parking: 2-Car Attached Garage Median Income:
  • Median Income: West Hollywood $67,500

Located in the Hollywood Hills this townhouse constructed in 2015 would feel right at home in Denver’s Cherry Creek North neighborhood. Similar in design to the townhouses on 4th Avenue between University and Josephine the layout includes a guest/office on the lower level and two master suites above. While close to a freeway highway impact is minimal. Newer construction, energy-efficient and close to Hollywood and easy access (by Los Angeles standards) to downtown as well as to the Valley.

Concerning the home pictured above, asking was $200M, sold for $100M. Curious about the location and provenance, send me a note.