Should we be Concerned with Mortgage Delinquency Forecasts

Covid-19 has truly impacted every sector of the economy. While The Great Recession started on Wall Street (implosion of Lehman Bros) and let to the housing crisis which was not unprecedented i.e. look back at the Savings and Loan Crisis of the 1980’s, Coronavirus may make those past challenges seem trivial over the long-term.

A recent report from Oxford Economics estimates that 15% of homeowners will fall behind on their monthly mortgage payments. If that forecast comes to fruition, mortgage delinquencies caused by the coronavirus pandemic would exceed the number seen during The Great Recession. Back then, the peak delinquency rate was 10%.

At present nearly 4 million homeowners are in the midst of forbearance plans, representing 7.5+% of all mortgages. Unfortunately, the actual percentage is worse when you include government-backed loans i.e. FHA/VA and related. Some believe the actual number may be closer to 11%. Thus, to put this perspective 11 out of 100 residences that have mortgages are within forbearance including options to delay payments, renegotiate terms and so forth. Of note for those with Government backed loans, forbearance requests can be for up to one-year.

As I have commented in prior blog posts larger money-center banks have imposed more rigorous standards concerning lending including higher down-payments for purchases and some banks are avoiding HELOC and related products due to concern about default risk.

The one positive concerning forbearance opportunities is the potential reduction concerning foreclosures. While foreclosures were rampant during The Great Recession with opportunities for a workout limited the assumption is lenders realize 1) they do not desire to have non-performing loans and their underlying assets on their balance sheets and 2) the hedge funds and investors that purchased those distressed properties during The Great Recession may not be available today.

We are all witnessing unique circumstances and the reality is forbearance is an option that is welcome for many yet has its risks. Of note, forbearance is not forgiveness of payments; depending on its structure it is usually a pause concerning monthly payments. The mortgagee will have to work out terms with their lender concerning repayment of the amount not paid during the forbearance period. While government back loans do not require a balloon payment to make up the forbearance, other loans may require such repayment.

The point is forbearance is welcome for many in during these unique circumstances coupled with some states legislating a pause concerning foreclosures and evictions. If concerning forbearance, it would be best to secure advice from a trusted source whose fiduciary duty is to you and not your lender. There are various non-profits available. Locally in Denver I am a fan of Alexandra Erlich, a Credit Advisor/Educator.

We are all navigating an unchartered course coupled with mixed messaging and misinformation littering the landscape. I write my blog to inform, assist and entertain. I hope this post even if assisting one person; I will be satisfied.

 

 

 

In Real Time the Real Estate Market is Showing Additional Signs of Stress

When brokers were again able to show properties again post Covid restrictions there was a flood of activity. The statistics from ShowingTime advised that Monday, May 1st was one of the busiest days for showing since record keeping started in Metro Denver. I do believe the enhanced activity was a mix of true buyers and maybe some voyeurs. Let’s all admit viewing real estate online is actually quite enjoyable and a nice diversion.

Yet a recent commercial sale and a new residential listing are I believe exhibiting a flashing sign of caution and potentially a challenging period ahead of us. I do not envision the era from 2007 i.e. record prices that 3 years later included foreclosures and homeowners underwater. Yet with the major money-center banks adding loan loss reserves and cutting back on HELOC activity, being proactive versus reactive may be the manta for the next 6 to 18 months.

A Commercial Building Endures a Loss: The Citadel Building at 3200 E. Cherry Creek South Drive is unique as its location is between Cherry Creek and Colorado Boulevard. The building has 130,652 SF of finished space. The structure is a bit of an outlier as it is surrounded by deluxe and luxury residential. Even with its early 2000’s stone façade mixed with new-classical elements the building is consistently occupied. The lobby is attended. Present tenants include New York Life and Bessemer Trust.

  • The building last sold in June 2017 for $37.03M
  • The building just sold last week for $33M, a $4M loss in just shy of 3 years not including maintenance, upkeep and commissions.

As I have commented prior, 2017 in my personal hindsight seemed to be the pinnacle of the real estate market for both commercial and residential. I am not privy concerning the motivation for the sale. There could have been an upcoming large tenant departure which would impact the rent roll or the building may be in need of structural/cosmetic updates that cannot necessarily be passed through. The point is a loss is a loss.

A Classic Cape Cod in Cherry Hills Losses Value Over 13 Years:  Cherry Hills Village is the most affluent suburb in Metro Denver. A bucolic setting of single-family homes, large lots, home to the world-class Cherry Hills Country Club that has hosted PGA events and a location between Central Denver and the Denver Tech Center. Yet the home value expansion post Great Recession seems to have favored central city locations leaving gains in the suburbs behind. This listing may reflect this trend as follows:

12 South Lane, Cherry Hills Village is on the larger size of homes in Cherry Hills. Located in what is considered Old Cherry Hills i.e. west of University Boulevard is a two-story home with 7,381 square feet above the ground plus a 2,341-square-foot finished basement. Luxury design details include a William Ohs eat-in gourmet kitchen. The 2nd level master includes its own fireplace, his and her closets an en-suite spa-oriented bath and a private patio. Additionally, the 2ndlevel has additional bedrooms, a gym and space that can be used as an extra apartment. The finished basement has a large recreation room with a media center, wine room and playroom.

  • The home last sold for $3.475M in August 2007
  • The asking price in May 2020 is $3.35M

Thus a $140,000 loss yet when considering inflation; the $3.475M in 2007 equates to $4.4M today. Of note the loss does not include real estate commissions. Assuming 6% on $3.35M would equate to another ($200,000) plus closing costs.

Unfortunately, the sales history of this house is not favorable as it has been listed prior:

In Nov 2007, 3 months after the initial purchase the house was listed for $3.785M or a 9% gain. It did not sell after 3 weeks on the market. Interestingly this is a period when the housing market started to show weakness and in less than one year later Lehman Brothers would file for bankruptcy.

The residence was again placed on the market as follows:

  • July 2018: $3.950M or a 4.4% gain against the purchase price 11 years earlier.
  • Jan 2019: Reduced to $3.695M or a 6.5% loss against the original purchase price.
  • May 2019: Reduced again to $3.495M, removed from the market two months later.
  • Sep 2019: On the market again asking $3.350M
  • April 2020: Listing Removed
  • May 2020: On the market again asking $3.350M

I do not have a crystal ball yet having been through downturns I would be concerned.

The following is the advice I am providing to my clients:

Buyers: If you plan to be in the house for a minimum 4-5 years, absolutely love it and OK with a potential 10%-15% reduction in value coupled with tax bill assessed during the pinnacle of the market let’s proceed. The reality is a home purchase, primary or secondary is an emotional process coupled with lack of liquidity and more recently challenging to draw monies out if needed. Thus, purchasing in the present market needs to be quantified on both financial and emotional spectrums.

Sellers: I am asking my sellers their true motivation to sell. If the answer is “If I get the price I want” I usually suggest I am not the real estate advisor for them. However, if the sale is required for financial reasons i.e. employment loss, relocation, lifestyle change and related I am advising price at market or slightly below to encourage showings and will work out commission structure to be more advantageous to their situation.

Unfortunately, the headlines suggest housing is retaining its value. Yet this is based on inventory in many markets having been cut in half due to Covid. Thus, the remaining listings may present on-paper a continued strong valuation HOWEVER this is based on artificially low inventory and questionable demand.

While many have suggested job losses have been in the lower sector of the economy i.e. the service sector, this is accurate. However we have what is called the Multiplier Effect. The point is, we are now experiencing job insecurity in not only the service sector and traditional blue-collar jobs but also in while collar high-income (6+ figure) and educated professionals and small businesses.

Headlines in Denver have been advising the housing market at $1M plus has converted to a buyer’s market. I would suggest that number i.e. $1M will continue to drop. While there may be a burst of activity this summer, I predict it will be on the lower end of the market and the upper end i.e. $700,000+ will be challenged.

I have also requested to opine concerning the 2nd home/vacation market. This is challenging;  the upper end of the market is insulated i.e. not a concern to the top 1% of earners. More concerning is the owners of 2nd/vacation homes that relined on transient-stay incomes generated from listings on VRBO, Airbnb and related entities. That income stream evaporated suddenly and who knows when leisure travel will generate revenues again. If the stock market performance of the airlines and rental car companies is an indicator; more pain versus gain is on the horizon.

It is a brave new world out there and only time will advise how the markets do.

 

Future of Internet and Traditional Real Estate Brokerages

During The Great Recession as in past recessions the downturn provides a catalyist for new ideas, ways of thinking and while I am not a fan of the term being a disrupter in the marketplace.

When Zillow, Redfin, Redefy, Rex Real Estate, Trelora and others desired to disrupt the status quo concerning real estate brokerage i.e. brokers representing buyers and sellers; a form of which has probably been in practice since Biblical times where real estate investing is actually mentioned.

The stock market also took notice as the old-guard real estate firms were losing value while the new kids of the block were attracting venture capital as well as ma and pa investors. Traditional brokerage seemed to be falling out of favor, being known as Boomer while the new entities were the disruptors promising to upend traditional brokerage practices and in turn benefit buyers and sellers across the board. Personally my favorite comment during the booming real estate transaction landscape of a few years ago includes Trelora’s young founder and former CEO Joshua Hunt telling Inmanagents are going to shit themselves.”

There is an irony in the present marketplace. With Covid-19, the technology concerning marketing and presentations would seem to be at the forefront concerning real estate when in-person showings and open-houses are verboten in most of the United States. Yet when Covid-19 hit the new firms on the block having been in their infancy during The Great Recession or not even operating entered a brave new world concerning real estate brokerage.

Some headlines from the past two weeks:

  • Redfin will cut 7% of its staff and furlough hundreds of agents due to decreased housing demand amid the COVID-19 crisis. The Seattle real estate giant will slash 41% of its field agent workforce, with a majority furloughed until Sept. 1, and the remaining laid off.
  • Zillow will slash expenses by 25% this year; freeze hiring across the company; cut nearly all marketing spend; and suspend home-buying through its Zillow Offers business. 

Trust me traditional real estate brokerages are not doing any better at present. Realogy which is the umbrella company for many traditional traditional brokerages (see picture below) has their share price down 66%+ year-to-date.

Screen Shot 2020-05-03 at 8.48.36 AM

 

Recessions are known to be a great equalizer. The new technology brokerages may survive Covid-19 and prosper. Concerning their pitch; technology and attractive pricing for sellers i.e. fees and/or commissions less than traditional brokerages and for buyers potential rebates.

However traditional brokers, those who have a longer tenure in the market have advantages including experience, client lists and the ability to advise from having eyes and ears in their local market and not dependent on algorithms based on data points.

Personally one of my best years in residential real estate was in 2012. The reason, the economy was starting to show green shoots coming out of The Great Recession. I advised my buyer-clients to consider entering the market. Asking prices were beaten down (some were truly distressed), demand was soft and the opportunity presented was too good to pass up.

Concerning my sellers during this period in the market, I advised if possible hold-on, rent their residences for cash-flow (as those who could not qualify for a mortgage went the rental route) and wait until the market strengthens which it did in the subsequent years. This is not information the disruptor firms can necessarily provide to clients in a local micro market.

While optimists advise Covid-19 is a speed-bump concerning real estate and the sellers market will continue; I hope they are correct. With the percentage of listings recently put on hiatus due to the restrictions concerning visitation and so forth I forecast the following:

  • Covid-19: Once the Covid-19 issues are rectified i.e. therapeutic options, vaccine and so forth we may see those houses come back on the market. HOWEVER, this may lead to a flood or glut on the market thus depressing prices and transitioning to a buyers-market.

 

  • Unemployment: While the stimulus packages will eventually provide short-term relief, longer-term I would be concerned. While unemployment skyrocketed during the past month I do not believe hiring will follow a similar trajectory upward post Covid-19. Due to longer-term unemployment or under-employment we may witness houses coming on the market due to job loss, employment relocation and other economic challenges.

 

  • Interest Rates: I believe will continue to remain at historic lows which in general is positive for home-purchasing. Yet with employment insecurity and potential retrenchment in housing values I am not sure low-interest rates will in-fact be enough of a catalyist to sustain the sellers-market.

New Brokerages on the Block: Zillow and Redfin I believe will be sustainable as publicaly traded companies i.e. access to capital. However I believe their business models will continue to evolve out of necessity. beyond their existing models. For example Zillow Offers which is presently suspended may not survive long-term as the model is I believe only sustainable in a sellers-market.

Redfin’s salaried brokers may have their compensation model revised to reflect a market in transition.

Concerning the discount, flat-fee, Internet Only firms; they may witness a boost short-term from sellers wishing to limit expenses concerning the selling of their homes, however, longer-term I would not be surprised to see a few of the firms cease operations. This has happened in past recessions and some of these new entities remind me of businesses that flourished during the the DotCom Bubble of the early 2000’s.

Realogy and Other Traditional Firms: Call me Boomer however I will be the contarien and advise there may be opportunity here. The old-line traditional firms have embraced technology coupled with the advantage of human interaction and full service and advising.

I believe the next 6-12 months will provide guidance concerning both residential real estate and the future of the firms i.e. traditional brokerages and the so-called Disruptors. Personally, I have been impressed with how traditional firms including the one I am affiliated with have been able to not only embrace technology to circumvent the ban on in-person showings but more impressively how brokers have been able to pivot to the new market realities.

I am not a naysayer concerning the Disruptors. I witnessed how the neighborhood bricks and mortar travel agencies disappeared due to the advent of the online travel agencies i.e. Expedia, Orbitz and others. HOWEVER, I am also impressed with the tenacity and resurrection of travel agents and consortiums that support them i.e. Virtuoso, Travel Planners, ASTA and others. More importantly how the old-line travel agents were able to come to the rescue as noted in a Forbes article authored by Doug Gollan titled: COVID-19: Airlines And OTAs Say, ‘Don’t Call Us’ As Travel Agents Come To The Rescue, assisting their clients during the recent issues concerning Covid and how their online competitors were not able to react and respond as quickly and as efficiently. Full Disclosure, in addition to being a Real Estate Advisor I also hold an IATAN Card as I am a Travel Advisor for a select group of clients and my brokerage affiliation also offers travel services including Vacation Rentals, General Aviation and Yacht Sales and Charters.

Sometimes the personal, human interaction is actually desired.

 

 

Two Years and Counting a Fix and Flip Cannot Find a Buyer

While HGTV and other channels make the whole Fix and Flip niche seem easy and profitable rarely are the Flops shown. When they are; the losses seem minor. The following is an example of a Fix and Flip that Flopped and is still looking for a buyer

I was introduced to the home a few years ago post fix-up. I had passed the house almost daily on my commute between my residence in the Cherry Creek North neighborhood and Downtown Denver. I liked the design i.e. pre-1900 Victorian, historic coupled with a manageable size, however the location challenged me.

While the residence is within a few hundred yards of Cheesman Park the home is adjacent to a heavily trafficked (2+ thru lanes) one-way road and is across the street from a commercial strip which has a later evening demand i.e. crowds and noise. The master bedroom, oriented to the east challenged me as well due to the morning sun orientation in the summer and the headlights heading west into the windows during winter mornings. A design background can make one hypercritical or just a good eye concerning potential issues down the road.

The Interior renovation while visually attractive was mostly cosmetic. Yet the majority of the original single-pane windows facing north were NOT replaced; this could be challenging concerning both noise from the roadway and winter temperatures. The rear yard adjacent to the major roadway separated by a flimsy wood fence would be in my opinion noisy, a security challenge and of limited use. Thus we decided to forgo pursuing the house coupled what we felt was an inflated asking price.

The home first came on the MLS as a closed sale with the following note:

“Entered for comp purposes. Sold to a developer before going into MLS. Needed updating and the addition of a garage.”

  • 5/16/2018 Sold:    $700,000

The home after the renovation came back in the market on 10/2/18, 4.5 months after the initial purchase. The asking price $985,000!

The Fall and Winter of 2018/2019 challenged the pricing of the house as follows:

  • 10/17/2018: $985,000-$975,000
  • 10/31/2018: $975,000 – $970,000
    • *1/17/2019: Change of Ownership – $719,500
  • 1/23/2019: $970,000 – $962,000
  • 2/4/2019: $962,000 – $958,000
  • 2/18/2019: $958,000 – $954,000
  • 3/6/2019: $954,000 – $952,000
  • 3/22/2019: $952,000 – $935,000
  • 4/10/2019: $935,000 – $928,000
  • 5/6/2019: $928,000 – $916,000
  • 6/2/2019: Listing Expired

Three (3) Days later the home comes back on the market, this time with a different broker:

  • 6/5/2019:        New Listing $899,000
  • 7/23/2019:      $899,000 – $889,300
  • 8/20/2019:      $889,300 – $859,900
  • 9/26/2019:      $859,900 – $843,000
  • 10/18/2019:    $843,000 – $829,000
  • 11/14/2019:    Listing Expired

 

  • 4/20/2020:      New Listing $889,000

It seems the ownership is continually trying to recoup their investment. As noted on 1/17/2019 there was a change in ownership per the Denver Assessors office between two  LLC’s. My assumption the original owner/LLC could not sell and relinquished to the lender or sold an interest. The transaction at $719,500 was $19,500 above the cost of original purchase May 2017, 1.5 years later.

Even with the new list price of $889,000 the home is being listed at $96,000 less than the original post fix/flip asking price of $985,000. Add to this the house back in October 2019; 6 months prior was last asking $829,000 and did not sell at $60,000 less than the asking price posted last week.

Thus in a span of two years the home had been purchased, fixed up, listed by multiple brokers and has yet to sell. Of note during the two years the ownership has had to cover carrying costs i.e. debt service, real estate taxes and upkeep.

My gut is the home if/when it sells will be $799,000 to $845,000 range possibly still a little aggressive due to location being adjacent to a major one-way street. Even at $845,000 when including the cost of the renovation, carrying costs for 2+ years and eventual broker commissions a break even may be achieved; yet I assume a loss not only in real dollars but also the opportunities missed concerning the monies tied up in this one fix and flip.

While there seems to be pent-up demand for housing in Metro Denver coupled with low interest rates there is a fine line between demand and irrational exuberance. In a strong seller’s market negative attributes including adjacent heavily trafficked roadways, lack of view, cosmetic versus mechanical/structural improvements seem to be dismissed by prospective buyers based on the assumption prices will continue to rise.

However we have been in a 10+ years bull run, not only in Denver, the whole country. Our regional economy has diversified (dependence on oil and gas has diminished yet according to a Denver Partnership Study from 2015 oil/gas accounts for 11% of Downtown Private Sector workforce, troubling concerning the rout in the oil markets of late) yet when Denver is in the top ten most expensive housing markets and is the only one not located on a coast, should we be concerned? I would be and this fix and flip may be the canary in the coal mine.

2020 Not Off to a Great Start – One Denver Metro Subdivision Downdraft

I am the first to admit one quarter does not set a trend. Add to this the issues surrounding Covid-19. While real estate brokers are considered an essential, the reality is showing homes in person is now verboten. While we (brokers) have adapted concerning virtual tours, Zoom open-houses and related marketing techniques my concern 2020 may be a challenging year.

So, what prompted this blog topic? A few weeks back when the equities market was in seemingly a free-fall cycle, I peer broker posted the following quote on his Facebook page:

 “You know what hasn’t dropped 10% during the past month? Housing.”

I personally love the quote, as a fellow broker I complement him on his marketing acumen. However, is his assessment accurate?

While the information provided by our local MLS coupled with aggregators i.e. Zillow, Redfin and others who proport to have economists on payroll are good with macro statistics I decided to drill down, specifically on a subdivision within unincorporated Arapahoe County.

The subdivision (in which I have transacted) is located at the juncture of the City of Denver border and the south suburbs. The majority of homes within the subdivision were built between 2010 and 2013 (when the economy was emerging from The Great Recession and Metro Denver experienced an unprecedented in-migration).

I went back the researched closed sales from 2015 to the present i.e. March 31, 2020

Below is the chart:

Screen Shot 2020-04-20 at 7.43.46 AM

While one quarter does NOT set a trend, I will advise what troubles me about the information above.

  • 2018 may have been the pinnacle of the market with 9 units sold.
  • 2019 secured the highest prices paid on a PSF basis yet days on market increased.

Over the 5-year period $/PSF closed matched inflation of the overall economy; this subdivision I believe is a better representation of home values and activity versus the headlines concerning exponential gains in real estate values between 2010 and 2019.

  • The 1st Quarter of 2020 is not good for this particular subdivision.

Then we come to the one close during the 1st Q of 2020. First the days on market which averaged 42 during the previous 5 years increased for this one home to 107, over double. The 107 Days on Market is troubling as it shows the home entered the market months prior to Covid-19 emerging as an external threat.

Concerning the Price Per Square Foot, an approx. 10% reduction. While the number of bedrooms is one less than the 5-yr average the size of the home i.e. above grade and total square feet exceed the average. While interior finishes including basement, lot orientation and views can impact a home’s value, a 10% downdraft from the previous 5-yr average is troubling. Of note this one transaction will impact appraisals in the subdivision for 6 months.

If the singular 2020 sale is compared to the sales of 2018 and 2019 the downward revision concerning values is even more pronounced.

While I am not clairvoyant and again one sale does not make a market prediction or a trend; this one subdivision does show a 10% drop in valve during Q1 of 2020 against the previous 5-year average and a more pronounced drop against the prior 2 years.

Concerning the broker who proclaimed housing has not corrected 10% during the equities market rout, I am not sure the longer-term statistics will be in his favor.

JP Morgan Chase and Wells Fargo Tighten Mortgage Lending Criteria and My Predictions Post Covid-19

Before the Covid-19 crisis mortgage interest rates were close to historic lows. Refi’s were happening and while the housing market may have been in a seasonal slowdown it was and still is a seller’s market. However, Chase the country’s largest lender by asset and the nation’s 4th largest mortgage lender in 2019 is raising borrowing standards this week for most new home loans as the bank moves to mitigate lending risk stemming from the novel coronavirus disruption.

  • Beginning on April 14th, 2020 those applying for a mortgage through Chase will have to have a credit score of at least 700 AND provide a down payment of at least 20% of the home’s value. Of note the average down payment across the housing market is around 10%, according to the Mortgage Bankers Association.

While on the surface this may seem Draconian in fact it is a smart move on the part of Chase and I assume other lenders will follow. Consider the following:

  • Within the past few weeks 16M+ workers have become unemployed.
  • Economic uncertainty is an issue; while the equity markets have gained back some value lost over the last month, we are still enduring 20% losses across most major indexes.
  • Chase’ decision will reduce their exposure to borrowers who unexpectedly lose their job, suffer a decline in wages, or whose homes lose value.
  • Shifting staff to refi’s is profitable i.e. collection of fees and lower risk i.e. underlying asset usually has higher percentage of equity.
  • The residential mortgage market is already under strain after borrower requests to delay mortgage payments rose 1,900% in the second half of March.

While Chase let the way, according to Forbes, others are jumping on the wagon: Mortgage Loans Get Harder to Come By As Lenders Tighten Standards

As prospective buyers, sellers, real estate brokers and others associated with the industry should we be concerned?

As a broker who has been in the industry for almost three decades, I too have found the events of the last month unprecedented. However, history usually has lessons that can be applied to recent events.

Colorado Regional Recession (mid to late 1980’s): A downturn in oil prices and an exodus of oil related businesses from Denver consolidating to Calgary and Houston there was an outflow of population and employment throughout the state. In Metro Denver housing prices peaked in 1983/84 and bottomed between 1987/88. Of note the home I purchase in the Fall of 1987 for $140,000 previously sold as new construction three years earlier for $200,000. The drop-in value 30%.

Fall 2008 Financial Crisis: The collapse of Lehman Brothers would be the catalyst for the Great Recession. Coupled with housing considered a commodity and purchased with leverage the result a drastic downdraft in values beginning in 2009 and not showing positive activity until 2012.

Concerning the Denver Market while our economy has diversified and we may truly believe there is a housing shortage I believe we may be in for some challenging months ahead.

  • There will be job losses as some businesses will not re-open and others will experience contractions of their business.
  • The existing glut of deluxe and luxury rentals will be exacerbated due to employment relocations i.e. out-migration and job losses.
  • Demand will continue for starter homes; I believe we will see more requests for modifications and pre-foreclosures in the middle and upper-markets where some owners were already on the margins concerning debt-to-income ratios.
  • While not immediate, I do believe there will be job losses in our economy. While demand will be sustained concerning starter homes, I feel we already have a glut of high-end rentals which will lead to an increase in vacancy.
  • Home values will not necessarily drop immediately and even though the equity markets may stage a rally I believe the impact on small and medium sized businesses and loss of the wealth effect (doe to equity markets and loss of values of homes) will lead to a retrenchment in asking prices and may move the overall real estate market back to equilibrium.
  • Real Estates Taxes in Denver and surrounding counties have increased due to underlying home values. However, I believe there will be a short fall in sales tax collection and if home values decrease will lead to a contraction of real estate taxes collected which could result in budget shortfalls and/or increased borrowing.

Concerning Luxury Real Estate: The wealthy are still wealthy. However, in top-tier markets with a glut of luxury real estate i.e. $50M+ spec homes in West Los Angeles, Billionaires Row in Midtown Manhattan I do forecast price drops, concessions and opportunities for long-term appreciation reminiscent of 2010-2013.

Where do I see opportunities?

  • Commercial/Business Real Estate: If one has the three L’s coupled with a financially strong tenant and or owner/user, I believe opportunity is there for rental income and equity appreciation longer-term.
  • 2nd Homes: Usually one of the first markets to show signs of stress. Add to this so many properties that were placed on the transient rental market i.e. Airbnb. VRBO, Professional Management and so forth. With travel and tourism challenged for the foreseeable future coupled with a loss of rental income do not be surprised to see inventory increase and prices fall in resort/2nd home communities.
  • Overall Entrepreneurial Opportunities: While Recessions are painful one bright spot is invention and innovation. I believe we will see opportunities concerning small businesses including franchise sales. Personally, I see opportunity in aspirational businesses and those offering affordability. Thus, I am a fan of Dunkin, Wal-Mart, Family Dollar and other consumer staples that are necessities versus luxury.

I do hope fiscal stimulus works yet I believe it is a short-term bandage on a larger structural issue. The world economy has been expanding due to expansionist fiscal policies i.e. cheap to borrow money coupled with tax cuts. While I am not here to debate of austerity versus capital spending (OK, I am for the latter), the reality is Covid-19 may be an economic reset both short and long-term and the decisions we make today will impact our future.

Finally to answer the question in the visual posted; I believe it is a good thing as tightening of credit channels I believe in the long-term is a positive HOWEVER during times of fiscal crisis and uncertainty I do feel the spigots need to be opened up to spur and sustain economic activity. 

 

 

 

 

 

 

 

 

 

 

Home Prices Continue to Climb in 2020 Yet Statistics are Pre Covid 19

During the first quarter of 2020 the equity markets were close to historic highs then Covid-19 concerns rattled the markets leading to record point drops and volume. The housing market is still an unknown. As the stock markets see-sawed I viewed one posting from a peer broker as follows “You know what has not lost 10% over the past week? Real Estate”.

The comment posted by a peer broker was and is factually true as real estate is not as liquid as stocks and bonds. I also understand the optimism of real estate brokers no matter the condition of the overall economy. Yet I am also a realist as I have been in the business for 30+ years having been educated as an Urban Planner and have worked in commercial, residential and investment real estate. I have witnessed devastating declines (for which the astute took advantage of opportunity) in Denver real estate two times in my career as follows:

  • Oil Bust: 1985-1989: A regional recession and significant out-migration
  • Great Recession: 2008-2011: Worldwide Recession

Back to the Case-Shiller index released on March 31, 2020; the data reflects closings completed during January 2020 and unlike the stock market, the index looks backward not forward.

For January 2020 the index shows that home prices continue to increase at a modest rate across the U.S. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.9% annual gain in January, up from 3.7% in the previous month.

The 10-City Composite annual increase came in at 2.6%, up from 2.3% in the previous month. The 20-City Composite posted a 3.1% year-over-year gain, up from 2.8% in the previous month.

Of interest Phoenix (6.9% Y/Y), Seattle (5.1% Y/Y) and Tampa (5.1% Y/Y) reported the highest year-over-year gains among the 20 cities. Fourteen of the 20 cities reported higher price increases in the year ending January 2020 versus the year ending December 2019.

Concerning Denver:

  • Jan20/Dec19: +.03
  • Dec19/Nov19: -.01
  • Year/Year: +3.8%

Prices in Denver Metro seems to have stabilized yet with continued low inventory I am concerned as the continued low inventory of homes for sale should increase prices due to basic supply and demand laws coupled with low mortgage interest rates.

Concerning the immediate future and I hope I am incorrect….both equities and housing markets have been buoyed by a historically low interest rate environment versus basic fundamentals. The swift downdraft in the equities market may have been a knee-jerk reaction or could be advising equities are returning to sustainable and rational valuations based on actual present and forecasted earnings.

With real estate I am concerned longer-term. While markets across the country seem to be stabilizing with the West and South showing strong demand my concern is the weakness in the Midwest and Northeast. The Midwest representing our industrial and agricultural sectors and the Northeast oriented towards investment. When the next reports are distributed, they will review sales completed in January 2020. What will be most indicative are the reports coming out at the end of May and June providing a picture of the 1st Quarter and during what historically is the height of the home selling season.

The conclusion of the March 31, 2020 report including a quote as follows:

It is important to bear in mind that today’s report covers real estate transactions closed during the month of January. The COVID-19 pandemic did not begin to take hold in the U.S. until late February, and thus whatever impact it will have on housing prices is not reflected in today’s data.”

 

In the Middle of a Real Estate Transaction and COVID 19 Hits

Just before Covid-19 entered our lives leading to stay-at-home orders, the prior weeks were busy with mortgage refinancing due to interest rates dropping close to record lows. Brokers including me believed the low interest rates would spur activity in the resale and new housing market especially in the first-home and move-up transactions, buyers that are most sensitive to interest rates. Then Covid-19 hits, the real estate market stalls.

The reality is real estate is a person-to-person business. I have heard of showings being cancelled by buyers concerned about entering a residence and sellers skittish about allowing strangers in their home coupled with stay-at-home directives as one can only walk around the block so many times.

Vendor support has been challenging as well. Many home inspectors are wary about entering a residence due to Covid concerns as are appraisers. Of note some appraisals have been allowed to be conducted via the drive-by method, using images of the interior coupled with additional research concerning comparable sales.

Closings are taking on additional challenges. From document procurement and signing (while much can be done electronically there are still logistics concerning paperwork). An added challenge is many municipal offices are working with skeleton crews thus from recording deeds to checking for liens; while many local governments have electronic access not all do and files are not updated instantaneously.

For buyers, if you are just beginning your search (of note real estate brokers in Colorado are considered essential personally I have advised clients I am not available for in-person showings as I wish to be part of the solution and not exacerbate the situation); if homes are vacant showings should not be a concern. Brokers if they are willing should be able to attend showings. Many brokers are providing virtual tours and/or can set up a live feed for their clients. Of note in many markets multi-unit buildings are restricting access and common areas may be closed off.

For sellers, while many are hesitant to place on the market during this period my suggestion: go for it (and if more comfortable restrict showings during the pandemic). Consider the following; prospective buyers are sitting at home, online throughout the day and what a better way to kill boredom than to look at real estate listings. I am not advising “Can you see yourself being home quarantined in this lovely home” concerning prospective listings.

Concerning offers, in our era of electronic communication this should not be an issue. My suggestion push dates out beyond the average 45 days from offer to closing. Push out into the summer months as 1) we do not know how long this pandemic will impact our daily lives and 2) contracts can always be amended to shorten the transaction timeline.

Vendors could be a more immediate challenge and why one should consider pushing out dates and deadlines. Some inspectors are using hazmat suits or similar PPE. Inspecting the exterior is not the challenge, it is the interior. This is a perfect opportunity for sellers to have all their paperwork concerning maintenance and upkeep available for review by prospective buyers and their inspections and/or consider monies in escrow in lieu of a formal inspection including a termination date (I suggest retaining at attorney to draft the language).

Closings: Title companies have been proactive concerning remote closing from electronic signing to pick-up and drop-off of paperwork. Some states even allow electronic notary. In Lawyer to Lawyer closings of course each attorney’s prerogative yet arrangements can usually be facilitated.

Covid Moving Forward: Proactive states such as Colorado have already developed pre-printed forms concerning Covid to allow delays; it is assumed such forms and clauses will become the norm and not the exception.

Opportunity: While home prices have not fallen sharply my gut instinct is:

  • -Inventory will increase over the next few quarters.
  • -The downtown in the economy i.e. job losses may force some to list and sell.
  • -Mortgage interest rates will remain low to spur economic activity.
  • -A potential uptick in foreclosures.
  • -Actual monetary losses if purchased within last 18-24 months.

While the Covid pandemic is new to our shores globally within the last two decades we have witnessed SARS and MERS. While their impact within the United States was limited in countries that were affected real estate prices dropped from 10%-30%, eventually recovering over-time (Hong Kong which has few cases of Covid, real estate is challenged in the world’s most expensive city). In the United States Covid is more wide-spread, its trajectory is still unknown, medical response and vaccines are still in being developed, thus my suggestion is hold-tight for the foreseeable future.

 

 

 

Concerning Home Buying In These Challenging Times What We Learned from 2008

If you are lucky you had placed your down-payment fund in a safe cash or similar option and thus have been immune to the downdraft in the equities market. Should you proceed?

At present the housing market does not seem to have been impacted. However, consider this; stocks have fallen into bear market territory and some suggest additional downdrafts, major industries are on pause and small businesses, the backbone of our economy are being decimated. As of this writing we still do not have a Federal Stimulus Package passed and even if it passes it is a short-term infusion of capital into unchartered waters.

Hare some tenets of the market:

  • Everyone needs someplace to live.
  • For Sale housing stock is usually more attractive than the rental options available.
  • The majority of inventory on the market and pending are sellers who are moving up or on.

About 2008, at this point that crisis was different. Yes, the S&P 500 lost half its value and housing values cratered; in many markets down more than 40% from their peaks. Yet from 2000 to 2008 we also experienced a glut of sub-prime mortgages provided to risky borrowers, appraisals that were out of alignment with the actual market and the belief that housing values can only go one-direction being up.

The years between 2008 and 2012 were a wake-up call and while memories are short, I believe our lending standards are much more stringent, there is less overall speculation in the housing market, negative equity loans are almost non-existent i.e. 125% loan to value, and while collateralized debt obligation (CDO) are still in the marketplace the low interest rates from mortgages have tamed their demand.

So, what to expect in 2020 and beyond?

  • Inventory is still challenged in the most in-demand urban areas.
  • Interest rates continue to hover at historically low rates.
  • Prices had been stabilizing prior to the Covid-19 outbreak.

So, what are the headwinds we are about to encounter?

  • For those whose down-payment is in equities and/or in a retirement account they may have to sit on the sidelines for the foreseeable future due to the downdraft in the equities market.
  • For sale inventory will most likely increase due to job losses and relocation concerning employment opportunities in turn may be beneficial to landlords.
  • Psychological concerns related to housing values i.e. if the economy is moving into a recession, housing may not be far behind.
  • On a micro level, limited showing opportunities, inspectors and appraisers not willing to enter homes, multi-unit building restricting access all of the prior due to Covid-19 virus concerns.
  • Lenders inundated with refinancing activity in lieu of new purchase loans.

So, what should one do i.e. sit on the side-lines or is this a period of opportunity as we witnessed in 2010/11 when the housing market started to show green shoots?

Assuming your down-payment funding is secure and available:

  • Location, Location, Location: This is still one of the most important considerations AKA Supply and Demand. During the recent up-market houses that would have languished on the market due to challenges i.e. on busy roadways, demanding structural renovations and so forth were selling due to inflated demand and limited supply. I believe those homes will be the first to be challenged in this market. Thus, consider the longer-term value and potential equity appreciation versus immediate price adjustment.
  • Income Stability: If your employment and income stable? If a couple do you need both paychecks to quality for a loan and cover the monthly PITI? Even if you qualify for a mortgage and the PITI is lower than rent one must consider residences are NOT LIQUID. If you have to relocate for an employment opportunity one cannot immediately divest and even if considering renting the residence your mortgage may not allow it AND you may not qualify for another mortgage to purchase where you plan to relocate.
  • Longer-Term Ownership: Between 2012 and 2017 in many markets’ buyers could literally secure added equity post-closing due to demand. As readers of my blog know I have showcased many residences that were purchased and sold within 2-3 years for a monetary loss.

So, what to do?

  • I Love It: If you find a residence you truly love to go for it. My rule of thumb, regardless of price would you buy it? Now is not that time to consider “if we do this or that” I could learn to love it. Remember 25% of homebuyers regret their purchase.
  • FOMO: Disregard the Fear of Missing Out. The reality is a purchase of a residence is most likely the largest investment and debt you will incur in your lifetime, thus proceed with caution.
  • Think Long Term: As mentioned above beyond a longer ownership period consider other tangibles i.e. Will the home work for us in 5-7 years? Is the school district in demand? Are values in the neighborhood stable? What is the future concerning zoning, inventory, development, regional employment and so forth? Not every neighborhood is Washington Park i.e. long-term demand and stability.
  • Secure the Services of an Experienced Real Estate Broker: For many inexperienced brokers we are treading uncertain waters. Many brokers have not experienced a market that has plateaued or heading down. Others may not have experience concerning adding contingencies to allow the buyer to delay or cancel the purchase due to unknown externalities.
  • Final Suggestion: If you are securing a mortgage in Colorado, we have The Loan Approval Contingency; my suggestion push out as long as possible and make the deadline the day prior to closing if agreeable to seller to provide you a penalty free out of the contract if needed.

Finally good luck and I am available for individual consultation as I too am practicing social distancing at Joseph.Sobin@EVRealEstate.com

Even in Silicon Valley Real Estate Profits are NOT Guaranteed

Even prior to the swings of the equity markets due to coronavirus virus some believed owning real estate in Silicon Valley would equate to the gains seen in its well-known tech names from Apple to Facebook and so forth. While we mention irrational exuberance concerning the stock market, in real estate it is call timing. Take the following for example.

Are you familiar with Woodside, California?  This charming northern California town is located approximately 30 miles south of San Francisco, thus adjacent and some would suggest within Silicon Valley. While discreet, Woodside is one of the wealthiest zip codes in the United States. Past and present residents include Larry Ellison, co-founder of Oracle and Charles Schwab (who also has a lovely residence in Vail, Colorado).

While Hollywood royalty usually desire to reside in Southern California, actress Michelle Pfeiffer and her TV producer husband David E. Kelley resided in Woodside, CA. About their compound (a term I do not use lightly):

  • A Mediterranean-style main house measures 6,000 square feet with 4 bedrooms, 4.5 bathrooms including media and library areas.
  • Five (5) satellite structures, including three (3) detached guest or staff apartments (each with its own bathroom and kitchenette), a guesthouse with office, and a separate gym.
  • Inclusive of eight (8) acres at the end of a quiet cul-de-sac.

The compound was originally listed in mid-2018 asking $29.5 Million. The property recently sold for $22 Million or $7.5 Million below asking. Of note the $22 Million transaction is believed to be all-cash (or Bitcoin maybe?)

However, the couple originally purchased the property in two separate transactions—the first in 2004, and another in 2008—totaling $20.6 million. Thus, doing the math:

  • Assemblage Price: $20,600,000 in 2008
  • Sold Price: $22,000,000 in 2019
  • Gross Profit: $1,400,000 in 2019
  • Commission at 5%: ($1,100,000)
  • Let us assume the couple made $300,000 Net

However, in reality when adjusting for inflation, their $20,600,000 in 2008 would equate to $25,315,981 in 2019.

In reality a real-dollar $5M loss over an 11-year period.

As many have short memories; when the couple were assembling the compound between 2004 and 2008 the real estate market was on an exponential growth cycle including investment speculation and the belief real estate values only increased over-time. With the implosion of Lehman Brothers leading to the world-wide Great Recession, well the rest if history.

During the last two decades values in Silicon Valley have risen in every sector of real estate from residential to commercial to industrial in tandem with the growth of the technology sector. Yet even a world-class estate/compound in one of the toniest enclaves on the West Coast can lose money over-time.

Of note it seems the couple have reinvested their proceeds into an estate in the Pacific Palisades neighborhood of West Los Angeles.