Denver Real Estate Market seems to be slowing yet irrational exuberance has not been tempered just yet

Preparing for the Next Cycle

Earlier this week REColorado AKA our Multilist service advised of a “Summer Cooldown” in Metro Denver. Anecdotally we are witnessing an increase in available inventory, longer periods between on market to under contract and pricing that seems to be adjusting to the new reality of lessening demand coupled with higher interest rates.

Thus I was amused to see a new listing in my neighborhood of Cherry Creek, which seems to defy conventional logic. I am not the broker, I am not the owner/seller and I have no idea what the motivation or rationale concerning pricing is HOWEVER I will keep an eye on this one just for my own edification.

While I will not disclose the exact address, the residence is within the 300 block just north of the Business Improvement District aka Cherry Creek North. Many could consider this block prime (I am mixed as it has a concentration of condominiums, curb-cuts and cut-through traffic but I am also trained as an urban planner thus I see what many prospective buyers do not).  Thus owners are literally a few hundred yards away from a wine bar, artisanal coffee, restaurants and so forth. Thus true urban lifestyle with a suburban design and space.

Concerning pricing, here is the history of the residence:

  • February 1999:         Sold for $620,000/$146 PSF ($937,837 in 2018)
  • May 2006:                 Sold for $950,000/$223  ($1,187,527 in 2018)
  • -Of note top of the market, yet good for the seller, 53% gain in 7 years.

 

  • October 2015:           On market for $1,595,000/$376PSF ($1,695,868 in 2018)
  • Did Not Sell: if sold would be a 68% increase over the last sale at the top of the market during the last up-cycle.

 

  • November 2015:       Price reduced to $1,495,000/$352PSF ($1,589,544 in 2018)
  • -Did Not Sell
  • July 2018:                  Place on market for $1,650,000/$388PSF

At $1,650,000 I wish the sellers the best of success. If they are indeed successful selling at asking they will have matched inflation, which is commendable considering, they purchased at the top of the market. Of course when factoring in upkeep, taxes, interest on the mortgage and so forth the calculus changes however they have also had a roof over their heads.

Just for fun I compared the returns above against the S&P 500 with dividend reinvest and not considering inflation, just in real dollars:

Between February 1999 and May 2006

  • The residence appreciated 223%
  • The S&P 500 appreciated 15.5%

Thus residential real estate was the way to invest over those years.

Between May 2006 and June 2018 (most recent S&P Calculator month)

  • The residence (assuming a sale at asking) appreciated 75%
  • The S&P 500 appreciated 172%

During the post Great Recession period we have witnessed the values of real estate and equities rise in tandem. Based in the period from 1999 to 2006 real estate was the better investment. Yet from the Great Recession to today we have witnessed equities and real estate both escalate in tandem. While I am not an economist some would argue bubbles are forming or have formed.

In a Continuing Education class this past week we were collectively discussing the return of non-conforming loans; the ones that brought on the last recession i.e. non-income verification, low or no money down mortgages and other exotic mortgage vehicles. Granted most mortgages are repackaged and sold to investors through various channels.

With interest rates going up and inflation a distinct possibility not to mention trade wars, currency issues (see the Turkish Lira) and investors chasing more aggressive returns…..my advice, sit on the sidelines or better hedge and buckle your seat belts as the old adage goes History Repeats Itself and we all have short memories.

 

 

 

 

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Can real estate activity in the affluent Hamptons predict performance in the rest of the country?

The Hamptons on the eastern end and southern fork of Long Island (stretching from Westhampton to Montauk Point) has been a playground for New York City’s wealthy since the Long Island Railroad brought service to the east-end in the later 19thcentury. Known for its fertile soil, the towns of The Hamptons were once known for their agriculture and orientation to the Atlantic Ocean (Montauk and Sag Harbor were Whaling Villages and Bays. By the middle of the 20thCentury the economy of the area changed from agriculture to leisure including artist colonies, wineries and prime oceanfront commanding in the 7 figures.

Real estate sales in resort communities historically slow when there is concern in the economy as this is truly a discretionary spend.  Select brokers with history in the market usually raise concern where their local resort markets begin to show signs of sales weakness (this is also a market where an uptick may predict confidence in the overall economy). News from The Hamptons may be sending a caution signal as follows:

  • Home sales have slowed down this year in the Hamptons bringing the median price below the $1m mark. Second-quarter sales fell 12.8 percent from 2017 levels, according to data prepared for Douglas Elliman by Miller Samuel Real Estate.
  • The median price dropped 5.3 percent to a $975,000, compared with $1.03m one year earlier.

The spring selling (and summer rental Memorial Day to Labor Day) season is usually the high point of the year in the Hamptons, so the drop is stoking concerns that the resort areas of Long Island’s south shore are succumbing to the pressures depressing property activity in other parts of the US. Of note Metro Denver is not immune as inventory is increasing, demand seems to be decreasing and price reductions are becoming common on listings that are reacting to local market conditions.

Rising mortgage rates are increasing costs for homebuyers of all stripes. Higher-end properties have been affected by the 2016 federal tax reform, which imposed new limits on the deductions of mortgage interest and state taxes — the latter a particular concern in high-tax New York and California. Sales have slowed most in the “Hamptons middle” — homes listed in the $1m-$5m range.

Now the Hamptons is a true microcosm when you consider the following:

The inventory of homes listed at more than $4.25m rose 36.5 percent year on year in the second quarter to 329, according to Miller Samuel.  Sales in the luxury market were down 11.6 percent from last year’s level.

According to one broker “We have seen houses listed at $15m brought down to $12m, and maybe trading at $9m or $10m.” The spring saw only one sale closing for more than $20m in the Hamptons — compared with four in the same period one year earlier. The property in East Hampton sold for $40m in April 2018. It had been on the market for two years, and was first listed with a price tag of $69m. That folks is a serious price reduction.

Why One in Three Millennials may be making a serious mistake when purchasing a home

It was not so long ago when one purchased a home with the rationale of not only having a roof over’s one head but also a vehicle to keep up with and even better beat inflation and have enjoy some added tax deduction benefits.

While the above value concept may have been eroding for some time:

  • Assuming a residence can only increase in value (the Great Recession shattered that myth).
  • Using equity in one’s residence as leverage (the House as Personal ATM).
  • Limitations on the deductibility concerning real estate taxes.

As a broker I completely understand the desire for a home purchase especially when we see markets with low inventory and continued historically low-interest rates. Yet are Millennials setting themselves up for future challenges?

Yes most millennials went through the Great Recession and while experienced may not have been in the workforce or owned a residence. They may not have witnessed the job losses, foreclosures and the evaporation of paper wealth over that period. While the economy has come roaring back (even though I question the longevity of this bull market) as I always advise past performance is not indicative of future returns.

This is why a recent survey from The Bank of the West truly concerns me as follows:  “The fact that nearly one in three millennials who already own their homes have dipped into their retirement nest eggs to finance their down payment is alarming. With careful financial planning, millennials can have it all – the dream home today, without compromising their retirement security tomorrow.” Ryan Bailey, Head of the Retail Banking Group at Bank of the West.

Basic reality; a mortgage is debt, plan and simple. While a long-term mortgage with a low monthly payment and a fixed interest rate may be attractive and definitely can be a hedge in an inflationary environment, it is still debt.

Yes the mortgage payment may in fact be less than comparable rent (yet did the buyer factor in the down-payment).

While there are tax advantages including mortgage interest and real estate tax deductions, are the benefits truly appreciable concerning one’s income? The debt to income ratio can be an eye-opener.

Unlike retirement investing which is usually liquid and easily revised depending on market conditions, a residence is truly illiquid and can incur major costs when trying to sell i.e. commissions, preparation to sell and so forth.

Home ownership can be a foundation for a lifetime. This is not necessarily a positive attribute. What happens if the homeowner decides to entertain an employment opportunity elsewhere? What if the market during that time is a buyer’s market?  What if market rent would NOT cover the monthly PITI? In such scenarios one may be losing precious investment opportunities while covering the monthly payment coupled with an inflation reduced asset.

Mortgages do provide leverage and equity via one’s down-payment HOWEVER during the recession the terms negative equity, short-sales and foreclosures entered the vernacular and unfortunately we all have collective short-memories. Just last week I viewed a home on S. Monaco in the Southmoor neighborhood. While needing some cosmetic updates the home is in good condition and state of repair. Lowest priced home in the area concerning both asking and on a PSF basis. The asking $475,000 yet this is a short-sale with a loan balance of $515,000. Yes in the present sellers market a short-sale!

In addition to all of the above what concerns me locally here in Denver is the type and location of residences millennial’s are purchasing. I am seeing a proliferation of townhouse style residences as well as condos and similar attached multi-family construction in all the most desirable neighborhoods i.e. Golden Triangle, LoHi, Highlands, Sloans Lake and others. Concerning affordable, think again, many are $500K+ some pushing 7 figures. Yet I am seeing younger buyers purchasing with the assumption that 1) housing will continue to appreciate,  2) they plan to live in or potentially rent if they move or lifestyle change and 3) using monies allocated for retirement and/or using family capital to assist in purchase with the belief that inflation coupled with low mortgage loan rates is a winning combination.

While these new homes are beautiful and contemporary and perfect for the single or young DINK (dual-income no kids) couple; lifestyles change. Are these buyers considering children in the future? Are the local schools the caliber they desire for their offspring? Is there a risk of a glut in the area when the market adjusts course? How deep is the rental market for their unit style? Will rent cover their PITI?

I recently worked with a couple and this was their course concerning home ownership over the past decade and my forecast for their future:

  • Years 1-4: First Purchase: Smaller Home in West Washington Park
  • Years 4-8: Sold West Washington Park Home. Purchased in Stapleton as one child heading to elementary school and another on the way.
  • Year 10: Sold out of Stapleton, purchased in Littleton, house triple the size of Denver and large lot, literally 1/2 the cost of anything within 8 miles of downtown, more attractive school system yet more challenging commute (both work in downtown) however easy access to light-rail and Santa Fe Drive.
  • ————————————————————-
  • Year 10-15: Forecast – Will stay in Littleton until youngest goes off to college.
  • Year 16: Forecast – Sell Littleton home, move to Cherry Creek North.

I am a firm believe one’s first home can be a great foundation for future success from lifestyle to investing. However I also feel one’s first home should not be over-extended i.e. live within one’s means, consider allocating some housing expenditures to the equities market to take advantage of compound interest and if planning so change jobs, careers, locations be realistic as if changes are happening in 3-5 years the potential loss of equity concerning one’s home can happen. Ask all the buyers in 2006 which sold between 2008 and 2013…..

 

$60,500 in 2014 sold for $199,000 in 2018 Would You Take That Return

Compelling yes; however what about the person who purchased in 1998 and 10 years later lost the unit to foreclosure.

Earlier this week I closed the seller-side of a condo at Monaco Place in SE Denver.  From a previous blog post I suggested this complex represented the Denver Real Estate Market of the past decade.

This is a complex with a stellar location i.e. 1 block east of I-25 and Hampden Avenue. Excellent walk score, units ranging from 1-2 bedrooms in various configurations. Ample open areas professionally landscaped. Amenities include an indoor pool, workout facility and the HOA provides both heat and air-conditioning.

The complex was built in the early to mid 1970’s. Stacked 2-3 stories most units included wood burning fireplaces. Top floor units have vaulted ceilings. There are communal washers/dryers and some units have stackable units installed.  Each unit comes with one deeded carport parking space and guest parking is ample. The units did fall on hard times from decay of the exteriors to investment units outnumbering owner-occupied (of note at present 63% owner-occupied and climbing).

Thus the unit I am going to profile I believe represents the Denver market and may be an indicator of where the market is going. Spoiler alert, softening yet not a crash landing.

Being respectful of the seller and buyer I will not disclose the actual address and unit #. I can advise the unit is a 2BD/1.75BA top floor condo. My seller during his tenure did various cosmetic and mechanical upgrades totaling approximately $15,000 over his time of ownership during which time the unit was rented.

Based on Denver Assessor Office Records:

  • 9/30/98:       Purchased for $59,000
    •            -$91,210 in today’s dollars
  • 7/9/08           Foreclosed upon by Bank of New York
  • 9/5/08           Placed on market by Bank of New York asking $29,500
    •                -$34, 526 in today’s dollars
  • 10/30/08      Unit sells and closes for $36,375
    •             -$42,573 in today’s dollars
  • 2/14/14        Placed on market for $69,000
  • 2/24/14        Sold for $60,500
    •            -$64,400 in today’s dollars
  • 6/6/18           Placed on market for $209,900
    •             – Asking based on comps selling for $209-$216 within prior 3 month
  • 6/17/18        Asking reduced to $199,000
    •             -Prior week 4 showings no offer
  • 7/23/18        Sold for $199,000 minus $3,000 Concession
    •            Net Sale $196,000

Thus looking at the history, the 10 years between 1998 and 2008 were not kind to the owner of this unit including a foreclosure during the Great Recession.

The next owner did well i.e. in 6 years of ownership enjoyed a gain of $24,000 or $4,000/year equity appreciation. Of note the seller was attending college in the area, thus owning not only comparable to rent yet also enjoyed equity appreciation of $4,000/year.

However my seller literally knocked it out of the ballpark with a gain of $135,500!

In addition to the rental income i.e. $1,200/month – HOA fees of approximately $450/month, my seller was netting $750/month on his initial $60,500 investment.

Over the 4 years and 3 months of ownership:

  • Initial Investment     ($60,500)
  • Net Rental Income    $38,250
  • Upkeep and Maint.   ($15,000)

Thus just from rental income over the 4 years 3 months of ownership my seller netted literally half his initial investment.

And he sold the unit for $196,000 after seller concession.

Thus once calculating all the numbers, his net gain over the 4 years and 3 months excluding commissions:

$158,750 or a staggering $3,100/month during his ownership tenure.

My view is a follows:

  • Such gains will NOT be replicated for the foreseeable future if ever.
  • When we priced at $209,900 was based on market, had to reduce to $199K to sell.
  • Market may be softening due to higher yet still historically low interest rates.
  • Rents seem to be retreating coupled with additional inventory.

At $199K w/ 30 year fixed including HOA and taxes comparable rent i.e. similar unit asking $1,495/month. Factor in tax benefits and potential equity appreciation still an attractive opportunity for the buyer.

While I am not an economic forecaster I do believe within the next few years we will witness a softening of the market in real estate coupled with the potential of a mild recession. Further out I am more concerned with another Great Recession or potential Depression gripping the world economy around 2030.

My prediction is based on economic cycles, tax cuts which will balloon our deficit, rising interest rates worldwide to tame potential inflation, higher oil and overall commodity prices and I have not even considered the potential impacts of a trade war waged with tariffs.

BTW: I am not alone in my thinking: Dr. Alan Beaulieu, President of ITR Economics

The following article is great reading: 2019 Recession/2030 Depression

 

 

 

 

How did The Brady Bunch do in The Real Estate Market

Remember The Brady Bunch the iconic television series of the late 1960’s. Well the famous house (the façade shown in the opening and closing credits) is up for sale; the first time since 1973.

Now I always questioned why Mike, an architect would design the children’s bedrooms to be triple occupancy and share a Jack-and-Jill or a Greg-and-Marcia bathroom. Mike and Carol’s bedroom had an en-suite and Alice had her room (see floor-plan link below). Yet the children ensconced in their shared bedroom until Greg had the brilliant idea to convert Mike’s study and later the attic to his own pad including beads and mood lighting. And those kids having to play in the yard with fake grass. I assume Mr. Phillip’s; Mike’s boss was paying him well.

Floorplan of the fictional Brady Residence

The Listing as presented on Zillow: 11222 Dilling Street, North Hollywood, CA 91602

Do to the popularity a low fence had been installed: Brady House Then and Now

Back to the real estate. While the home’s façade was famous the actual filming of the series was on a lot and not in the house. Now the house has not changed much since 1973 as the interior shots show via Zillow.

I was curious on how the fictional Brady’s would have done if they actually owned the house. Now realistically the kids would have moved on by now, or so I hope. Or Jan stayed at home with the parents to take care of them. Greg and Carol would probably be challenged to install a stair-lift on the contemporary staircase. And Alice’s room would probably now be the room of their live-in aid or Jan’s abode.

  • In 1973 the house was purchased for $61,000
  • Adjusted for inflation, that $61,000 would be $346,200 today.
  • The asking price is $1,885,000.

Thus not a bad windfall. The sad news is most likely the next owner may consider razing the home due to its 12,500 SF lot in Studio City, which is a geographically most attractive area of West Los Angeles. If one were to renovate to today’s code and tastes, most likely $400K or higher. Of note being the most photographed house in the United States only 2ndto The White House (the house is surrounded by mature shrubs which has not dissuaded visitors) you are guaranteed all day voyeurs.

Thus The Brady’s at asking will net over $1.5M in 2018 dollars before commissions.

If you may be interested my firm affiliation  Engel and Volkers does have shops in the Los Angeles area.

The Whipsawing of the Real Estate Market, an example in Cherry Creek North

The 200 block of Harrison Street in Cherry Creek North is an interesting block and one I have some familiarity with as I resided on it for 27.5 years. The east side abuts Colorado Blvd, the west side somewhat sheltered from the traffic. Yet old-time brokers know Jackson St and Harrison St. were always more challenging due to their proximity to Colorado Blvd. Yet in recent years developers have found opportunities on these blocks for redevelopment and advantages with the higher natural topography allowing for unobstructed mountain views.

With interest I have been watching 235 Harrison St, the south side of a duplex. Constructed during the tail end of the boom in the mid 2000’s I always appreciated the contemporary design. While most of the block is of traditional design including a bungalow, the expansive glass and landscaping truly set this duplex apart.

The unit is presently on the market and seems to have been struggling to find a buyer thus I decided to look at the history (please see inflation adjusted to 2018 dollars as noted by the *):

  • The unit came on the market on 4/26/18 for $1,100,000
  • The most recent price adjustment happened on 6/8/18 down to $950,000

Thus I decided to look back at the history a little further:

4/30/08:Comes on the market as new construction for $899,000.

*In 2018 Dollars: $1,050,500

-Of note the beginning of The Great Recession is happening.

1/13/09:Sells for $750,000

*In 2018 Dollars: $879,526

-Basically 6 months later and a $149,000 price reduction from initial asking.

2/09/12: Comes onto market at $799,900

*In 2018 Dollars: $875,540

-$49,000 above last resale 3 years earlier does not sell!

After multiple iterations on the market and price adjustments:

2/24/14: The unit sells for $764,276

*In 2018 Dollars: $812,224

Thus from January 2009 to February 2014 the unit in real dollars increased $14,000 and based on inflation has lost $60,000+.

  • 4/28/18: The unit comes on the market at $1,100,000
  • 5/16/18: Asking reduced to $1,050,000
  • 5/23/18: Asking reduced to $1,000,000
  • 6/08/18: Asking reduced to $950,000

As mentioned this is a lovely residence perfect for the buyer who wishes to own a contemporary residence with mountain views and a roof deck. However as astute buyers, sellers and investors we usually desire our real estate holdings at minimum keep up with inflation and even better exceed inflation coupled with various tax advantages (which are usually negated by maintenance and upkeep).

Thus for 235 Harrison Street the past decade has not been a wise investment. Historically buyers and sellers have come close to breaking even yet when factoring in inflation, which has been historically low over the past decade the ownership, has in fact lost money.

Most economists believe inflation will be making a comeback as we witness low unemployment, increased pricing for basic goods and services from gasoline to commodities coupled with potential trade disputes all coupled with rising mortgage interest rates and a possible recession.

What is interesting I have been watching similar designed row houses going up on Harrison Street south of First Avenue; units with a more pronounced impact from Colorado Boulevard and south of 1st Avenue. Will be interesting to see how the market reacts to those units. Granted new construction does have a premium.

Concerning 235 Harrison as a broker, unless one can get a better price on the purchase consider renting or if making an offer present the information from this blog. Good luck out there.

Is the Bond Market Forecasting a Recession Sooner than Later

On more than one occasion when discussing the Denver housing market I have heard “This time is different”. While we have experienced an unprecedented bull market concerning housing and equities since coming out of the Great Recession; it is never different. Unless I missed the memo, business cycles have not ended.

So why this blog today? Well a couple of reasons:

The Bond Market May Be Advising A Recession is Not Far Off:  While I am a real estate broker I do keep an eye on the bond markets as they influence mortgage interest rates. It is well-known interest rates on mortgages have been ticking upwards from historic lows and still, historically are quite attractive at sub 5%. To be honest mortgage interest rates are not what is worrying me, it is what is called The Yield Curve.

While I can probably explain The Yield Curve the following from The New York Times is an excellent simple description:

“The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.

Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.

At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.”

What is worrisome, on the 21stof June (a few days ago) the gap between two-year and 10-year United States Treasury notes was roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years. Of note the Yield Curve fell below zero in late 2007 and the Great Recession started soon after.

Ok, so there is a risk of a recession. A layperson may argue the Yield Curve is not accurate HOWEVER it has predicted recessions over the last 60 years as noted by research conducted by the San Francisco Federal Reserve which can be found via the following link https://www.frbsf.org/economic-research/files/el2018-07.pdf

However to be fair interest rates on long-term bonds have been somewhat manipulated downward due to worldwide central bank interventions i.e. long-term bond buying to shore up economies and keep interest rates low. Thus one could suggest and I partially buy into the idea that the flattening yield curve may be somewhat artificial and not truly representative of the economy’s future course.

Case-Shiller Housing Index: One of my favorite monthly reads and this month’s numbers are nothing new as the same cities continue to hold the top spots: Seattle, Las Vegas, and San Francisco continue to report the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 13.1% year-over-year price increase, followed by Las Vegas with a 12.7% increase and San Francisco with a 10.9% increase.

Yet what intrigues me (and I hope the readers of my blog) is the historical perspective coupled with factoring in inflation as noted from the most recent report in italics as follows:

Looking back to the peak of the boom in 2006, 10 of the 20 cities tracked by the indices are higher than their peaks; the other ten are below their high points. The National Index is also above its previous all-time high, the 20-city index slightly up versus its peak, and the 10-city is a bit below. However, if one adjusts the price movements for inflation since 2006, a very different picture emerges. Only three cities – Dallas, Denver and Seattle – are ahead in real, or inflation-adjusted, terms. The National Index is 14% below its boom-time peak and Las Vegas, the city with the longest road to a new high, is 47% below its peak when inflation is factored in.

Thus if you were a buyer in Denver even during the peak in 2006 and managed to hold onto your home through the Great Recession to today, you are actually ahead concerning real and inflation adjusted dollars.

However I have provided evidence of real estate purchased within the last few years when adjusted for inflation actually losing value.  Thus I decided to look at the annualized return on housing within Denver in a style similar to how mutual funds are profiled i.e. 3, 5 and 10 year annualized returns:

For Denver:

  • 3 Years: 8.17%
  • 5 Years: 9.06%
  • 10 Years: 5.20%

Based on the above-annualized return the last 3-5 years have been a great time to buy and sell. However 10 years ago when the recession started as you can see from the above the annualized return was 5.2%. Yes this beats inflation which we all desire, however when compared to the S&P 500:

S&P 500:

  • 3 Years: 7.30%
  • 5 Years: 7.07%
  • 10 Years: 6.76%

Over the longer term equities continue to beat the housing market.  My message is simple; I believe we may be in an inflated housing market in Denver. As I have provided evidence in past blogs the luxury market seems to be showing signs of resistance to upward prices as evidenced with price reductions coming on line sooner and days on market longer even in what should be peak selling season.

Even the middle and lower end of the market seems to be reacting to the interest rate environment with price increases not as dramatic as higher interest rates reduce affordability.

Between the whipsawing of economic news concerning tariffs/trade, the potential for an inverted yield curve, a slow down in the Denver housing market possibly due to interest rates or buyer fatigue due to lack of inventory based on anecdotal observations or just a bull market that is getting long in the tooth; maybe it is time to take profits and if in cash, maybe time to sit on the sidelines and chill.

 

 

 

 

Is the Market Slowdown Seasonal or an Indicator of Future Activity

As I have always advised clients one will rarely sell at the top of the market or purchase at the bottom. It happens as does winning Powerball i.e. right time, place and lot’s of luck.

Within the last month I have witnessed challenges to the market. At first I thought it was anecdotal based on eyeballing activity on the MLS, the proliferation of For Rent and For Sale signs and in discussions with peers. Yet it finally hit home on a listing I have.

Monaco Place is a popular condo complex located close to I-25 and Hampden Ave. The complex went through some rough times including the infamous shooting of a Denver Police Officer in 1997. During The Great Recession units were being foreclosed on a regular basis. The buildings also fell into disrepair related to the facades, roofs and common areas (most of the complex was built in the early to mid 1970’s). During the period from 2009-2014 one and two bedroom units were selling for under $65,000, this was not an anomaly.

Of course astute buyers saw the value in the complex including a great location, units with wood burning fireplaces (a rarity), low taxes and an HOA fee which includes heat and air-conditioning coupled with large open common areas, deeded covered parking and other positive attributes.

Earlier this year two two-bedroom units sold for new records for the complex:

In March of 2018 3307 S Monaco Parkway Unit C was asking $200K and sold for $215K after just 5 days on the market.

One month earlier in February 2018 3319 S Monaco Parkway Unit A was asking $200K and sold for $216K after just 4 days on the market. Of note, there was a $1,500 concession, thus the true sold price was $214,500.

In April of 2018 3311 S Monaco Parkway Unit C came on the market at $199,900 and closed at $209,500 after 4 days on the market.

The three sales were impressive and many brokers including myself thought those two sales would set a benchmark for the upcoming spring/summer sales season. All three were nicely updated and of similar quality. Based on averages, the three units sold for just over $213,000 with an average 4.3 days on the market before going under contract.

May 2018 saw little activity within Monaco Place, which was surprising with 2oo+/- units and a price point and location that is in high-demand including walking distance to shops, restaurants, supermarket, light-rail, two bus lines and easy access to I-25.

Fast forward to early June 2018. I am asked by a client to place his unit on the market 3351 S Monaco Parkway #F. A nice 2BD/2BA on the top floor of one of the south-central buildings adjacent to parking, steps from the indoor pool/workout facilities and the coin-op washers/dryers just steps from the entry.

The unit was renovated including new paint, flooring including wood and carpeting, replacement of the hollow core with solid doors, kitchen renovation including tile backsplash, granite counters and stainless steel appliances. The bathrooms also remodeled with granite and wood and all updated electrical. The unit, a top floor also offers vaulted ceilings and views onto the open-space surrounded by mature trees thus insuring privacy.

Based on the sales comps we wanted to be fair yet aggressive thus on June 6th we placed on the market for $209,900. The asking was based on the prior 3 sales as noted earlier in the blog.  Showings were limited and little interest. We were surprised again based on recent re-sales.

After 2 weeks we adjusted the price to $199,000 coming in just under $200 PSF. Showings have increased and multiple brokers have advised offers will be sent in the immediate future.

I am confident we will have the unit under contract before the end of the week.

My concern is as follows:

  • Were we overly aggressive pricing at $209,900? While the other three units came on at $199,900 and $200,000 they all sold for above $210,000 or more than 5% over asking. Even at $209,900 we were priced lower than at the price the past 3 re-sales closed.
  • Did the 5% price reduction open the floodgates? Again, based on past re-sales which are within the public domain one could argue instant equity even at the higher asking.
  • Did mortgage interest rates play a role? In Feb 2018 the average 30 yr. mortgage was at 4.32%. In May the rate was 4.61%. As of today (June 19th, 2018) Wells Fargo is quoting 4.75%.

Thus interest rates may be one factor i.e. higher rates increase one’s payment and subsequently can impact housing prices downward over longer periods.  Yet historically interest rates continue to be at record lows.

While the economy continues to gain steam nationally is Denver still experiencing the influx of buyers? At a recent closing in conversation with the title company closer she mentioning having two deals close earlier in the day; both sellers native to Denver moving out of state to buyers moving to the state flush with cash from their out-of-state sale. It seems the blockbuster pace in in-migration may actually be slowing and out-migration increasing as noted in the Denver Post last year: More Coloradans Moving Out….

I have provided statistical evidence in previous blogs concerning the slowdown on the upper-tier of the market. While the sale of $1M+ homes may have set records on a pure transaction basis, the reality is prices on the upper-end are stagnating and adjusting downward as days on market are increasing. And while the overall market set records for average and median home prices during the beginning of the 2ndquarter was that the top?

Monaco Place by most measures is an affordable opportunity where one can purchase with a monthly payment that is less than comparable rent.  Yet to generate activity my seller had to reduce his asking by 5% now at 7.5% less than comparable sales in the 1stand beginning of the 2ndquarter.

Is this a seasonal shift i.e. summer vacations or a signal that the market is plotting a new course? Only time will tell. However while the spring season used to be known for sizzling activity so far this season like the weather has been cool and mild.

Will keep you posted when the listing closes and what the final sales price will be.

Wish me luck.

 

 

 

 

 

If At First You Do Not Succeed; Relist and Hope for the Best

While I do not necessarily believe the following quote is attributable to Einstein in the context of this blog I find it most appropriate:

 Insanity: doing the same thing over and over again and expecting different results.

I use the above quote to characterize some aspects of the real estate market in Metro Denver that I am witnessing as both a broker and observer. To distill the niche of the market for which this quote is appropriate are the select listings which enter the market, do not sell, are withdrawn or expired and come back on the market at the same or higher price.

Here are just a few select examples:

100 Lafayette Street: A sprawling 2-story post-war suburban style home in the desirable Country Club neighborhood on an expansive lot.

  • 4/2/16          Listed at $1,350,000 – subsequently withdrawn or expired
  • 3/9/17          Listed at $1,300,000 – subsequently withdrawn or expired
  • 5/18/17        Listed at $1,300,000
  • 6/6/17          Price Adjustment to $1,280,000
  • 7/18/17        Price Adjustment to $1,250,000 – subsequently withdrawn or expired
  • 3/18/18        Listed at $1,250,000
  • 4/18/18        Expired
  • 4/19/18        Listed at $1,199,000

This residence will have been on and off the market for 2 calendar years. During that time, while there has been at the most recent resisting a $150,000 price reduction or approx. 9% the residence continues to search for a buyer. Yet the pricing over the past year had remained static. Yes, one may argue inventory for the neighborhood continues to be challenged and just waiting for the correct buyer. I will continue to watch as while the residence has many positives i.e. finished square feet and larger lot; much of the interior could use a cosmetic update and the residence is adjacent to 1stAvenue at a partial motion intersection; while designed correctly i.e. south garage will continue to be a challenge.

600 High Street: A large sprawling large brick potential duplex configuration sitting on a coveted 100’ x 125’ lot. Personally I have had my eye on this one for potential redevelopment HOWEVER I too cannot make the numbers work yet its pricing history continues to baffle me:

  • 8/26/14:      Listed at $1,495,000
  • 8/26/15:      Price Adjustment to $1,445,000
  • 11/20/15:    Price Adjustment to $1,395,000
  • 1/9/16:        Price Adjustment to $1,345,000 – under contract and active again
  • 4/8/16:        Relisted at $1,150,000
  • 10/8/17:      Price Adjustment to $1,250,000 (yes adjusted upward)
  • 10/27/17:    Price Adjustment to $1,150,000  (1.5 years to get back to that price)
    •                         -Goes under contract multiple times and falls through
  • 12/11/17:    Price Adjustment to $999,000 (under contract and falls through)
  • 3/23/18:      Relisted at $999,000
  • 4/15/18:      Goes Under Contract
  • 4/26/18:      Back on market at $999,000

At of April 2018 this residence has been on and off market for 3.5 years. While there had been a substantial price reduction from the original $1,495,000 to a more realistic $999,000 the home has still not sold.  I will not get into the details of Time Value of Money and Inflation. Yet I will suggest the history of this house seems to repeat itself, look at the sales history:

  • 7/13/1995:   Sold for $670,000
  • 2/20/1997:   Sold for $670,000
  • 6/15/2002:   Sold for $625,000

Thus between 1995 and 2002 the home actually lost $45,000 (more if factoring in inflation) and now with 3.5 years on the market continues to look for a buyer. While there may be a buyer willing to pay $999,000, when factoring in inflation and rising interest rates is it worth the wait not even considering maintenance and carrying costs.

140 S Claremont Street: This is a home I have watched as I walk by weekly when looking at options in Hilltop. With its coveted location within 2 blocks of Graland as well as Cranmer Park coupled with great curb appeal I have literally watched this home bounce around concerning pricing as follows:

  • 6/15/16:       Listed at $2,375,000
  • 8/30/17:       Price Adjustment to $2,275,000 – Subsequently withdrawn
  • 1/12/17:       Listed at $2,275,000
  • 4/10/17:       Price Adjustment to $2,175,000
  • 6/14/17:       Price Adjustment to $2,075,000 – Subsequently withdrawn
  • 8/7/17:         Price Adjustment to $1,999,000
  • 10/4/17:       Price Adjustment to $1,900,000 – Subsequently withdrawn
  • 4/1/18:         Relisted at $1,950,000
  • 4/27/18:       Goes Under Contract

During its almost 2 years on the market there were multiple price adjustments coming down to $1,900,000 in October 2017 only to be placed back on the market in April 2018 at $50,000 more. Again, I understand spring selling season yet I guarantee you any good broker representing a buyer will review the history of the listing and share with their client. As of last week, went under contract; I assume the broker representing the buyer has shared the pricing history.

Back to the definition of insanity. While I am not suggesting the above examples are insane. I believe it is more a function of the market or the perception of the market i.e. unabated demand, low supply and continued low interest rates. Yet the markets are a changing i.e. interest rates are ticking up, inflation is on the horizon and the equity markets are buoyant yet the charts are showing a slow downward trend from their peak on 1/28/18 of 26,616 (while composing this blog the DJI is trading at 24,288 or 9% off the high of 3 months ago.

I do not fault the brokers or their clients i.e. the sellers…..this has happened to me as a broker! This was back in 2012 when the market has just endured the Great Recession and was just beginning to show signs of a activity. I will not disclose the address as the home has since been sold and closed however the neighborhood was Cory-Merrill.

The house a pop-top first sold after renovation in October 2005 for $810,000. 2005 we were 1.5 years before the peak of the market; the buyers in retrospect over-paid for the residence. In addition to being in the house for $810,000, they added an additional $40K in cosmetic upgrades to the interior, thus their in the house for $850,000.

I am contacted in early 2012 concerning listing the residence. The sellers are retiring and moving and desire to leave Denver. I go over to the residence with a peer broker armed with comparable’s and camera. My co-broker and I confer and suggest an asking of $715,000. And now the saga begins as follows:

Per the seller the house is listed in April 2012 for $819,000! Yes, $819K

  • 4/25/12:       Listed at $819,000
    •   -3 weeks, one showing off an open-house.
  • 5/15/12:       Price Adjustment to $739,000
    • -Seller still believes this is the selling price regardless of our $715,000 suggestion a month earlier.
  • 10/4/12:       Relisted with another broker for $739,000
  • 11/2/12:       Price Adjustment to $725,000
  • 12/14/12:     Sold for $710,000

In addition to the loss between the $810,000 paid in 10/2005 to the $710,000 paid in 12/12 or $100,000 over the 7 years during my 10 months as broker the seller’s paid in excess of $40,000 in mortgage and carrying costs only to sell the residence for what my peer and I suggested 10 months earlier.

While I did not share the following with the seller; based on inflation the $810,000 paid in 2005 equaled $952,250 in 2012; thus their loss was even more severe.

 

The lessons are simple:

For sellers, even in a hot “sellers market” be realistic.

For brokers, while a listing may look attractive, if it does not sell, it is a challenge both financially and psychologically for all parties.

Finally from Wall Street we say “Do not fight the tape”…..the DJI is off 9% from its high, interest rates are going up, inflation is an actual concern and wages while ticking up are still considered stagnant for now.  My humble suggestion, price correctly and sell immediately, the Goldilocks market conditions can change to a Papa Bear in a moment’s notice. Sell like its 2016 not 2005.

 

 

 

 

 

 

 

 

 

 

 

 

Does the New York City Luxury Market Foretell the Denver Luxury Market and Beyond

Yes I am well aware Denver is not New York City even if we do have Rosenberg’s Bagels and The New York Deli News; literally a slice of the Big Apple on Hampden Avenue. However the old adage goes when New York sneezes the rest of the country catches a cold. The reference is to the stock market; I am more concerned about the real estate market.

As some of my readers know I hold real estate licenses in both Colorado and New York and I work in both markets. Most recently the statistics concerning New York City real estate is concerning:

  • Real estate sales in the first quarter of 2018 posted their largest drop in nearly a decade and reached their lowest level in more than six years.
  • The high end of the market is getting hit the hardest, partly because of asking prices.
  • Many sellers have yet to lower their prices in keeping with tax law changes and a general slowdown since 2014.

The big headline in Manhattan was the 25% reduction is sales in the first quarter of 2018 when compared with the prior year. While the number in itself raised a few eyebrows more shocking was the drop, the largest in a decade meaning since the day when Lehman Brothers and Bear Sterns basically imploded and some argue the catalyst of The Great Recession.

The high end of the market is getting hit the hardest, since it’s the most discretionary segment. Prices for luxury apartments in Manhattan fell 15 percent and sales were down 24 percent in the quarter from 2017.

In Denver the luxury market seems to be on fire with sales including the highest number of over $1M homes selling in 2017 and a few blockbuster listings already in 2018. New York City went through the same cycle a few years back including the record setting $100M condo sale at 157 W 57thStreet.

For now Denver seems immune as the luxury sales have been associated with truly unique and rare properties in Denver’s toniest neighborhoods including Country Club, Cherry Creek North, Polo Club and in the suburbs including Cherry Hills Village. My question is anyone concerned about the number of condos coming online and developed in Cherry Creek North, many asking over $1M. Or the potential glut of luxury rentals on the market and those in the pipeline in Cherry Creek and along the Speer Corridor.

The luxury housing market I have suggested is similar to the stock market; it in general looks forward and sets the trends for the overall market. Well let’s look at the overall Manhattan market…..

The average sales price in Manhattan dropped 8 percent when compared to one-year prior. 8% may not sound like much however let’s assume you purchased a home in Metro Denver in 2017 for the average price of $480,140. How would you feel if suddenly $38,000 of your value suddenly disappeared and your home was now worth $442,140?

The money you invested in the conventional down-payment has basically disappeared yet your mortgage is the same, your PITI will probably increase due to property taxes and thinking about refinancing, interest rates are trending up not down.

While many believe the Federal Tax Law changes concerning deductibility of real estate taxes being capped at $10,000 mostly affects the Northeast and California, guess again….many of the luxury homes selling in the Denver metro area have tax bills in excess of $10,000 annually. The next assessment coupled with the gains over the past few years will increase valuations even further.

Let’s assume tax law changes are inconsequential; let’s consider other factors, which are challenging the Manhattan market:

Glut of Luxury Properties: In Manhattan due to land and construction costs luxury is what has to be constructed to justify investment costs. The same is being said in Cherry Creek North and in areas of gentrification i.e. LoHi and RiNo. Yet the luxury market is not infinite i.e. the higher the price point the less demand, as the potential pool of buyers is smaller and honestly more fickle.

Out-migration: While I continually hear about the continued in-migration leading to challenges concerning livability the reality is according to the state demographer, we are experiencing increased out-migration.

Cost Of Living: Denver is and has been for a few years the most expensive city not located on a coastline. While we believe we can rest on our laurels concerning the Colorado Lifestyle and the hipness of Denver, Salt Lake City is nipping at our spurs. We also forget such cities as Minneapolis, Dallas and others are actively courting tech businesses and capturing new residents due to their reasonable cost of living.

Do I see the market changing radically in the next few months? Not necessarily however the headwinds are there i.e. interest rate hikes, a bull market that seems to be losing steam, housing costs that are increasing faster than average wages and over-priced listings sitting on the market the light of rationality.

While we may wish to emulate Seattle, Portland and San Francisco we should be careful what we wish for.