Case Shiller Index Nationally 2019 a Decent Year

In 2019 home price gains continued their upward trend rising 3.8% on a year over year basis as measured in December 2019. Regionally, Phoenix, Charlotte, and Tampa led the way with the highest gains at 6.5%, 5.3% and 5.2% percent, respectively. 12 out of 20 of the biggest cities in the U.S. saw bigger home prices gains in December compared to November. Of note, Metro Denver/Aurora is within the Composite 10 AKA 10-City Index.

Concerning Denver our year over year gain was 3.7%

While Metro Denver’s 3.7% is in line with the national average I believe we are actually entering a plateau phase concerning the real estate market. Anecdotally I am witnessing more active price reductions (possibly based on initial exuberant pricing), closing prices below asking (bidding wars seem to have dissipated) and listings coming on and off the market when activity does not generate interest or an acceptable offer.

Granted I work in the rarified neighborhoods of Central Denver which had witnessed exponential gains since the end of The Great Recession. A plateau not necessarily a negative. Markets that have exponential gains can also endure monumental corrections i.e. the housing bubble of the early 2000’s.

What will be interesting is how the housing market fares in the Spring of 2020.

• As of this morning (2/26/2020) the Commerce Department announced new home sales jumped 7.9% to a seasonally adjusted annual rate of 764,000 units last month (January), the highest level since July 2007.

 

• The strength of the housing market could help keep the economic expansion, now in its 11th year, on track. The housing sector accounts for about 3.1% of GDP, is being supported by cheaper mortgage rates after the Federal Reserve cut interest rates three times last year. What will be interesting is how the equity markets react to the continued coronavirus issues, an election year and mortgage rates at a 4-year low.

 

 

Million Dollar Foreclosures Happen When a Home Will Not Sell Keep Changing Brokers and Seesaw the Price

Recently a savvy client of mine was looking on the schedule for pending auctions concerning foreclosures within the City and County of Denver. Needless to advise not much comes up these days HOWEVER the following just mystifies me.

Out of respect I will not disclose the document numbers, however I will advise the residence is located in the popular Observatory Park neighborhood, east of TheUniversity of Denver, west of Colorado Boulevard and south of Evans Ave. A year in review of a pending foreclosure sale:

Concerning the pending foreclosure sale that my client found as follows

• Foreclosure Filing: 11/5/2019
• Notice of Sale: 11/13/2019
• Lis Pendens: 1/21/2020

Concerning the loan history (please note borrower same entity throughout):

• 10/27/17: Pvt. Individual Loan for $525,000 w/ a 7% Interest Rate was recorded.
• 6/12/18: An LLC lends $968,000, 1 yr loan, interest rate unknown, was recorded.
• 4/18/19: Pvt. Individual Loan for $3,760 w/ a 10% Interest Rate was recorded.
• 4/29/19: Pvt. Individual Loan for $150,000 w/ a 8% Interest Rate was recorded.
• 6/26/19: Pvt. Individual Loan for $45,000, 1 year term at 12% Interest Rate recorded.

Based on back of the napkin math, total loan amount over 27 months: $1,691,760

I have absolutely no idea if past loans were subsequently retired, I have no idea. The high interest rates and short-term maturity one must assume a developer or flipper.

Now for the Listing History; another case of potential insanity i.e. repeatedly replicate actions and assume a different outcome:

• 2/15/2019: Listed for $1,749,000 with a full service real estate broker/firm
• 6/14/2019: Listing Expired
• 6/14/2019: Same broker refreshes with a new MLS ID, asking $1,730,000 (minus $19,000 from initial listing price).
• 6/16/2019: Listing goes under contract
• 7/1/2019: Listing Expired, did not sell.

 

• 7/11/2019: Listed with a flat-fee brokerage for $1,699,000 (minus $50,000 from initial listing price).
• 8/25/2019: Listing expired, no sale.

 

• 9/3/2019: Listed with a new full-service broker/brokerage for $1,675,000 (minus $74,000 from initial listing price)
• 9/28/2019: Price Reduction to $1,625,000 (minus $124,000 from initial listing price)
• 11/2/2019: Price Reduction to $1,600,000 (minus $149,000 from initial listing price)
  • Foreclosure Filing: 11/5/2019
  • Notice of Sale: 11/13/2019

• 11/26/2019: Status revision from Active to Under Contract.
• 12/27/2019: Status revision from Pending/Under Contract to Active i.e. Back on Market
• 12/27/2019: Increase in asking price $1,749,000 (back to asking price from 2/15/19)
• 1/20/2020: Price Reduction to $1,697,000 (minus $52,000 from initial asking price).
  • Lis Pendens: 1/21/2020
• 1/25/20 Status revision Active to Pending/Under Contract
  • So as of 1/25/2020 the last asking was $1,697,000
  • $52,000 below the initial asking price first posted just shy of one year prior.
  • Yet asking $97,000 more than listing price recorded on 11/2/2019

Again based on Based on back of the napkin math, total loan amount over 27 months is $1,691,760 almost exactly the amount of the last asking price.

I have to again advise I do not know if past recorded notes/loans have been paid off. However the cumulative loan amount does not include interest on the loans nor repeated closing and filing costs. Also one must assume real estate taxes, utilities and insurance costs have been incurred while the residence has been on the market over the last year.

Personally I find the history of this home fascinating as:

• I assume the developer will at best break even assuming the foreclosure and sale is cured, yet most likely a loss.
• Between three (3) brokerages over the period of 11 months the residence went from an initial listing price of $1,749,000 down to a low of $1,600,000 (-$149,000) with the last asking at $1,697,000 or (-$52,000) from the initial asking price 11 months prior.
• Did I mention the pending foreclosure? Yes I did.
• BTW: assuming 5% ($84,850) in brokerage fees and 1% ($16,970) closing costs at asking of $1,697,000 would equal ($101,820) and I doubt the prospective buyer plans to cover those costs.
• As I enjoy the Zestimate by Zillow; Foreclosure Estimate: $1,631,514 (2/11/2020)

On HGTV it seems all the parties make a profit on their fix and flips and redevelopments.

Of note the above scenario is not as rare as one would assume. I hope the prospective buyer’s broker has done their research as a pending auction on the courthouse steps may be an opportunity. I will amend this blog concerning final disposition when recorded. Does history repeat itself? On this listing; looks a lot like 2009/2010.

 

Owning Versus Renting The nation’s top 50 metropolitan areas are almost evenly split on the rent vs own calculation

As a real estate broker I am at times conflicted as my business in to assist clients in the purchasing or selling a home. Yet I am also aware there are circumstances when renting makes both economic and rational sense. Personally I have always subscribed to three rules as follows:

• Purchase when it is cheaper to own than to rent (including potential deductions but also keeping in mind expenses that a renter may not incur).
• Purchase if the residence will at minimum keep up with inflation and better have long-term equity appreciation.
• Rent if you plan to relocate in 3 years of less.

According to a recent report based on data from First American Data Tree concerning the nation’s top 50 real estate markets it is cheaper to own in 24 markets and cheaper to rent in 26 and 14 showed very little difference between the monthly costs of renting and owning a home.

The data crunching looked at median rent prices, median home sale prices, and taxes and insurance aka as the T & I in PITI). For the buy calculation, it only considered homes in the lowest quarter of the price scale, which would typically be purchased by first-time buyers. It assumed a 30 year fixed-rate mortgage at 5% interest with a 5% down payment.

While not surprisingly the South and Midwest were attractive markets for owning versus renting. Cities including Memphis, TN, Birmingham, AL, Pittsburgh, PA, Jacksonville, Tampa, and Miami FL, Oklahoma City, OK, St. Louis, MO, New Orleans, LA and Atlanta, GA all had monthly home payments that were significantly cheaper than median monthly rent.

Not surprisingly the Western United States is where renting is cheaper than owning. Cities California of course held the top four spots including San Francisco, San Jose, Los Angeles and San Francisco. What is more surprising is the remaining 6 top markets where it is cheaper to rent than to own including Salt Lake City, Portland, Providence, Seattle, Sacramento and Denver (which was similar to New York City which boggles the mind).

Now rentals in San Francisco and San Jose are challenging to secure due to the tech industry. Los Angeles due to urban sprawl and desire for lower-density also places pressure on rental inventory. One additional issue is many of these cities have rent-regulations and/or rent-control laws which while protecting various segments of the market can influence market rate housing with higher rents.

Denver is one I find of interest. Before the Great Recession Denver was one of those markets where rental and purchase on a monthly basis was somewhat even. Yet beginning in 2012 when the Denver Metro area started an exponential rise concerning home values an rental rates.

Thus I decided to look in detail in February 2020 at the deluxe and entry level markets to compare:

Deluxe Rental:

• 545 Jackson Street, Cherry Creek North Asking $5,000/month
• 3BD/4BA/2-Car 3,987 Finished SF

This is a lovely pre WWII single-family house (rare in Cherry Creek North) that was renovated within the last decade including incorporating the attached street-facing garage into living space and adding a 2-car garage off the alley.  With 3 bedrooms, 4 bathroom and just shy of 4,000 SF finished definitely a large home and a nice street within walking distance of Trader Joe’s the new 9^th and Colorado and Cherry Creek North Shopping District. Of concern, some 6^th Ave impacts, a block including multiple rentals and a condo building with 27 units.

Deluxe Sale:

• 422 Cook Street, Cherry Creek North Asking $1,175,000
• 3BD/4BA/3-Car 3,741 Finished SF

As single-family homes for sale are rare in Cherry Creek North, I expanded the search to include attached homes. I used similar criteria i.e. size, bedrooms and bathrooms. While an attached townhouse, construction was 1987 and recently renovated. While attached may bring value down the proximity to Cherry Creek North, no impacts from 6^th Ave and a block dominated by multi-million dollar homes, a strong contender.

Let’s assume a sale of $1,125,000:

The PITI + Homeowners Insurance would run approximately $4,800/month

Thus on the upper-end of the market, rental versus purchase is about equal. However on the rental one must assume maintenance and upkeep will be performed by the landlord. Keeping this in mind; According to US News and Freddie Mac, homebuyers should actually budget up to 4% of the property’s value in annual maintenance costs. That’s $12,000 for a $300,000 home. Or $1,000 per month. If you have a home worth $1M, expect maintenance to be as $1,000 to $3,333 per month.

Thus in the scenario above when factoring in annual maintenance costs of between $12,000 and $36,000 the rental may be more attractive. Granted I have not factored in tax deductibility concerning mortgage interest and real estate taxes however when purchasing with 20% down serious money is tied up and inaccessible.

How about the entry level market?

Entry Sale:

• 3430 S. Locust St #C, Hampden Asking $170,000
• 1BD/1BA/1-Car 785 Finished SF Condo

Moncao Place is a large complex spanning between Locust St and Monaco St Parkway just north of Hampden. Amenities include a clubhouse with indoor pool.

Let’s assume a sale of $160,000:

With 20% down the PITI + Homeowners Dues would run approximately $1,154/month

Entry Rental:

• 2835 S. Monaco, Hampden Asking $1,250/month
• 1BD/1BA/2-Car 700 Finished SF

Let’s assume a rental rate of $1,200/month

Plaza de Monaco is a smaller scale complex closer to Yale Avenue. Similar amenities with Monaco Place including an indoor/outdoor pool, workout and party room.

Both units have been renovated the rental slightly nicer renovation concerning materials used. Both have wood burning fireplaces. Location is similar.

At first blush owning seems to be a better option i.e. slightly larger unit as the PITI plus HOA dues would be $160/month cheaper. Let’s assume deductions due to ownership and make the monthly savings between $200 and $220 or $2,400-$2,640 annually

However we forget the purchase at $160,000 has 20% down or $28,000. Let’s assume one invested the $28,000 at a 4.25% rate of return, their increase would break down as follows:

• Year 1: $29,190
• Year 2: $30,431
• Year 3: $31,724

Now one could argue rent will go up annually, maybe. Yet with condo ownership HOA fees and taxes can also increase annually so it is even.

However if someone is purchasing a $160,000 condo in most cases they will not be placing 20% down. Thus let’s assume 5%-10% down which is not uncommon for first-time home buyers, all of a sudden owning becomes more expensive than renting

• At 5% down the PITI plus HOA = $1,346/month
• At 10% down the PITI plus HOA = $1,299/month

Concerning the deluxe market the ratio between purchasing and renting is about equal.  However at the entry level market based on the examples above, renting may be the way to go in the immediate future. What one must consider is the down-payment or lack thereof, having set aside inaccessible capital i.e. the down-payment, future equity appreciation and flexibility i.e. a lease is easier to exit versus a sale.

I usually advise my clients if planning to relocate or move within 2-3 years of purchase I usually advise to rent as to sell would incur commissions, closing costs and so forth. Yet if planning to stay beyond 3+ years coupled with low interest rates and if a down payment can be secured purchasing may make more sense.

What is worrisome in Denver is the percentage of homeownership if dropping. Granted the higher cost of housing is one factor, yet demographics and inherent flexibility of renting cannot be discounted. While the concept of homeownership anchoring a community may be antiquated it is worthwhile noting communities with higher homeownership rates are general considered more stable. Until the Great Recession Denver was a market with a high percentage of home ownership and thus stability.

How will our Denver market react when the next recession happens?

 

 

 

 

 

 

Another Example of The Denver Market Showing Potential Stability and I believe Zillow’s Zestimate is way off

The Country Club neighborhood of Denver is one of the most in-demand within the City and County of Denver. A mmix of stately mansions as well as more conventional housing opportunities, while never inexpensive is a neighborhood market which is considered recession resistant. Of course, what’s not to like; great location just west of Cherry Creek and within 10 minutes’ drive of downtown. Quiet streets designed to discourage cut-through traffic. Neighborhood serving retail can be accessed along 6^th Avenue.

Thus, I have been watching with some interest 430 Franklin Street. I first was introduced to the house during the height of the seller’s market back in June of 2015. A cute house with street appeal within the historic Driving Park Subdivision. I noticed the house adjacent on the south was of similar style and popped i.e. added a 2^nd level. Thus, I thought to myself; opportunity may be calling i.e. purchase, land-bank so to speak and eventually pop or expand the rear section.

The home came on the market for $869,000. I thought pricy at the time however comps in the area were selling for even more. I toured the home, nicely done with two bathrooms on the main level already in place and a mostly finished basement. However, for various reasons I did not pursue yet I continued to watch the listing.

• On 7/3/15 the listing had a price reduction to $825,000.
• On 7/30/15 another price reduction to $799,000.

The price reduction to below $800K must have been the psychological admission of entry as the house closed on 9/30/15 for $780,000 or $89,000 below the original asking price, a 10% reduction in what was a generally strong seller’s market.

In August of 2019 the home came back on the market. There were few if any improvements done to the home during its 4 years of ownership that I could ascertain by the naked eye. Of note the house was and I assume still is in excellent condition, state of repair and show ready. The asking in August 2019, $895,000.

Subsequent price reductions happened as follows:

• 8/26/2019: $885,000
• 9/13/2019: $870,000
• 10/15/2019: $855,000

The residence did go under contract on 10/28, yet was active again on 11/7 still asking $855,000. The listing expired on 11/22/19 sans a sale.

As of this morning 2/3/2020 the home is relisted with an asking price of $850,000. There is also a new broker and brokerage firm listing the residence. One major difference I believe the seller has moved out as seems from the marketing materials to be staged.

Now the math. When the seller purchased the home in 2015 she purchased at an approx. 10% discount off of original list.

At present concerning the existing selling period, the house came on at $895,000 and is now asking $850,000 an approx.. 6% revision from asking.

If the seller does receive and close at full asking of $850,000, she will incur a profit of $70,000. Let’s deduct commissions (6%) and closing costs (1.5%) totaling $59,500 thus her net profit would be $11,000. This is all assuming the home sells for the asking. If the home sells for anything below $839,000 there would be an actual real dollar loss and already a break-even at asking based on inflation and closing costs.

My gut feeling is the house will close in the $800+/- range based on two-factors, lack of inventory and price-point. Personally, I feel at $800K a bit aggressive as a nice block yet not blockbuster, one-level i.e. a pop-top would bring the house to over $1M.

Yet at $800K with 20% down the monthly PITI (Principal, Interest, Taxes and Insurance) would run approximately $3,600 thus with utilities and upkeep assume $4,000/month. For some buyers this is an attractive number and while not affordable to the average buyer in Metro Denver, not unattainable.

For me is the house an option? I never say never however the lot is on the small-side i.e. 4,690 SF, I would prefer a 6,250 or similar. The garage is one car. The kitchen while functional is small with mid-grade appliances, taxes are in excess of $5,000/yr  and the improvements I would consider over time would bring my investment to over $1M.

Thus while the PITI is attractive; I am conservative as I look at equity value and appreciation versus purchasing a payment. What is my # you ask? $675,000 but I am again conservative, I don’t need to purchase and so forth. However, that is my personal # and I would be a cash buyer at that price.

BTW: Zillow as of 02/03/20 has the house valued at $1,125,000! Of note the house has 2 bedrooms and a 3rd in the basement, not 4 bedrooms as Zillow advises. If Zillow is correct  truly the beat deal in the market at present or why you use an actual broker for market analysis. See screenshot below:

Next week New York City, the real estate market seems to be the lost decade beyond the headlines concerning Billionaire’s Row.