April 2017 Statistics Are in the Books

While the news on the housing front continues to paint a rosy picture as we continue to be in a sellers market; statistically we may be entering a phase of normalicy concerning market conditions. While prices remain elevated and there is continued concern that average metro Denver incomes cannot keep up with the inflated housing market we are seeing signs of slowdowns concerning price appreciation and possibly an uptick in inventory coming to market.

Personally I enjoy looking at statistics. When combined with historical personal perspective i.e. lived through it there are insights and trends one may be able to extrapolate.

I was reviewing April 2017 market conditions:

In April 2017, there were 5,361 Active Listings in the metro area.

(Of note, the historical average # of listings in April is 15,710 based on statistics gathered between 1985 and 2016 also related usually the start of the Spring sales season).

Thus our average # of listings continues to be constrained especially when considering the increase of housing stock which has come on-line since the end of the great recession coupled with our population increase

Concerning sales prices:

The year-to-date average sales prices in April 2016 increased 6.05%.

In April 2015 that same statistic was 9.53%.

In April 2014 that same statistic was 12.9% (of note coming out of the recession).

Thus we are witnessing a slowdown in price appreciation (a good thing), slight increase in inventory (a good thing) and overall a potential plateau in the market.

Yes sales prices are stabilizing and getting closer to matching inflation and inventory is beginning to loosen HOWEVER couple this with the stock market at record highs, unemployment at record lows and no appreciable inflation or major interest rate hikes; we may be seeing signs of a housing slowdown in the metro area.

On the luxury side of the market while there have been some blockbuster sales of late, homes priced at $1M and over seem to be languishing on the market for longer periods coupled with price reductions. Granted some inventory came on market overpriced to start however price reductions are happening sooner and price cuts is more severe.

In my local Cherry Creek neighborhood which I admit is far from a barometer for the metro area the inventory of listings seems to be increasing and sales transactions are taking longer to close and usually after a price correction. Granted there has been a uptick in inventory south of 1st Avenue and much of the for sale inventory north of 1st Ave is east of Steele St. which some buyers consider less desirable yet the number of active listings continues to increase. As of this writing there were 41 active listings ranging from $215,000 to over $10M (of note both the lowest and highest price listings are condominiums).

Having been in the real estate brokerage business for a few decades now I am used to witnessing Metro Denver go through 5-7 year cycles concerning increased demand and then stability. While I do not believe we are in for a major correction, I do believe we will continue to see additional inventory come on-line and price appreciation slow to the inflation rate or a few ticks above which is the historic norm.

In the luxury market, which I track, I would be a little more concerned regarding price stability.

In the starter and move-up market baring a serious interest rate hike I am not concerned as demand will continue to outstrip supply. I would be hesitant concerning starter inventory in the exurbs as those markets are dependent on low fuel prices.

As I am advising clients at present:

Sellers: Consider putting on the market now as its low inventory and attractive interest rates.

Buyers: While rates are low, a good opportunity to lock in a fixed mortgage HOWEVER should consider waiting a few months to a year or two as inventory will continue to increase and while interest rates may tick up prices usually do the inverse.

Renters: Rents seem to be stabilizing and with the introduction of additional luxury inventory do not be surprised to see landlord concessions. Thus if in a rental consider resigning for another 6 months with an escape clause and if looking to rent, shop around and look for incentives to bring your net effective rent down.

 

 

Does the Seller Really Want to Sell

While the metro Denver market continues to hum along and there are a few “blockbuster” sales on the upper-end, anecdotally I am seeing signs of stress especially on the upper-end of the market. Some listings are coming on at inflated/fantasy prices and within 1-2 weeks a price reduction. Granted some reductions are more symbolic i.e. still priced above market and I never fault anyone for holding out hope of that blockbuster sale. However as an experienced broker I look for various signs showing that a seller is serious and motivated.

Yet first some signs advising the seller may not be so serious:

Will Not Close until Replacement Property Secured: In such a situation the seller is driving the transaction. You as buyer are in a holding pattern literally beholden to the seller and their timing and wish-list concerning finding a replacement property which in a hot market may not be so easy. In commercial transactions this can be a common occurrence and is a tactic used in 1031 Exchanges. Concerning traditional residential I would be more cautious. Not to dissimilar from a reverse contingency i.e. usually buyer will purchase contingent on the sale of their existing property. Instead here the seller will sell and close once their replacement residence is secured.

Holdover or Leaseback in Excess of 30 days: Holdover i.e. occupancy once the house is sold and closed is not so uncommon. I usually suggest 30 days or less; there is even a pre-printed Colorado Real Estate Commission Form known as the Post Closing Occupancy Agreement for such an event. For longer periods (and again if you are an investor the criteria may be different) I would be more cautious. Basically the seller is looking to cash out and lease their house back. I have been involved with situations concerning relocation when this is quite accepted. However barring a relocation situation my immediate concern is for the buyer. The seller is desiring to cash out and lease back. Again in commercial real-estate not uncommon, in residential may indicate seller may believe market is adjusting downward and desires to cash out at prevailing market conditions and assumes paying rent is safer than a mortgage associated with a downward trending asset. Yes the seller may need the cash out of the house; there are additional options from HELOC’s to Reserve Mortgages, thus a sale is more drastic.

Again the above are basic guidelines, not the gospel and each situation is truly unique.

The signs seller is truly serious:

Buy Me: Even in a hot market a property may go through multiple price reductions. Granted this could be an indicator the listing was over-priced to begin with. However when coupled with other indicators i.e. priced well-below market value, being offered “as-is” or desiring a cash transaction can possibly construe the seller is very serious.

Of note, be forewarned as some brokers will purposely list a property at below-market to instill excitement of prospective buyers and more importantly bids and offers. In a hot market such a tactic can be a benefit to the seller. However in a market trending downward such a strategy may place the seller in a losing situation i.e. full price offer at the below-market price and by not accepting barring contingencies the broker may demand a commission if seller does not sell.

Curb Appeal or Lack Thereof: Anyone who has owned a home knows landscaping takes time and money (even DIY’s i.e. materials, water, maintenance). While brokers usually advise an investment in curb appeal, a seller who may not have the time or capital to attend to the landscaping may be showing signs of motivation by their inaction and lack of investment. Such signs I look for include:

  • Overgrown or dead lawn/shrubs/flower beds.
  • Weeds and other decay i.e. trash, dead leaves, and overgrowth.
  • Newspapers that have not been picked up and/or fliers in the door.

Such signs could also point to an absentee owner, landlord or similar situation. I have used such visual cues to procure listings by researching public records and other databases.

Interior is Half Lived In: Hey I am all for staging and a staged house usually suggests a motivated seller i.e. the investment in staging. However dig deeper especially if you believe the house continues to be owner/seller occupied. Are the closets ½ empty? Is the furniture mismatched or haphazardly placed? Are walls showing signs of art having been removed and not replaced? Such indicators may indicate divorce, destitution, already moved out or similar. Usually when a home is in such condition, the seller is motivated. Please note there is a difference between purging and having moved on.

Of note, in Japan in the 1980’s some listings were not only staged but also included a live multi-generational family pursuing their daily routine during open-houses to show how the home functions and meets the needs of a multigenerational family as buyer. Trust me somewhat disturbing seeing children doing their homework during an open house yet also true early adopters of the precursor to virtual reality.

Family Dynamics have Changed: I see this quite often; the signs may include a child’s crib in one of the social rooms i.e. living, dining, home office or similar. Or on other side of the spectrum oxygen tank or other medically oriented items. Such indicators may suggest a new addition(s) to the family from a child to an aging parent or illness. This may be a situation where the owners desire to move for more space to accommodate and thus at present a not optimum living situation.

Estate Sale: Usually estate sales are when the owner passes and/or the present sellers are by descent. Such sellers may be more motivated to unload the property for various motivations from estate tax liability to not desiring the upkeep and maintenance. In the Denver Multilist there is a check box for type of seller and one option is Estate. If your locale does not indicate such type of seller and it is a deed of trust state, investigate what type of deed is being offered. Is it a Personal Representative Deed or similar? May be an estate. Of course some experienced brokers review obituaries and similar to look for listings; an old pastime in New York City which is practiced to this day (not to mention treating estate lawyers to lunch).

Providing Too Much Unrequested Information: In Colorado we have what is known as the Seller Property Disclosure, a 7+ pages form executed by sellers to provide information to the best of their knowledge concerning the residences condition and state of repair. Of note I advise seller clients to be truthful and honest as its both a legal and ethical course of action not to mention most buyers will engage the services of a home inspector prior to closing.

However some clients can be more forthcoming and mention issues and potential remedies before being prompted. In general I usually caution sellers to be circumspect in what they mention i.e. “We were going to install an on-demand hot water heater but went with the conventional as it was cheaper and we did not want to invest any additional money into the house”. This tells a buyer the seller while preparing for sale went for near-term economics versus cost-savings over the long-term. I am guilty of this myself. In the sale of my house I advised the sellers concerning a secondary bathroom; if they ever plan to renovate to consider changing the dual knobs to a single-lever. Was I disclosing too much? Maybe; however I advised since we did not use that particular bathroom we never did the upgrade; something to consider for their larger household and lifestyle.

The House Is Empty: Rarely do homes show better when vacant (that is why we have staging as an image is worth 1,000 words). In reality an empty property may indicate the seller has moved on. Yet continuing to retain ownership the empty home does incur carrying costs even if there is no mortgage i.e. real estate taxes, upkeep, insurance and so forth. Thus the seller may be willing to be more flexible knowing their for-sale asset is depleting capital while on the market.

Granted some homes are staged and again this may be a sign the seller is serious as staging is not inexpensive. In some markets we are now witnessing virtual staging i.e. computer generated staging to the benefit of on-line marketing, again a picture is worth 1,000 words. One company has brought the cost of staging down with inflatable furniture; just don’t sit on the props. Of note, a broker trick to show the scale of a bedroom, set up four to six boxes for support, add a camping air mattress, cover with a bedspread and pillows. The result an instantly staged and scaled bedroom.

Happy House Hunting

To Buy or Rent that is the Dilemma

As a practicing real estate broker you would assume I would be an evangelical advocate for purchase. In general I am HOWEVER as a seasoned real estate broker I am a bit concerned about the existing market conditions in the Denver Metro area. In some neighborhoods I have witnessed prices and sales volume up 50% in 3 years and some 100% gains since the depths of the Great Recession. Of note Denver was NOT as hard hit as Las Vegas and Phoenix where such gains after an over-sold condition may be warranted.

Thus the following are the 5 questions I usually ask of prospective buyers and not only 1st time buyers. Of note I personally am going through a similar exercise as I am under contract to sell my residence, which I have called home for 28+ years. Due to the inflated (in my humble opinion) market and lack of inventory; the 5 questions are hitting me personally. Here you go and I must advise please be honest as the questions are also a self-assessment of sorts:

How long are you planning to stay in the Home/Neighborhood/Area?

The reality; it is unlikely we will witness the gains we have had during the past three years. Simple economics would argue median incomes cannot match the gain in housing prices especially in the upper-tier of the market. Thus I advise clients unless they plan to stay in their residence a minimum 3-5 years (assuming this is not a fix and flip situation), may wish to reassess purchases.

The purchase and selling of a residence is not only time consuming, it is also capital intensive. Costs usually associated on both sides include brokers fees (usually paid by the seller in Denver), mortgage applications/origination, appraisals, title insurance (usually paid by seller) and so forth.

In general the longer you retain your residence the more time you have to recoup costs and based on dollar cost averaging (yes values can decrease), the more opportunity you have to enjoy an overall increase in value. Of note for those who retain a house for less than two years and if there is an increase in value, must factor in capital gains taxes (sometimes can be offset by expenses incurred concerning the divesting of the residence).

In the question I mention neighborhood and area. Do you have young children or planning on having children? School districts are a major motivator concerning one’s residential address. When childless; the gentrifying neighborhood may be the hip choice yet when the children come into the picture and Kindergarten is around the corner all of a sudden the school district and distance to school is of paramount concern.

My opinion, if planning to stay 3 years or less, consider renting.

House Prices Always Go Up, Right?

How we have short memories. While the market slide beginning in 2007 may be recent memory and quite severe, it was not an anomaly. When I purchased in 1989, the seller had purchased the home in 1984. Five years later he sold it for 30% less than the purchase price 60 months earlier (not accounting for inflation). The seller brought cash to the closing table to satisfy the mortgage and compensate the brokers. This was an era before the term short sale and “jingle-mail” entered the popular lexicon.

More recently, the median home price in the United States dropped nearly 13% between 2007 and 2009, falling from $247,900 to $216,700. In some overheated markets, such as Las Vegas prices declined as much as 62% from their peak.

Before buying a home, consider how your personal finances would fare if your house’s value increased slowly or not at all. With 3% annual price appreciation, a $250,000 (considered a starter in Metro Denver) house would be worth more than $337,000 in 10 years. With a 1% annual price increase, the same house’s value would grow to just $276,000 over the same time period. Barring a recession, nominal inflation of 2% would keep up however due to the added expenses concerning home ownership; one could envision a scenario of flat and potential decrease of value. For my economic pundit peers, yes during inflationary times, houses in general increase in value HOWEVER with high interest rates associated with the taming of inflation, transactions become muted as affordability becomes more challenging).

I provide the above scenario as I have witnessed some buyers placing all their eggs in the housing basket assuming the gains will outpace other investments. Trust me I am the first to argue a home is a place to sleep at night; the brokerage firm holding your stocks or the bank holding your CD’s are not leaving the light on for your arrival to bed down for the night.

Shelter is needed I agree. However one should not look at their house as their sole investment or worse an ATM i.e. Home Equity Lines of Credit. I view a residence as shelter and if there is an increase in value an added bonus.

If I Rent I am 1) Throwing Away Money and 2) Making my Landlord Rich?

On the surface such an argument does have some merit. Also I will avoid getting into the issues concerning home ownership restricting mobility concerning employment opportunities. I understand the line of most brokers i.e. owners are building equity in a valuable asset that can boost their long-term net worth whereas renting is spending not saving.

Home ownership has additional costs beyond the Principal and Interest on a loan.

Taxes: While metro Denver has in general low property taxes, it is still a recurring monthly expense. In the upper-tier of the market i.e. $500K and above, one can easily allocate $500/month just on real estate taxes.

Insurance: Home Owners Insurance in Colorado can be costly due to our climate i.e. hail, wind, heavy snow and other perils. While we do not have to worry about earthquakes; insurance rates in Colorado continue to escalate due to weather, cost of labor, materials and related factors; such rates rarely go down over time.

Basic Maintenance: I tell my clients to consider budgeting at minimum 1%-2% of their homes value towards maintenance and upkeep. This does not necessarily factor in unforeseen costs i.e. new hot water heater, roof repairs, HVAC and so forth. Condo owners you are not exempt, this is what monthly HOA fees are for.

In a rental such costs are borne by the landlord. However I will advise if renting do consider “Renters Insurance”, usually inexpensive and offers piece of mind. While you may have budgeted for your Principal, Interest, Taxes and Insurance, there are always other costs that can be budgeted for as well as surprises.

If I rent am I missing out on the tax benefits?

To be honest many homeowners do not realize the mortgage interest deduction is oriented towards larger mortgages and financial outlays. First as a homeowner you must itemize your deductions when claiming the mortgage interest deduction.

With the existing low-interest rate environment (and yes rates are still at historic lows) your itemized deductions should exceed the $12,600 standard deduction for married couples? This is OK if you have an upper-tier house with a large mortgage. Yet the reality is each year that goes by your deduction decreases as a larger portion of your monthly payment is allocated towards principal. Thus the deduction over time will decrease. (Of note, there are interest only mortgage instruments, unless truly financially savvy or blessed by your CFP or similar, I suggest avoiding).

When Does Buying Truly Makes Sense?

I always look at a rent versus buy scenario and run numbers accordingly usually in conjunction with a client’s financial and/or tax advisor. Yet sometimes I take the simple approach, which is basically, is it cheaper to purchase than to rent?

Beyond the down-payment (and please note I am not trivializing this, however when loans are available with 5% or less down, saving for a down payment is not as onerous as when I purchased my primary residence in 1989 and had to come up with 20%+) I look at basic monthly outlay after answering the prior questions.

Let us assume in metro Denver you are interested in a home that after the down payment the monthly PITI/Mortgage is $3,200. Now what if you could rent a similar property, apples to apples for $2,850/month?

One could argue for $350/month extra or $4,200/year you can have the security (and expenses) associated with home ownership.

Yet one could also argue that $4,200/yr. can be invested after taxes into a Roth IRA or similar instrument. For the uber conservative that person could buy bonds and secure a safe 2% return. For the more aggressive; there is the potential to be investing with returns of 5% or higher annually over a longer period; not unheard of (coupled with dollar cost averaging) and with a Roth monies going in post tax, comes out tax free. There are also options to use the monies for a down payment, however there are some tax implications, which are best, discussed with a tax advisor.

I also advise clients at the beginning of their home search consider using a price-to-rent ratio calculation. Price-to-rent ratio is calculated by dividing the home value by the annual rent amount. Generally speaking, if the price-to- rent ratio is less than 20, buying might be a better option. However, if the ratio is greater than 20, renting might be better. Needless to say, any ratio or comparison is meaningful only if you are comparing similar properties.

In closing I am just throwing our scenarios and “food for thought”. I am in a similar situation. As mentioned I am in the process of selling the residence I have been in for 28+ years and have enjoyed immensely. However due to the physical design and other factors it is time to move on. Assuming I close, I will be, guess what living in a rental! Yes I will be paying rent.

My personal view at present; I am more comfortable having the proceeds from the sale liquid and when the correct residence comes available for purchase at a price I feel is appropriate, I can proceed sans the restraints of trying to sell my residence and/or using a contingency clause which is never popular. In the interim, the money from the sale of my residence post taxes will be invested in short-term bonds throwing off income while retaining a margin of safety of the underlying principal.

Millennials Understand Opportunity Truly Knocks Beyond Central Denver

We seem to be in a unique environment concerning the national housing market as both buyers and sellers are excited. For sellers, record high prices are becoming the norm even in the rising interest rate environment. Buyers even though confronted with the challenging lack of inventory are strengthening the market due to confidence and the desire to lock in still historically attractive interest rates.

The above is based on the monthly Fannie Mae Home Purchase Sentiment Index® (HPSI)increased by 2 percentage points in January to 82.7, ending a five-month decline. Some of the highlights from the report include:

  • The net share of Americans who say it is a good time to buy a house fell by 3 percentage points to 29%, matching the survey low from May and September 2016.
  • The net percentage of those who say it is a good time to sell rose by 2 percentage points to 15%.
  • The net share of Americans who say that home prices will go up increased by 7 percentage points in January to 42%.
  • The net share of those who say mortgage rates will go down over the next 12 months remained constant this month at -55%.
  • The net share of Americans who say they are not concerned about losing their job rose 1 percentage point to 69%.
  • The net share of Americans who say their household income is significantly higher than it was 12 months ago rose 5 percentage points to 15% in January, reversing the drop in December.

Now concerning millennials, according to Fannie Mae research, more are purchasing and starting new households. While the Great Recession may have delayed purchases; millennials are now more confident concerning job security translating to an increased in marriages and parenthood (common during stronger economic cycles, nothing new there).

Yet of interest due to the expensive reality of city-centric residences some millennials are exploring and purchasing in the suburbs where values are generally more affordable. I have witnessed this myself concerning millennial clients looking beyond central Denver. Neighborhoods of interest include:

Southmoor Park: Lots of home and land for the spend. Also close enough to Light Rail Station at Hampden and I-25 allowing easy access to downtown and easy drive to DTC. With Whole Foods and new restaurants options on the Hampden Corridor, becoming popular.

North Englewood: Just south of the Denver border clients are looking at Englewood (north of Hampden Avenue) as a substitute for Platte Park especially adjacent to S. Broadway which continues to diversity businesses now catering to clients within their immediate neighborhood versus the traditional commuter traffic. Also a few good options for fans of Mid Century Modern who may not wish to pay the prices associated with Krisana Park.

Arvada: With neighborhoods close to the light rail line and with a new urbanism orientation, millennials are finding Olde Town Arvada has urban qualities found in areas such as Old SouthPearl, Old South Gaylord and other urban enclaves. With the easy commute to Denver via rail or car and lower prices, demand will soon outstrip supply.

Westminster: As with Arvada, the new rail line is opening up opportunities for those who desire more affordable housing, an ongoing renovation/development of a town center and easy access to the Broomfield office parks.

Edgewater: For those who have been priced out of Sloans Lake, Edgewater offers a respite within a stone’s throw geographically. With a charming commercial street, small town feel yet within easy viewing distance of the downtown skyline and a nice diverse housing stock, do not be surprised if this hidden enclaves demographics see a dramatic shift in years to come skewing towards younger buyers and families.

With this millennial flight to the suburbs what is going to happen to the inner-city? In essence the millennials are basically skipping a step i.e. usually starting in the inner-city and then moving to the suburbs for access to additional square footage, suburban schools and so forth. While these areas were once car-dependent, the expansion of RTD’s rail lines are making these suburbs once considered commuter oriented into their own attractive and thriving towns.

Yet I am far from concerned about the City of Denver. While I have some personal issues with the desire to increase density in some neighborhoods; Denver will always remain in demand due to geography, diversity of housing stock and varied amenities from cultural to financial i.e. lower water bills, low-taxes, municipal services and so forth.

My one concern for Denver is this rush to increase density. Full disclosure I am a native New Yorker thus I understand density having been raised in within an apartment building on the 20th floor and taking the subway to and from school. I am also educated as an urban planner. I view the cranes on the skyline of Cherry Creek, west of the Denver Country Club and other areas and I have three questions:

1) Is there truly longer-term demand for all the new multi-family buildings?

2) If in fact there is demand and zoning is keeping up with this demand, will our infrastructure follow suit i.e. roads, mass-transit, pedestrian corridors, dedicated bike lanes?

3) Are we remaking the inner-city of Denver unaffordable akin to San Francisco, New York, Paris, London and other cities in which the income gap is severely pronounced. These were cities which used to have a true diversity of cultures, incomes and employment and now have become playgrounds of the wealthy or long-time owners.

 

 

Bubble Probably Not. Am I Still Concerned Yes

Between reading The Denver Post article concerning record low inventories, visiting listings and chatter at open houses we seem to be in a Goldilocks period for home sellers and a Draconian period for buyers.

I will be the first to admit there is a severe lack of inventory at all price levels which based on the laws of supply and demand will raise prices. Thus why should I be concerned? As a broker I should be thrilled! Let me preface the following with the disclosure that my market niche is deluxe and luxury.

Irrational Pricing and Exuberance: Last week I went to look at a listing in a very in-demand neighborhood in Denver where average prices are triple of the average of the Metro area.The house I felt was priced on the upper-end of the Per Square Foot for the neighborhood. Granted great location, well-kept yet some design issues and so forth (yes no house is perfect). Within 2 days of my visit I received a note from the listing broker advising the sellers recieved a strong offer and if my client were interested, they needed to get an offer in ASAP. My client and I both felt the house was not for them and it was in our humble opinion overpriced. 5 days later I receive a notification from our MLS service that the house which received a strong offer suddenly had a price reduction.

Even earlier today I went to a public open house. The house was not correct for my client i.e. larger lot than they desired; however there was the appeal of some unique features including a carriage house and the perfect 1st level of entertaining. As assumed the house was not for my client. The 2nd level was two bedrooms with a shared jack and jill bathroom. Thus realistically a two bedroom house. Basement was OK, nothing out of the ordinary. The carriage house, while a rare amenity was basically a dated studio sized apartment and advertised as the 3rd legal bedroom (I saw income rental potential both long-term and transient) .

The Open House was packed. I heard one of the brokers mention the listing already had 15+ scheduled showings before the open-house . Yet across the street were two houses which sold last summer, comparable size, more conventional bedroom layouts, slightly smaller lots and more traditional design. Both sold for almost half of what the listing price on this listing. Now I am not suggesting the larger lot and carriage house would not increase the value, yet by double? Coupled with limited bedrooms, unconventional design and double the price in one year, sustainable? Probably not.

Are Stock Market Paper Gains Sustainable? It is no secret the stock market has been hitting new records and the market usually looks to the future; thus we may believe the overall economy will continue to expand. The Federal Reserve believes so i.e. advising a rise in interest rates is forthcoming. However is a sell-off in the immediate future?  Most real estate brokers know a downturn in the market also challenges confidence concerning real estate purchases as the wealth effect is psychologically proven.

Interest Rates Will Continue to Rise: Interest rates can only go up assuming no major shock to the overall economy i.e. war, terrorist-attack. Granted we have been within a historically low interest-rate environment for way too long. The low-interest rates naturally raised housing prices as many buyers were purchasing a payment and not necessarily underlying equity. Yet this is a dangerous precedent. Except in markets with rampant inflation; in general higher interest rates translate to lower housing prices as the cost to borrow money increases.

This is worrisome; as interest rate hikes usually impact the first-time home buyers, yet the ripple effects can impact all facets of the market as move-up and move-down buyers are also impacted concerning the distribution/inventory within the overall system.

A healthy housing market is usually considered fluid corresponding with life and circumstance changes. When supply and demand is disrupted and housing becomes challenging to either acquire or sell, the ripple effects are felt within all aspects of the local economy. Few may remember the late 1980’s in Denver when the HUD Foreclosures insert in the Rocky Mountain News was literally as thick as the newspaper it was included in. More recently between 2007 and 2009 For-Sale signs dominated the landscape during the “Great Recession”. Those buyers will eventually be sellers, sooner than later?

Investors Having Realized Gains Begin Selling: One of the reasons we have such low inventory is from past investor activity plowing cash into the housing market during the tail-end of the Great Recession. However with recent gains in the stock market, higher interest rate yields in fixed-income markets and weakness in some rental markets do not be surprised if those investors having enjoyed equity appreciation and now having owned long enough to just pay ordinary capital gains on appreciation we may see investors begin to relinquish their inventory sooner that later.

Reduced Equity Can Happen: For buyers who purchase at the top or pinnacle of the market cycle the ramifications can be challenging. One of the hallmarks of the Great Recession was the Negative Equity associated with many purchases made at the top of the market assuming housing prices do not go down. Granted I am advising clients if they plan to stay in residence for 5 years or more they usually can ride out a cycle. However if one is purchasing investment property at present, my more experienced clients are literally selling or sitting on the sidelines and looking at alternative investments.

Fix and Flips Less Common: With the boost in prices, fix and flippers are having challenges fining acceptable inventory and foreclosures. While this may be a sign of a healthier market the ripple/multiplier effect can be worrisome i.e. general/sub contractors, building material suppliers, retailers such as Home Depot and Lowe’s and so forth may be challenges ahead. While the service economy may continue to hum along, blue-collar trades and related industry may be challenged.

The Next 12-18 Months: While I do not have a crystal ball and I have been told I am a pessimist I do have the luxury of the knowledge of history having been in the real estate trade since the late 1980’s in Metro Denver. I do not believe business cycles have ended and while at present demand outstrips supply, I do not believe this market is sustainable. What I feel we need to look out for is as follows:

Challenges to the Luxury Market i.e. $600K and Above: The luxury market is usually the first markets to show weakness. Due to the uniqueness of the market i.e. cash buyers, not necessarily dependent on income ratios, experienced buyers and sellers, this is where I would watch for issues pending. If we suddenly see an influx of luxury listings hitting the market and absorption slows, this to see is a signal that astute and more experienced buyers are sitting on the sidelines waiting for prices to correct somewhat.

Glut of Deluxe and Luxury Condominiums: Based on underlying ground prices new condominium construction is usually oriented to the deluxe and luxury buyer.  However what are the depths of this market? Seeing the skyline of Cherry Creek and Downtown leads me to be a bit concerned. Denver for the most part has been a home market. Yes the aging population may desire condos for the ease of maintenance and younger buyers may desire condos for the same reason. However younger buyers may begin having families; will they remain in the condos or eventually sell or place on the rental market. With the majority of new construction in the one and two bedroom range, these condos are not oriented towards emerging families or longer-term retention.

Rent Prices Coming Down Incentives Increase: Part of the downturn in rental rates is due to the glut of luxury rentals. Cherry Creek is a perfect example (just look at the east-side of the Steele Street and 1st Avenue intersection); the same trend is happening in Downtown. Is our influx of millennial and others with disposable incomes sustainable?  Are these renters now suddenly purchasing? Yet with low inventory it’s a challenge.

We shall see what the traditional Spring Selling Season brings to market. Will there be a controlled flow of inventory hitting the market or will we witness a glut or continued tightness i.e. lack of inventory.

If I were considering selling, I would be placing on the market immediately to take advantage of the low supply and high demand. With interest rates on the rise future prices will be challenged. While interested rates on borrowing money continues to be attractive, lower rates will not last forever (when I purchased my residence in 1989, I paid 12% interest on a 15 yr. mortgage with 20%+ down-payment!).

If I am a buyer and I had the option I would probably sit on the sidelines and consider renting for the immediate future. Granted if one’s dream home hits the market, go ahead and purchase it. However if settling or to purchase just to purchase, I would suggest take a step back and reassess and take the emotion out of the process.

 

Changes to Zillow/Trulia: Brokers and Lay Persons Need to be Aware

Since I am licensed in Colorado and New York I follow both markets. StreetEasy while not known in CO. is one of the de-facto multilist services in NYC used by brokers and clients alike. StreetEasy is similar to how the consumer site of  www.REColorado.com works here in Metropolitan Denver presenting listings to the general public and providing contact information for the Listing Broker.

While the following may be more oriented to brokers, the information is truly relevant to all concerning the presentation of properties and how the listing broker or those looking to build a relationship with a buyer is changing. In Colorado we have quite strict criteria developed by the Colorado Real Estate Commission concerning representation and disclosures.

StreetEasy is planning a significant, industry-wide change to their lead generation process. They are switching their focus from lead generation for exclusive selling agents (those brokers who have a contract to list the property with the seller) to a more buyer agent focused site. Since StreetEasy falls under the Zillow/Trulia umbrella, this will apply to all three sites.

Some brokerages pay the Zillow/Trulia group to keep other agents off the listing detail pages of exclusives (of note, the vast majority of listings in Colorado are exclusives i.e. represented by one agent/brokerage) on Zillow, Trulia and StreetEasy, so that all leads go directly to the listing exclusive agents. As of March 1st, 2017 this option will not be available. Instead, the sites will allow buyer agents to receive leads from all listings. Potential customers on these sites can select the exclusive agent, however, leads will default to buyer agents who pay to appear on listings within specific zip codes.

Will this muddle the information put out to the market? Depends on the level of disclosure. I understand why Zillow/Trulia is taking this action i.e. additional revenue generation. However for buyers and sellers who may be doing research on listings and/or are considering engaging in a brokerage relationship, it will become more confusing. Is the broker who contacted you the listing agent whose fiduciary duty is to the seller, or are they looking to represent you as a buyer and thus owe their fiduciary duty to you, or will they be a transaction-broker?

When I represent a buyer I desire to talk to the actual listing broker; I have access to this information from our Multilist service. For the general public brokerage relationships may become more confusing with the potential for buyer brokers to insinuate representation or insights on a listing which is not actually their exclusive. While it will be the responsibility of clients to insure their brokerage relationship is correct for their needs and their broker, regardless of the relationship is treating them in a professional and ethical manner my concern; the listing of brokers and lead generation will add to confusion on behalf of the general public.

I believe in Colorado we have multiple layers of protection and disclosure forms to insure proper representation and fiduciary duties associated with specific brokerage relationships. However in this day and age of Internet marketing and information  sound-bites there is a good chance there will be confusion. Stay tuned as if we see an uptick of complaints filed with the Real Estate Commission concerning representation, more clarity and disclosure requirements may come down the pipeline to catch up with technology.

Rental Concessions Price Drops Incentives Oh My

Should we be concerned about the health of the real estate market?

Anyone who follows my blog knows I have been “concerned” for a while. Of note I have been in the business for over two decades thus I have been through multiple market cycles.

Concerning the Rental Market it is no surprise we are beginning to see rental concessions i.e. free rent, lease signing bonuses, additional amenities and so forth. These concessions have been segregated to the deluxe and luxury segment of rental market, a segment that has witnessed a significant increase concerning inventory throughout the metro area. While concessions benefit the high-end renter in the short-term, the middle and lower-end of the market continue to experience demand far outstripping supply.

In addition I am witnessing a newer trend in the upper-end of the market. Those who may have considered placing their home on the market are now considering placing their home on the rental market, either long or short-term. The upper-end of the market i.e. over $500K is experiencing some fatigue as supply has increased and demand has decreased. Thus some sellers are reassessing their plans to sell and are considering renting their residences with the belief the market will again begin to increase at a later period.In the Cherry Creek North residential area adjacent to the Business Improvement District“For Rent” signs are sprouting up and beginning to crowd out or being placed adjacent to”For Sale” signs.

While the market may begin to uptick in the months to come I tend to be slightly pessimistic. Metro Denver has enjoyed an upswing for multiple years now. Over time markets do eventually correct. Historically housing prices matched the rate of inflation over the long-term. Since we have climbed out of the Great Recession our market has been expanding beyond national averages. Yes we are a pseudo sun-belt growth state with a continual influx of population however market forces eventually lead to corrections.

There is a fine line between demand and cost-of-living. While Metro Denver has enjoyed net migration since the oil bust of the last 1980’s, much of the attraction to Denver was affordable housing. Yes naysayers will advise the average home in Metro Denver is running about $330K in-line with average incomes yet most new inventory throughout the metro area is coming on line at much higher costs. The reasons are complex and varied, yet the end result is product becoming unaffordable to the average buyer.

Am I sounding an alarm? No. However I am advising clients to be cautious. I am finally seeing rationality return to the marketplace i.e. purchasing based on value versus a monthly payment and the realization that over the next 3-5 years equity appreciation may not be guaranteed as past performance is not necessarily indicative of future returns.

However I must advise, if priced correctly no matter what tier of the market, residences are in fact selling. Yet I am advising sellers to consider looking at prices from one year ago versus the last six months. While spring is usually a period of increased sales and activity, having witnessed longer days on market especially at the upper-end of the market, usually a harbinger of trends to come, thus tread carefully and with proper guidance.

Is the rental market moving towards equalibrium

To be honest I have no idea. However according to The Denver Post in an article titled Rising Vacancy Rates Signal a Shift in Metro Denver Apartment Market  there has been a surge concerning vacancies. While this is not to be unexpected due to the massive supply having come on line in recent months, those like myself with some history in Denver are reading the tea leaves and the word pessimism keeps forming.

Denver real estate is not immune to boom and bust cycles. Since moving here in 1984 I have been through three (3) cycles of the market. What concerns me about this newest cycle is the following:

  1. Apartments (rental and condo) being constructed throughout the metro area based on pro-formas targeting deluxe and luxury market which is truly a finite market.
  2. Asking rents and PSF prices sans correlation to average income in the metro area.
  3. Assumption that demand will continue to outstrip supply (sorry folks we are not in New York or San Francisco).
  4. Increased Density in a marketplace which generally values personal indoor and outdoor space.
  5. Apartments with common area amenities while skimping on size; while attractive to millennials, guess what, millennials do age and their desires change.

Such cycles are old news. I still remember when Parkway Center and Uptown Village came on the market inclusive of rental incentives. For some perspective during the summer of 1987 (yes almost 30 yrs ago), I worked in downtown Denver for the summer while attending CU Boulder during the school year. I was able to rent an apartment at One Denver Place, a one bedroom on the 25th floor (unit #2507) with an unobstructed view of downtown, including parking and utilities. With my rental furniture bill, the monthly was approx. $500.00 which at the time was considered slightly above market. When I graduated CU and moved to Denver full-time my first apartment, an expansive one bedroom with an enclosed sun room at 900 Lafayette was a whopping $400/month. During these times there was a general glut of rentals on the market and rents were in line with average incomes.

Even in the early 1990’s as Denver began to climb out of the energy sector recession one was able to purchase units at The Barclay Towers downtown for $50K including parking and either mountain or city views coupled with below market financing provided by the sponsor/developer. Granted during this time LoDo was in its infancy, the loft trend had yet to gain traction and the Platte Valley was literally a dust-bowl, how times have changed.

Granted between natural inflation, an expanding population (yes folks even with the snow we are considered pseudo sun-belt) and other factors it is natural for prices to increase and trust me I look back and concerning some real estate purchases say to myself “Could Have, Should Have and Didn’t”. While hindsight is truly 20/20, history is known to repeat itself as we rarely learn our lessons.

With the many apartments and condos still to come on-line in 2016 and beyond (just look at the skyline of Cherry Creek North and west of the Denver Country Club) do not be surprised to see developers providing incentives and other marketing perks to increase occupancy.

As a broker working in the deluxe and luxury market niche I understand these clients are as mentioned are a finite resource. There are only so many out-of-state buyers and mountain residents  looking to drop $1M+ on a pied-a-terre condo in Cherry Creek North or $2,000+/month for a Manhattan sized apartment in downtown or Cherry Creek.

Looking at the macro picture long-term I am not as concerned about absorption. As baby-boomers age, condos and multi-family maintenance-free living becomes more attractive. Denver will always attract the youngest and brightest due to lifestyle, climate and an overall entrepreneurial orientation. However for the immediate future i.e. 1-3 years, I personally am a little concerned. If I were bringing such product out of the ground over the next 1-3 years I would be considering contingency plans from price correction to financing concessions to rental incentives to owner will carry.

 

So what can we expect in 2016 concerning the Denver Housing Market

Over the weekend the Denver Post ran an insightful article: Metro Denver Housing Remains Constrained and Combustable. While it is no secret the Denver Metro area has experienced a significant uptick since the great recession, there are questions about sustainability, a housing bubble and other concerns. As a broker in the business for a few decades a few personal thoughts:

Potential Bubble: While I truly believe prices at the upper-end of the market i.e. $600K and above are not sustainable; the concern of a bubble is probably overblown. Yes Denver did experience a bubble in the mid 2000’s HOWEVER leading standards were lax, buyers assumed 10%+ annual gains were the norm and housing prices vastly exceeded average incomes. While there are still issues in the market; stricter lending requirements and verifications, appraisal oversight and other safeguards I believe will prevent another bubble in the immediate future.

Housing Type: One concern is the development of apartments and multi-family housing due in part to land being more expensive and thus the need for the end product to justify the cost of the dirt. Three issues: 1) Metro Denver has historically been a region dominated by single family homes as style of choice, 2) the younger buyers of condos will eventually seek out single-family homes once they start families and 3) the glut of deluxe and luxury rentals developed and proposed does not match the demand for more affordable housing throughout the metro area. During a showing last week one of the clients mentioned a standard 50′ x 125′ (6,250 SF) lot in The Highlands is asking $2M. A similar lot in Cherry Creek North is running $1M. While the Highlands is hot and in-demand and may facilitate higher density one must start to question is exuberance trumping location, location, location?

Is Income Sustainable: With the average house in Metro Denver selling in excess of $300K. Most lenders would require an income of approximately $70,000 – $75,000. The average income in Metro Denver for 2014 was $69,000, thus we are bumping up against some thresholds. Assuming income growth matches housing price increases we should be OK however this seldom happens.

Interest Rates: Even with the recent turmoil concerning equity markets worldwide, once growth begins in earnest interest rates will rise. At present we are still enjoying historically low interest rates HOWEVER this too is not sustainable. The low worldwide interest rates were in direct response to the worldwide great recession. When growth happens if not kept in check inflation can be an issue which generally leads to an increase in interest rates as the Fed uses Federal Fund rates to control growth. Rising interest rates usually lead to a reduction in housing prices as the cost of lending is increased. Thus, if I were a buyer in today’s market, capture the 30 yr fixed rate and sit back and know your payments are fixed. Of note, when I purchased a row house in Cherry Creek North in 1989, lending requirements including 20% down as it was an attached house i.e. perceived risk and the interest rate on my 15 yr. mortgage was close to 10%.

Prophecy by So Called Experts: My concern is the market prognosticators are advising 2016 is Denver’s Year. These same pundits advised the same moniker for Phoenix, Las Vegas and other hot markets of years past. Thus that alone gives me some concern.

What am I telling clients? If you are buying for the longer haul i.e. minimum 3-5 years, go for it. If you may be moving sooner, don’t expect the continued 10%+ annual valuation increase as if you must sell within 3 years of purchasing it may be wise to consider renting as equity appreciation is far from guaranteed and when coupled with the fees related to selling one may incur a loss.

 

Cherry Creek North Real Estate Recap for 2015

It was another banner year for the Cherry Creek North residential neighborhood (generally considered from 1st to 6th Avenues, University to Colorado Boulevards).

Cherry Creek North: 1st Avenue to 86h Avenue, University Blvd to CO. Blvd:

Average Home Sold: 3 Bedrooms/3 Bathrooms

Average Size: 2,009 SF Above Grade / 2,642 SF Total

Average Days on Market: 62

Average Price: $987,303

As a neighborhood resident since 1989 I am in awe at the numbers.  As a broker I and others were shocked when Paul Kobey developed a row of luxury attached homes called the Georgetown on the 400 block of Columbine Street. At the time of development the asking price of $400,000 was considered the top of the market and unattainable. In today’s market, the lowest priced listing in the neighborhood is in the $450K range, a small tudor abutting Colorado Boulevard.

Will the success last? If I were truly clairvoyant I would not be composing this blog and would be residing on

the French side of St. Martin, however I would be somewhat concerned. While the average sales price is just shy of $1M; of concern is the number of days on the market.  While conventional wisdom does advise the higher the price the longer on the market, coupled with increased inventory available and higher interest rates the pinnacle may have been reached.

Of concern from a brokers perspective is the development of the luxury rentals and condos being developed in the neighborhood. I am just not sure where the demand for such inventory is coming from. While I have represented mountain residents and others desiring a pied-a-terre in Cherry Creek, this market is truly finite. It is not uncommon to look up at the buildings and see few if any lights on.

More positive is the lack of spec houses i.e. those built on speculation. With standard 50′ x 125′ lots pushing the $1M mark, development on those lots is now more commonly bespoke by a buyer versus speculation. While there are a few spec developments, still more common south of 1st Avenue where land is generally less costly.

If I were in the market as a potential seller at present I would place on the market yet price attractively to cut through the clutter on the market and stand out as a value proposition. As a buyer, unless planning to stay a minimum 3-5 years I would seriously consider advising to rent or hold off a few months and keep an eye on inventory and price reductions. Granted I am a conservative broker yet I have also been through three business cycles during my years as a broker and while I am not concerned about a potential crash of value; between forecast increases of mortgage interest rates, the equities market moving sideways the economic issues in China, many pundits are cautious. As one long time client who is a voracious buyer commented to me “I am now a seller”.