May I take my readers on a journey back to 2005?
A friend asked me to opine on a potential purchase of a single-family home (at the time I was a commercial real estate broker). The house was a pop-top on a secondary block (one block south of a more desirable neighborhood); the only pop top on the block and across the alley a nefarious use for many prospective homebuyers, a playground.
The asking price at the time was $810,000 ($1,064,000 in 2019). I warned my friends not to purchase as I thought the residence was over-priced and over-improved for the block and neighborhood. Long story short the buyers purchased for $810,000 and I was advised by the buyer “In 10 years this will be the cheapest house on the block”. The buyers subsequently invested another $40,000 ($52,500 in 2019) into custom shelving and other, in retrospect over-improvements.
Fast-forward to 2012. The Great Recession is has decimated real estate around the country. Here in Denver we are finally seeing green-shoots as savvy buyers are taking advantage of rock-bottom prices. Long story short the same buyers who paid $810,000 + $40,000 in 2005 sell their residence $710,000 ($793,000 in 2019). Thus between 2005 (close to the height of the market during that cycle and 2012 as we began to climb out of The Great Recession the sellers lost in real dollars $140,000 or $20,000/year not including expenses related to their mortgage, property maintenance and upkeep, homeowners insurance, real estate taxes, utilities and so forth.
The reason I bring this up; I do not believe we are in a period of concern about another Great Recession HOWEVER the tea-leaves are advising a slow-down is imminent as I do not believe business cycles have ended i.e. the Goldilocks Economy is fleeting.
Yes we have buyers who may be swayed by historically low-interest rates yet these buyers do not seem to understand low-interest rates usually indicate the market economy that is not robust. The reason we are seeing zero to negative interest rates in Europe and Japan; their economies are stagnant or worse potential deflation.
Yet as I work in multiple affluent Denver neighborhoods I see the massive duplexes, row houses and single-family homes still being built on speculation in Cherry Creek North where I reside. I am seeing the Contemporary Farmhouse being built on speculation in Washington Park (where I have a listing) commanding seven (7) figures where the adjacent bungalows are valued at half or less or are on the market priced based on irrational exuberance for eventual razing and rebuilding.
Are there opportunities out there? Of course and to many buyers credit they are being more selective, taking their time and I believe being more rational. And while asking prices seem to be adjusting to a new reality concerning supply and demand I am still witnessing a combination of over-improvement and over-spending.
In real estate I still believe to this day purchasing the smallest or least expensive home on the block allows one to be insured so to speak for the future. Yet when I see buyers in the 7-figures purchasing assuming their investment will only continue to rise my gut is they seem to have forgotten the years between 2008 and 2013. Many brokers I know are advising internally their sellers believe it is still 2018 and their buyers believe it is 2020 or beyond.
I find it interesting that the stock market has spoken concerning the valuations or lack thereof of Lyft, Uber, WeWork, Peloton (of note, I experienced a Peloton while traveling, while not a fan of their bikes due to I feel dated technology and design; love the concept! I like Keiser Spin Bikes much better and full disclosure I own one and my club uses them for Spin/Cycle) and others i.e. floating stock yet not turning a profit and questionable if they ever will. Not to different from the Dotcom Bubble of the early 2000’s. Maybe the stock market is flashing that same warning signs for housing…..