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
–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.