The Numbers May be Large Reality is kept up with Inflation

Recently I read about a house in The Denver Country Club neighborhood which has changed ownership in less than 2 years. As it was an off-market i.e. not marketed in the MLS little is known about the circumstances of the sellers and so forth. What intrigued me was not the ownership history but instead the sales history.

Collectively we hear how Denver’s housing market is one of the most expensive in the country. How home sellers have experienced exponential gains since The Great Recession, and so on. Thus I decided to track the history of 363 High Street which can now be rented for $10,000/month.

The 300 block of High Street is a beautiful street, probably one of the finest in the city representing the opulence of early 20thcentury Denver mansions as the Gold Coast shifted from Capitol Hill south and east closer to The Denver Country Club.

The home at 363 High has gone through 5 owners in 22 years as follows:

9/12/96:       Sold for $660,000 ($1,077,465 in 2019$)

10/9/01:       Sold for $1,701,000 ($2,461,577 in 2019$)    -Gain of 157%

9/28/16:       Sold for $2,400,000 ($2,561,355 in 2019$)    -Gain of 60%

10/12/18:     Sold for $2,950,000 ($3,009,162 in 2019$)     -Gain of 18%

07/19             Selling for $3,050,000  -Gain of 3.2%

Thus while the numbers are impressive the gains have mirrored inflation almost to the dollar over the years.  Concerning the most recent sale from 2018 to 2019 while the 3.2% gain may seem respectable; after commissions, closing costs and fees there is probably a loss.

For comparison during the most recent ownership of 363 High St:

  • The S&P 500 closed on 10/12/18 at 2,728.37.
  • On 7/12/19 the S&P 500 closed at 3,013.00.
  • The gain approx. 10% not including dividends.

 

 

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Has the Denver Housing Market Reached its Peak and now on the Descent?

Let me begin by advising I am not a pessimist. However headlines from other cities around the world has indicated the housing market which has seems to have been in auto-drive since crawling out of The Great Recession has witnessed its peak and is beginning to retreat.

According to REColorado aka as our MLS and best source of activity data concerning the housing market in the metro area during June 2019 there were 9,520 active listings for the Denver metro market, up 7.07 percent from May and up 28 percent from one year earlier. Ok, I am first to admit our prior months/years inventory of for sale homes was truly constrained.

Concerning pricing the news is a little more positive. As inventory increased, sale prices dipped on a month-over-month basis. The average sales price for a single-family home was $547,461, down 0.82 percent from May but up 1.26 percent year-over year, while the average sales price on a condo was $370,442, down 2.16 percent from May but up 2.5 percent from one year earlier. While these gains are far from the numbers we were witnessing this shows the market is matching inflation and is moving towards a more normal orientation.

I have continually advised the luxury market is a predictor of the overall market. Upper-tier listings seem to be having more price adjustments and longer days on the market.

According to Brigette Modglin, Denver Metro Association of Realtors (DMAR) Market Trends Committee member “While things seem to be pointing in the right direction with more inventory in the luxury segment of the market, sales of single-family luxury homes were slightly down from 1,067 sales year to date in 2018 compared to 1,038 year to date in 2019, a 2.72 percent decrease. She goes on to advise “Diving into the numbers, they still look good as we are in a more balanced market and all signs show this is good for both buyers and sellers in the Denver Metro Luxury Market.”

I will be curious when the books are closed for 2019 how the overall market does. Concerning the luxury market  and to some extend the overall housing market I believe there is additional room for adjustment downward. Just too much inventory (luxury and conventional) and too few buyers. Of note the equities market is again towards record highs coupled with low interest-rates. Housing should be selling at a brisk pace yet we are witnessing increased inventory, prices barely matching inflation and a downdraft concerning the sale of luxury homes.

I am suggestion caution ahead. While I do not see a significant downdraft in values I believe the increased inventory, stagnant price growth coupled with low-interest rates may spook some more homeowners to be sellers thus increasing supply which will in turn lead to I believe year-over-year price declines.

Demand for Rental Apartments hits 5-Yr High Across The Country

As the national economy hit a milestone today having achieved the longest expansion on record news comes out that demand for rental apartments nationally has hit a 5-yr high. While this may all seem to be positive news I remain skeptical.

According to The Wall Street Journal the number of move-ins during the second quarter shot up 11 percent compared to last year citing data from RealPage. That surge caused the national occupancy rate to hit 95.8 percent, according to the report.

In Chicago and Houston, demand grew particularly strongly, as move-ins outpaced new construction by an almost 3 to 1. Smaller metro areas witnessed big rental price increases as well, including Wilmington, N.C., where rents jumped by 7.4 percent, and Huntsville, Ala., where they rose by 6.4 percent.

Yet there are some disconnects in the marketplace. While apartment construction is nearing a 30-year high most of the products coming on line are for higher-income earners (those most capable of purchasing a home), leaving the market for affordable rentals significantly challenged. We have witnessed this phenomenon in Denver over the last 5 years where prior to the expansion Denver was considered an affordable place to reside.

Also some pundits suggest the demand for rentals is in part due to the over-priced housing markets in many cities coupled with continued low-inventory.

I see a few different versions of the statistics having been in the real estate market for more than two decades:

  • Housing purchases are strong when there is a collective feeling that the marketplace is stable or expanding as traditionally housing costs have kept up and usually exceeded inflation making one’s residence a wealth builder. Are people renting due to lack of for sale housing inventory? Or due to uncertainty about where housing prices go from here?

 

  • When monthly rental expenditures exceed those of a mortgage for-sale housing usually receives a boost as a mortgage allows one to purchase with leverage and take advantage of various attributes of home ownership including building of equity, tax deductions and potentially additional leverage i.e. HELOC versus a rental which offers none of those attributes.

 

  • While driving around the most in-demand neighborhoods in Denver the new apartment buildings are all around from Cherry Creek to Country Club Towers, the former CU Health Sciences Center to Golden Triangle/Speer Boulevard corridor. However many of those buildings are now offering incentives to entice leasing activity usually in for form of a month-free or other compensation.

I honestly do not know what to make of the market conditions. While are equity markets continue to make new highs it seems C-Level executives are sounding cautious and already raising concerns about future earnings.

If our economy is so strong why have interest rates not risen? Historically low interest rates are an indicator of a sluggish economy in need to stimulation.

With mortgage rates still below 5% why is there not even higher demand for housing purchases or have housing prices so severely exceeded income levels that only those down-sizing or moving from a more expensive locale can afford to buy.

While I do not consider myself a pessimist, I too am sitting on the sidelines ensconced in a rental for the immediate future as inventory remains strained, prices to me see high i.e. I do not believe there will be appreciable equity growth in the next 3-5 years and the monies we have allocated for a future home seems to be doing better in the equity market versus the housing market…..only time will tell.

 

 

 

 

Is Recent Home Flipping Activity Warning of a Slowdown in the Market

While most of the country is enjoying an economic boom including housing which may be buoyed by low interest rates an interesting statistic crossed the wires last week: Home flipping in the U.S. has hit its highest rate since 2010*. The 49,000 homes that were flipped in 2019’s first quarter represented 7.2% of the total volume of sales.

Now before the other shoes drops please remember back to 2010, not even a full decade prior. The country was still in the depths of The Great Recession. Terms such as foreclosure, short sale, jingle-mail and so forth were in the daily vernacular of real estate brokers like myself. And many astute fix and flippers saw opportunity i.e. cheap homes, low-interest loans and potential opportunities once the market righted itself.

Ok, the other shoe: Despite the percentage increasing, the actual number of flipped homes fell by 8%, while the number investing in properties to flip declined by 11%. The median sales price of flipped homes was $215,000. With an average profit of $60,000, down $8,000 from a year earlier.

Now there could be many reasons for the down statistics above including lack of inventory, higher costs for materials and labor and so forth.  Yet let’s dive in a little deeper……

*Just over 49,000 single-family homes and condos were flipped in the first quarter of 2019; according to a recent report by real estate data firm Attom Data Solutions.

These homes comprised 7.2% of all home sales nationwide during that time period, representing the highest home-flipping rate since the first quarter of 2010. However do not consider this an indicator that the market is all peaches and cream…..

The number of homes that were flipped was actually down 8% from the previous year to a three-year low. And the number of investors engaging in home flipping has dropped 11% over the past year. Add to this the gross flipping profit was $60,000, down $8,000 from a year earlier to a three-year low. The take-away while home-flipping activity is increasing gross profit and Return on Investment (ROI) is decreasing.

Some brokers who work in this niche of the market are wondering if investors/fix & flippers are watching as their profit margins drop, time on the market increasing i.e. longer time on the market, most costly to hold have decided to sell now with the assumption that demand and thus prices will continue to weaken.

What is interesting as I noted a few weeks ago interest rates are at 18 month lows YET housing activity for which we are in what is historically the most active season is not increasing.

I have three additional comments concerning what I believe will be a soon to be upon us slowing market and one that may actually witness price drops.

First is the cooling of the luxury market across the country. In NYC we have witnessed a glut of luxury condos coming on the market and buyers sitting on their hands. Not only in New York City but also in Miami and throughout the country. Of note the first signs of positive indicators concerning climbing out from The Great Recession was the astute buyers acquiring luxury homes usually for cash that had been severely discounted.

Second is the influx of the iBuyers, the tech firms using algorithms to make instant home offers are proliferating across the country. Zillow in particular, has said it is investing more money into its home-buying and flipping operation, Zillow Offers, which launched last year. Yet here in Denver so far the short-term iBuyers have not been so successful. The following articles from BusinessDen are most insightful:

Third is the proliferation of the reduced fee brokerage signs I am witnessing and new entries into the market i.e. Rex Real Estate and others. The proliferation of signs from Redfin, Trelora and others may suggest strength in the market i.e. go the lower-cost option as the market is strong. I see the opposite i.e. as the market weakens and profit margins retreat sellers may opt for a lower-cost brokerage option to increase their already shrinking margins.

As many readers of my blog know we have been looking for out next home as well. In discussion with our financial planner we have decided to put that on hold for the immediate future as prices seem inflated and shorter-term upside seems limited. Yes we are long-term owners and can take advantage of low interest rates. However historically low-interest rates are indicative of a market needing a growth catalyst, thus personally I believe there are better options for our capital concerning the immediate future.

Of note I am not sure if I will be posting on Monday July 1st, 2019, may actually take a few days of personal time off.

 

Neighborhood Identification Does Matter in our MLS and Online Distribution Channels

Last Monday I was preparing for a showing for a client, 3 homes on the same block in the Washington Park neighborhood. The three homes, two Bungalows and one English-Norman Cottage are all similar in size. The homes range from $620,000 to $825,000.

Let me disclose the listing brokerage, a firm that markets reduced cost has been notified of the error.

However what was curious was one particular listing 435 S. University Blvd. The home looks spectacular i.e. a renovated bungalow. While the master bedroom is in the basement which is not uncommon for bungalows which have not been popped the master includes a very nice en-suite bathroom and the majority of the basement is finished.

I then looked at the listing history as follows:

  • 5/30/2009: Sold for $390,500
  • 9/08/16: Placed on market asking $675,000
  • 9/26/16: Price Reduction to $595,000
  • 5/30/17: Listing Expired
  • 5/15/19: Placed on market asking $649,000

Thus the home has been on and off the market for over 2.5 years, it happens, yet one issue arose for which I have notified the listing brokerage, the neighborhood/locale for which the house is located is identified as Cory-Merriell. HOWEVER, the house is actually located in the Washington Park neighborhood!

The following is the email I sent to the brokerage when I spotted the error:

Just a courtesy….concerning your 435 S University Blvd listing (which I am showing later this afternoon) the neighborhood is actually Washington Park.

On MLS you have the listing neighborhood as Cory-Merriell. However Cory-Merriell’s northern border is Mississippi Ave i.e. 5 blocks south AND Cory-Merriel western boundary is on the east-side of University Blvd and your listing is on the west-side of University Blvd.
While an oversight may be missing potential buyers looking for Washington Park.
In this day and age of Internet Marketing and distribution channels that exceed triple digits it is of utmost importance that the information presented in the MLS which provides the information to those distribution channels is correct. Granted if searching by address not an issue HOWEVER if searching by neighborhood who knows how many lookers missed 435 S. University due to this seemingly minor error.
The Response: Noted, we appreciate the heads up.

The reality is white geographically the neighborhoods are almost adjacent i.e. 5 blocks concerning their eastern and western borders, the neighborhoods are vastly different from home styles to demand and pricing. Thus a serious error.
Locally the Denver Metro MLS aka www.REColorado.com does offer drop-down menus for neighborhoods and they can be over-ridden. An example, the condo complex Monaco Place is technically in the Hampden neighborhood however with 200+ units and a large multi-square block parcel many brokers will identify the neighborhood as Monaco Place. However to confuse Washington Park and Cory-Merriel may have truly impacted the marketing of the listing.

Mortgage Rates Drop to Lowest Level Since January 2018

Which should be good news for anyone in the housing market; an assumption that may be incorrect. Historically when interest rates are low housing prices rise as it is an inverse relationship. Yet the years since the Great Recession have defied historical norms concerning economic activity, we may be witnessing the beginning of the longer-term retrenchment in housing values. Of note we have now been in the longest economic expansion in the history of record keeping for such matters.

Let me begin with the basics….with the lowest mortgage rates available in almost 18 months, (on June 5, 2019 the average rate on the 30-year, fixed-rate mortgage  4.10% and average rate for 15-year, fixed-rate home loans is 3.57%) combined with the spring/summer selling season the real estate market should be reacting in a positive manner. However while rates may be dropping the rates are not compensating for the what some perceive (and I agree) as a price inflated housing market.

Total mortgage application volume increased 1.5% last week from the previous week and 12% from a year earlier, according to the Mortgage Bankers Association’s seasonally adjusted index. The gains were driven by refinances. In more detail total refinance volume rose 6% from the previous week and was nearly 33% higher than a year ago, when interest rates were 52(.52%) basis points higher. The refinance share of mortgage activity increased to 42.2% of total applications from 39.7% the previous week.

Yet mortgage applications for home purchasing fell 2% for the week and were barely 0.5% higher than a year ago. Many suggest the high prices in the markets with high demand continue to sideline buyers, especially first-time buyers, who are a growing segment of the market. While many argue prices need to come down the reality is construction costs including labor and materials, raw land and permits fees have all increased since the Great Recession and those costs, you guessed it are passed onto the homebuyer.

An additional issue for millennials who are aging into their prime home-buying years; they are saddled with debts, are likely paying high rents and are facing one of the least-affordable markets in decades.

The real estate market is truly in a conundrum. While low interest rates should spur activity under the same logic that low interest rates should be generating business activity and investment it is simply not happening. While I have written about the luxury housing market showing signs of weakness I am witnessing it even in the entry level marketplace.

Recently I listed a condominium in Monaco Place in SE Denver, a complex that attracts many first-time buyers due to location (walk to neighborhood services and light-rail) and affordability. The unit  2BD/1.75BA w/ in-unit W/D, central air, fully renovated including new stainless steel kitchen appliances, flooring, bathrooms and private patio. HOA dues include heat, A/C, water, sewer, trash and common area maintenance including an indoor pool, clubhouse and workout. The unit was listed at $199,900 (of note comparable units from prior 6 months sold from $180K-$220K based on condition and views, with the median sale being $199,000).

After two weeks on the market and with full disclosure we did receive multiple offers finally selling for $205,000 with a ($2,500) concession AND full payoff of the special assessment of ($6,000). Thus the actual sale price was $196,500.  However 6 month prior the unit would have received multiple above asking offers within the first 48 hours and would have been under contract within 3-5 days, not two weeks.

Was the seller complaining? No he was astute enough to purchase the unit during the Great Recession. The buyers should be thrilled as not only was there purchase price below comparable units from the past six months but even with a 5% down payment, their Principal, Interest, Taxes and Insurance (PITI) and HOA dues combined are still lower than the monthly rent the unit was generating in its pre-renovation condition. The above transaction advises to me we are moving towards a market closer to equilibrium. If there are continued issues concerning worldwide trade and a shock to the equities market we may accelerate into a buyers market very quickly.

 

Is Denver being bypassed by our Next Generation of Most Talented

Are Best and Brightest Bypassing Denver

Historically Denver has attracted the best and brightest, a city that continually ranks in the top 5 for residents educational attainment. Granted our weather is spectacular i.e. average 300 days of sunshine annually, an active city and state, which continually ranks  the lowest rates of obesity and a population oriented towards a healthy lifestyle.

However as mentioned in my May 13th, 2019 blog post there are headwinds specifically the cost of living. Of the top ten most expensive urban locales when taking into account housing costs and average salary, Denver was #2, not a ranking to be proud of. Yes as a city and metro area we continue to attract businesses, most recently VF Corporation coupled with an entrepreneurial spirit. However are our attributes enough to compete?

It is no secret that Metro Denver may be experiencing net out-migration i.e. more people moving out versus moving in. While the outflow may have been stanched due to housing prices stabilizing coupled with increases in wages, there is still concern.

What made me consider the content for this blog post was the following headline:

  • Nearly 25% of Wealthfront’s tech clients in the Bay Area plan to leave Silicon Valley for New York; Austin, Texas; and other more affordable cities, a survey of the firm’s investors found.

Ok to start, what is Wealthfront and why should we as Denver residents be concerned? First Wealthfront is an investment management firm that provides robo-advisor services. OK, before the next question, robo-advisor services is to millenials what Charles Schwab and Fidelity is to us Generation X members and what the former EF Hutton (when EF Hutton talks, people listen), Merrill Lynch and other investment advisory firms  are to the Baby Boomers.

Wealthfront’s clients are skewed towards the millennial and tech savvy generation so their client base is not exactly representative of general trends yet does provide insights to a workforce who are generally highly educated, entrepreneurial, and working in white-collar professions with higher salaries.

During the first 5 months of 2019, Wealthfront surveyed 2,700 of its clients who work in the Bay Area at tech companies. The results are interesting (of note a small sample size yet still of interest):

  • Fewer than a quarter of Wealthfront’s tech clients in the Bay Area plan to purchase a home in San Francisco proper. Those who choose to remain in California’s Silicon Valley think they’ll snap up a home in the neighboring cities of Sunnyvale, Mountain View and San Jose.
  • But nearly a quarter of clients think they’ll part ways with the Bay Area altogether, opting for other comparatively cheaper cities.

Those other cities are as follows and of note Denver did NOT make the list:

New York/Newark/Jersey City: While at first blush somewhat surprising as Manhattan is not known for its affordability just across the Hudson River cities including Newark and Jersey City have become hip and desirable with millenials and others due to affordable housing options and an easy commute to New York City via PATH, NJ Transit, Ferry Service and or course car and bus.  Many tech companies have outposts in NYC. The median list price for a home in the New York-Newark-Jersey City metro area is $525,000, according to Zillow. Within that region, Manhattan commands the highest median list price, which is $1.569 million.

Austin: While many would not consider Austin affordable and within Texas one of the most expensive urban areas Austin offers affordable housing — at least compared to San Francisco — and no state income taxes (Colorado is a flat 4.63% regardless of income). The median list price Austin is $400,000, according to Zillow. Austin also hosts plenty of tech companies, including Apple and vacation rental service HomeAway.

Seattle:While not affordable to most of the American population, this city that is home to Amazon and Microsoft and Boeing (manufacturing, HQ is in Chicago) and cheaper than Silicon Valley. The median home value there is $699,950 according to Zillow.

Los Angeles: While in the same state, Los Angeles and the Bay Area could literally be separate countries. From demographics and industry to weather, hard to imagine the two metro areas are within the same state. And while Los Angeles is not a city known as affordable the median home list price is $829,994, Companies located in the so-called Silicon Beach area include Ring, the home security company now owned by Amazon, and matchmaking service Tinder.

Chicago: Historically known as the 2ndCity, the reality is Chicago is affordable, centrally located and is developing a tech sector to complement its dominance in futures/commodities trading, transportation and multiple corporate headquarters. The median list price of a home is $349,900, according to Zillow. Of note Chicago is home to mutual fund research provider Morningstar, and it’s an outpost for Salesforce. The city has also set out to encourage additional tech jobs through a public-private partnership known as World Business Chicago.

 

A Listing in Congress Park May Be a Predictor of the Future of Denver’s Real Estate Market

Reality can be challenging.

As a real estate broker I am also a voyeur. I look at the new listings daily on behalf of clients and also for myself as it is no secret, my wife and I sold our Cherry Creek North residence and are casually looking for a replacement residence.

Concerning the listing; as it is public information and being marketed here is the address: 827 Jackson Street, Denver.

I viewed the listing on the MLS and was intrigued. To be honest I am not the strongest proponent of the eastern streets of the Congress Park neighborhood i.e. Garfield St, Jackson St and Harrison St as they are impacted by Colorado Boulevard coupled with mixed-uses i.e. single-family, rental and condo apartments, parking lots and so forth. Sale prices on those eastern blocks generally lag the more central Congress Park neighborhood streets.

Full disclosure I lived on the east-side of the 200 block Harrison St abutting Colorado Boulevard thus I am well aware of the impacts on real estate values.

Back to the listing. While offering in my humble opinion limited curb appeal I will be honest the interior images presented on the MLS caught my eye, well worth a visit.  I scheduled a preview and visited the listing within the first week on the market.

A unique design with a front room incorporating design elements of a loft i.e. vaulted ceilings, exposed electrical conduit, support beams and so forth. The kitchen while small is efficient and well-designed. The two bedrooms are quite small and the one bathroom on the at-grade level is ¾ i.e. lacking a bathtub and would be challenging for two persons to use at the same time. Also due to location of the bathroom, access is via one of the bedrooms or through the kitchen, no direct access from public/entertainment areas of the home.

The basement is attractive, finished and rarely found, walk-out to the back yard via stairs. There is also a full bathroom in the basement including a tub. However it is a basement and thus some prospective buyers may be challenged by the below grade orientation.

Overall impression, a darling house, perfect for a first-time buyer but definitely not for us for reasons that are personal.

Now concerning the listing, the pricing and the marketing.

First, a history of the residence:

  • April 2008: Listed at $284,900
  • May 2008: Reduced to $277,500
  • July 2008: Sold $280,000

 

  • Nov 2009: Listed at $329,000
  • Dec 2009: Sold $301,900
    • Gross Profit: $21,900 before commissions and closing costs.
  • Aug 2015: Listed at $400,000
  • Oct 2015: Sold $380,000
    • Gross Profit: $78,100 before commissions and closing costs.

Now this is where the listing becomes interesting. It seems the buyer in October 2015 embarked on a renovation of the interior with the updated loft-style design orientation as mentioned prior.

  • June 2018: Listed for $585,000
  • June 2018: Sold for $620,000
    • Gross Profit: $240,000 before renovation costs, commissions and closing costs.

One must assume multiple bids and sold for $35,000 above the original list price. The Listing Broker and the Selling/Buyer Broker are both affiliated with Liv Sothebys one of the dominant and well respected real estate brokerages in Metro Denver.

Yet less than one year after the sale where the buyer paid $35,000 over the asking price, the residence is back on the market:

  • April 2019: Listed for $650,000
  • May 2019: Reduced to $635,000

The residence is now being listed by Redfin AKA Real Estate Redefined, a full-service real estate brokerage which promotes savings on both listings and purchases. The seller has signed with Redfin and I presume agreed to a commission of between 1% and 1.5% (as noted on their web site) so I assume for this blog entry 1.25% or $7,937 based on the reduced $635,000 asking price. Of note while not a fixed rate based on discussion with peer brokers affiliated with traditional full-service firms, the listing brokers I work with are in the 2.9%-3.3% range concerning a listing commission.

Per the listing on the MLS the co-op commission i.e. the commission paid to the broker representing the buyer which is paid for by the seller is listed at 2.8%. Thus if sold for $635,000 the co-op commission would be $17,780. Add the Redfin listing fee of $7,937, the seller is paying in excess of $25,000 in commissions to sell the property.

However the home is listed at $635,000 down from $650,000. Thus even if sold for the asking of $635,000, deduct $25,000 for commissions and even before closing costs and title insurance we are now at $610,000 or $10,000 below what the seller paid one year ago in what I assume was a multiple bid situation.

The reality is even with the use of a lower-cost brokerage option i.e. Redfin, the seller will still be losing money from their original purchase. This happens and it is becoming more frequent as the pinnacle of the market seems to be behind us and head-winds seem to be ahead of us. Buyers who acquired between 2016 and 2018 seem to be taking the losses especially those on the upper tier of the market.

When the seller purchased for $620,000 or $35,000 over the asking they probably assumed a continued upward trajectory concerning value and thus bid over asking. I do not know the circumstances for the sale and subsequent loss. I assume a loss of value was not considered when the multiple prospective buyers were submitting their highest and best offers a year ago.

 

 

Denver is Number 2 on the List of…..

Most expensive cities to live in; not exactly the top of the list a city wishes to be on.

The list is based on a cost of living index having taken into account a city’s median income and having compared it to what it costs for homeowners and renters to live comfortably in the city. These numbers were derived from Go Banking Rates, which was able to ascertain the ideal incomes in major U.S. cities using the 50/20/30 rule.

The 50/20/30 rule suggests you take 50% of your income for necessities (housing, food, healthcare, transportation), 20% for savings and 30% for personal items you don’t need but want.

#10 San Jose, CA

  • Average Ideal Income: $170,586
  • Median Income: $96,662
  • Cost of Living Index: 1.76

#9 Honolulu, HI

  • Average Ideal Income: $157,765
  • Median Income: $80,078
  • Cost of Living Index: 1.97

#8 Boston, MA

  • Average Ideal Income: $124,901
  • Median Income: $62,021
  • Cost of Living Index: 2.01

#7 San Francisco, CA

  • Average Ideal Income: $197,250
  • Median Income: $96,265
  • Cost of Living Index: 2.05

#6 Oakland, CA

  • Average Ideal Income: $136,778
  • Median Income: $63,251
  • Cost of Living Index: 2.16

#5 Long Beach, CA

  • Average Ideal Income: $131,702
  • Median Income: $58,314
  • Cost of Living Index: 2.26

#4 New York, NY

  • Average Ideal Income: $138,500
  • Median Income: $57,782
  • Cost of Living Index: 2.40

#3 Los Angeles, CA

  • Average Ideal Income: $143,300
  • Median Income: $54,501
  • Cost of Living Index: 2.63

#2 Denver, CO

  • Average Ideal Income: $106,128
  • Median Income: $38,991
  • Cost of Living Index: 2.72

#1 Miami, FL

  • Average Ideal Income: $107,245
  • Median Income: $33,999
  • Cost of Living Index: 3.15

Now that you have gotten through the list let me add the following for thought:

As a trained urban and regional planner one significant geographical feature of the cities listed comes to the forefront; 9 of the 10 cities on the list are coastal. Thus their ability to physically expand horizontally is hindered by water. The one exception is Denver which while in a basin can easily expand in all four directions with the major constraint in the future being potable water supply.

Another interesting observation concerns Denver and Miami and the Cost of Living Index. Miami, while having a diverse economy is also challenged income-wise by its higher than average population of retired residents; thus living on fixed or limited incomes. Thus the disparity between housing cost and income can be somewhat justified coupled with a real estate market that is buoyed by out of the region demand from snowbirds of the north to capital sheltering from Latin and South America.

Denver is truly the outlier on the list. Our economy is more diverse than Honolulu but not by much.  In addition Denver is the only city/region on the list without a major seaport concerning trade and commerce.

Denver has been attracting the best and brightest for many years due to our pleasant climate and until recently an affordable cost of living. Yet is our cost of living and lifestyle sustainable longer-term if incomes do not catch up?

While Denver may be attractive concerning companies looking to relocate i.e. VF and others the reality is cost of living and lifestyle can be a determinate concerning corporate relocations. My concern if Denver continues on this trajectory concerning a disparity between income and cost-of-living coupled with competition for our brightest and best from cities such as Salt Lake, Austin, Dallas, Minneapolis, Atlanta and others; should be we concerned?

Yes! Denver historically has been a boom and bust city and while we may be fortunate to ride this wave of in-migration and housing price inflation increasing our wealth effect the same scenario happened in the late 1960’s before the inflation of the 1970’s. Also happened during the oil boom of the 1980’s until jobs fled en masse to Houston and Calgary in the late 1980’s into the early 1990’s.

This time may be different…yet even The Wall Street Journal advises:

For 2019 Graduates: The New Cities for New Grads: Salt Lake City, Pittsburgh and Baltimore. These emerging locales offer hot jobs for young workers—plus reasonable rents.

Next week a home listed in Congress Park that may be an example of Irrational Exuberance catching up with the reality of a charing real estate market.

 

 

 

 

Yes the Sky Does Have a Limit

For those old enough to remember The Concorde, the supersonic passenger airplane passengers traveling at 60,000’ were treated to an astonishing site of the blue sky below turning ink black above and viewing the curvature of the earth. So what does this have to do with real estate?

I have always believed the deluxe and luxury real estate market was and is an indicator concerning the future of the overall housing market. I have noticed anecdotally when markets are climbing out of recession the deluxe and luxury real estate shows early activity as it seems astute buyers understand the opportunities these properties offer in an up-cycle market.  I also find the same concerning markets that have crossed the pinnacle and are now on the downside of the curve. In Denver during the past 18 months we have witnessed a slow-down concerning the upper-end of the market including longer days on market and price adjustments: below is an example:

461 Race St:

  • 9/17: Placed on Market $4.85M
  • 6/18 Reduced to $4.65M
  • 8/18: Reduced to $4.1M
  • 4/19: Relisted $3.85M

My concern is a recent statistic concerning Billionaire’s Row in New York City. (Full disclosure I used to reside in a building adjacent to 220 Central Park South one of the buildings included in Billionaire’s Row).  While not actually a row the moniker concerns a section of Midtown West Manhattan bounded by 55thStreet on the south to Central Park South on the north, 5thAvenue on the east and 8ThAvenue on the west. Of note 432 Park is included in Billionaire’s Row as though east of 5thAvenue it does back onto 57thStreet and was also one of the first condo buildings to sell units for over $50M USD.

The construction of 157 West 57thStreet completed in 2014 (a mixed use structure with a Park Hyatt on the lower floors and condominiums above designed by architect Christian de Portzamparc many believe was the catalyst for the moniker and due to savvy marketing reinvigorated a bland congested segment of Midtown Manhattan and turned it into the supposedly most desirable address in the world in a similar league of One Hyde Park, Peak Road, Avenue Foch and other prestige addresses.

Subsequent to 157 West 57thStreet other towers are being constructed. I use towers conservatively as many are taller than the Empire State Building one mile south a defining structure of the Manhattan skyline.  Height sells as many of the buildings promote their unobstructed view of Central Park to the north as a selling point (as the structures tower over the neighboring mostly pre-war apartment and office buildings.

Yet of interest is a report from Miller Samuels a respected appraisal and market guidance firm based in New York. The New York Post nailed it: “Swank apartments are begging for buyers on Manhattan’s “Billionaires’ Row” — with more than 40% sitting unsold in towers that top out at 100 stories.

Concerning 157 West 57thStreet as mentioned prior, only 84 of its 132 pricey condos have been bought — leaving more than a third of them still on the market and none under contract. Six other nearby buildings (as noted above) have as much as 80% of their units available, the figures show, with the total value of all the unsold inventory estimated by one analyst at between $5 billion and $7 billion.

Another building that’s set for completion next year — Central Park Tower, at 217-225 W. 57th St. — will put an additional 179 apartments on the market.

Back to market forecast. As mentioned having been through three market cycles in my real estate career I truly believe the deluxe and luxury market is a forecast for the overall housing market. As one broker in NYC mentioned: “This happened in 1988 to 1992, when there was a glut of condos that didn’t sell. They were smaller and less expensive, but it led to bad times”.

The issue with Billionaire’s row could be timing. Yes a glut of condos all coming on-line with prices starting at $7,000 USD per square foot and some breaking the $10,000 PSF price. The reality is there are only a finite number of prospective buyers in the world at that level of wealth. Coupled with world events i.e. sanctions on Russia, limiting of currency departing China, increasing but below inflation oil prices, South American money heading to Miami, uniform cash thresholds,  reality is the finite market for these units continues to shrink.

Is Billionaire’s Row an anomaly? Of course. The first to the party i.e. Time Warner Center and 432 Park Avenue seem to have done OK. Those joining the party subsequently and potentially in haste should be concerned.  As developers, their success is their sales. However with leveraged capital and banks/financial institutions providing working capital exposure the risk is spread. However at some point mortgages need to be paid, asking prices may have to be slashed and as I have shown in past blogs re-sales have incurred losses.

Am I concerned about the developers and the banks? On a micro level, no. I am concerned about the fallout from massive defaults to empty buildings to job losses as when such real estate does not sell the multiplier effect does impact down the food chain.

During the Internet bust of the early 2000’s Alan Greenspan warned of irrational exuberance.  Prior to The Great Recession that begins in 2008, real estate on all levels was suddenly considered a commodity. Is the lack of sales activity on Billionaire’s Row a harbinger of the overall real estate market? When the deluxe and luxury market sneezes there is a good chance the overall market will eventually catch a cold.