Beige Book, Case-Shiller and Local Price Reductions. What’s Going On?

Nationally we still seem to be in a Goldilocks economy. The Beige Book evidenced positive economic indicators; The Federal Reserve indicated due to the continued momentum of the economy an increase in the Fed Funds rate is imminent. Interest rates on mortgages continue to bounce around yet continue to hover at historic lows.

So what is happening in Denver?

Well, a lot. The Case-Shiller Index advised the Denver area has fallen to #4 concerning price appreciation behind Seattle (12.3%), Portland (9.2%) and Dallas (8.6%). Of note Denver’s Year over Year appreciation was 8.4%. This is a positive as gains are still above national averages yet the cooling off concerning appreciation may indicate movement towards a market more oriented towards equilibrium.

For homeowners price appreciation may be a positive, yet when we have a continuing disparity between average income/wage growth coupled with higher prices; this is not sustainable and leads to potential corrections down the road including housing prices and employment attraction as many businesses will reconsider relocation if the cost of living is excessive.

And yes I have been told by some to look at New York (4.1% Year over Year) and San Francisco (5.1% Year over Year) as markets, which historically continue to increase in value. However both those cities have geographic constraints and higher demand leading to exorbitant pricing by Denver standards and strict rent-control programs, which impact the market, issues we do not have in locally.

While statistics can be interpreted any which way one desires; readers of my blog know I focus on the upscale neighborhoods of Denver. Specifically I believe the upscale neighborhoods are a leading indicator of the future of the overall market. Granted not scientific concerning methodology yet anecdotal evidence coupled with 20+ years as a broker makes me a bit concerned.

I have been keeping my eye on the Country Club Neighborhood of Denver, specifically are area bounded by Downing on the West, University on the East, 8th Avenue on the North and 1st Avenue on the South. While historically expensive the neighborhood has been the pinnacle concerning prestige and address within Central Denver for generations.

Suddenly there seems to be an increase in available inventory. Couple this with a section of listings that have endured price adjustments between 10%-25% to the downside, what is going on?

Granted some of the listings may have been overpriced to begin with. As brokers we advise our clients pricing options based on past sales, demand and other factors. Yet at the end of the day it is the seller who dictates the asking price. Thus some listing may have sellers believing their residence is valued higher than the market would dictate and thus the price reductions.

Yet there is another factor, which I call irrational exuberance of investment gains. A few listings I have watched include a selection that are asking 50%-100% return over their purchase price within the last 3-5 years. Granted some have been renovated/updated yet others are in similar condition when last sold and are asking for returns which are just not rational. Granted if the seller gets the asking price, all of a sudden it is rational.

However let me use the example of a home within the western section of Country Club south of 4th Avenue, a prime neighborhood that sold within the last 12 months and is NOT presently on the market.

The house sold in late 2001 for between $310,000 – $330,000

In early 2002 the home resold for $530,000 – $550,000*

Thus in real #’s gross #’s not taking into account commissions and closing cost the house appreciated $200,000+* or over 60%

*During that short period some improvements were made to the house yet far from a full gut renovation, mostly cosmetics and some mechanicals.

The next resale of the home was in early 2006 for between $640,000 – $660,000

Between 2002 and 2006 (4 years) the house appreciated $100,000 or approximately 19% still quite respectable for housing, on an annualized basis 5%, which was below gains in the stock market during the same period.

The new owners who purchased the home in 2006 bought at the pinnacle of the housing market during that period of expansion. Within 1.5 years we would witness the bubble burst with the shut down of Lehman Brothers and the subsequent Great Recession and Housing Crisis, which were soon to follow.

In late 2016 the house sold between $745,000 – $765,000, an approx. 16% gain yet took 10 years for this gain to happen.

Overall the home in the above example has done well yet also provides insights concerning timing and overall market conditions. In pure #’s between 2002 and 2016 the home went from between $530,000 – $550,000 to $745,000 to $765,000 or approx. $225K or 40%, quite respectable and beating inflation yet also took 14 years to achieve the 40% gain or under 3% annualized which matches inflation which housing (beyond select coastal markets) usually mirrors. 

Are we to assume Denver is now suddenly an outlier like New York, San Francisco and Los Angeles OR are we in a period of concern as our housing appreciation historically matched those of other inland regional cities.

To be honest I do not know but as many clients are sitting on the sidelines waiting to see what the market does. My view is business cycles have not ended and while not in a bubble, if I were looking to buy and resell within 12-36 months, I would be a bit hesitant to sign the mortgage.

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Is NYC Real Estate a Predictor for Denver

Early this morning the 3rd Q 2016 real estate market update for New York City provided by Douglas Elliman (and old line firm in conjunction with Miller Samuel Real Estate Appraisers) and the news is somewhat sobering.

The report noted in 2015 there were bidding wars concerning Manhattan real estate, recently the trend seems to have reversed. According to the report during the same period in 2015, 31% of listings sold for above the asking price, in 2016 the percentage has dropped to 17.4%. Yet more insightful is the listing discounts rising from 2.2% of listings during the 3rdQ of 2015 to 2.9% during Q3 of 2016. Add to this an 8.2% increase in inventory.

I am the first to advise (and being licensed in NY and CO) NYC is a unique market and much of the excess inventory is segregated in the high-end of the market with new construction, a general reluctance on the part of foreign buyers concerned about the world economy and new federal rules concerning disclosure and tracking of funds concerning purchases over $3M.

While the mean price of an apartment in Manhattan is $1M+ which would buy a very nice residence in Denver, we may be seeing trends in the Denver market a few months behind New York.

Listings above $468K in the Denver market seem to be sitting on the market for longer periods. Of note $468K is the conforming loan limit in Metro Denver. For sale signs in the tony neighborhoods of County Club, Cherry Creek and Washington Park seem to be growing exponentially coupled with continued new construction as cranes dominate the skyline in Cherry Creek North. While new listings continue to come on the market with what some consider inflated prices, older listings continue to see downward price adjustments especially pronounced in the Highlands where there has been a glut of upscale luxury developments and the absorption rate seems to have slowed.

A trend we are witnessing in NYC and I believe in Denver as well is movement to the suburbs and within Denver proper to the outlying neighborhoods away from the central business district. While one may suggest in Metro Denver the expansion of rail is partially the catalyst the reality is affordability. The NYC suburbs continue to boom as buyers who have been priced out of the city look to the suburbs for affordable options. A similar pattern is taking hold in Denver.

While I am not clairvoyant I am concerned about the activity in central Denver. While we may be heading into  seasonal slowing; with continued low interest rates sales should be continuing unabated.

Historically when interest rates rise, prices for houses falls inversely i.e. less affordability. Denver at present is at record highs concerning pricing (beyond the highs reached in 2007 even factoring in inflation). While an immediate rate hike may in fact spur transaction activity, the longer term trend may be more troubling i.e. if interest rates continue to rise to combat future inflation, houses prices may rise to match inflation however will probably not exceed and underlying affordability will be challenged in the higher interest rate environment.

 

 

A Burnham Hoyt designed residence comes on the market

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While not a household name in Denver, Burnham Hoyt is one of the more influential architects during Denver’s mid 20th century. His most visible projects include Red Rocks Amphitheater and  the original north-wing/rotunda of the Central Denver Public Library set the foundation in my opinion for the Michael Graves addition.

Hoyt was known for his residences which combined the traditional conservative designs favored by the wealthy yet bringing in a modern aesthetic known as The International Style. While some of his homes are classified as mid-century modern, they are truly International Style as his practice shut down in 1955 and he passed in 1960.

While many of his private residences have been altered beyond recognition and a few gems including The Botcher School (1900 Downing) have been completely razed, a few commercial and residential building remain not significantly altered. His primary home at 3130 E. Exposition Ave from 1945 to 1960 remains intact. Another gem at 545 Circle Drivehas been lovingly restored by SempleBrown.

Within the last week another home attributed to Hoyt came on the market at 2125 E. Hawthorne Pl in the Denver Country Club neighborhood. A quiet street within the larger neighborhood, Hawthorne Place, like Circle and Westwood Drives are considered the pinnacle of addresses in the neighborhood.

2125 E. Hawthorne Pl while not as dramatic and bold as 545 Circle Dr is still a testament to the design tastes of Denver’s elite during the mid 20th-century. While many mansions were built in the neighborhood, the Hoyt design captures and flow and size of the neighboring mansions yet encapsulated in a more international style design yet softened by cornices and other exterior features. With its side entry and mature landscaping the house is not as visible from the street as 545 Circle.

The interior is typical Hoyt with square and rectangular functional rooms perfect for entertaining yet also for daily living. Even through multiple owners various interior elements literally bring the viewer back to the 1950’s (constructed in 1954)from the stair railings to the heating elements. The way the home integrates with the surrounding lot is a Hoyt signature understanding the mild climate and designing for our 300 days of sunshine/year.

If the house is ever available to view on an open-house be sure to visit. While we are blessed to have neighborhoods including Krisana Park known for its mid-century moderns, if you wish to see the foundation for such design in Denver, visit a few Burnham Hoyt structures, you will be amazed.

 

Is there a Glut in the Denver Metro Luxury Housing Market

While stories abound concerning newer deluxe and luxury rentals starting to offer incentives to fill their units, little has been mentioned about the ownership market.

If you have driven through Cherry Creek, Washington Park East, Hilltop or Country Club you may have noticed the proliferation of real estate brokerage signs advising homes for sale. Granted we are entering the Spring season which is always a period of increased listings. However for fun I ran some statistical analysis based on our multi-list system.

At present in the Metro Area as of April 8th, 2016 there is 10,934 homes on the market. Breaking down the market by deluxe and luxury price segments for the metro area and separately the City and County of Denver:

$1,000,000+ = 1,400 Homes of which 221 are located within City of Denver

$750,000+ = 2,424 Homes of which 366 are located within City of Denver

$500,000+ = 4,651 Homes of which 740 are located within the City of Denver

Based on the above the luxury market is truly spread across the metro area with the City and County of Denver accounting for approx. 16% of the deluxe and luxury inventory on the market (a percentage I would assumed was higher as the Central City is generally the most expensive PSF real estate however the C&C of Denver does include outlying suburban markets including Green Valley Ranch and Bear Valley).

My concern is approx. 44% of the inventory on the market at present is asking over $500,000. While this number would be considered low for coastal markets, I am concerned as the average income in Metro Denver would translate to a home affordability in the mid $300’s.

Having been through multiple housing cycles during my 30+ years as a resident in Denver historically the deluxe and luxury market is the first to show signs of fatigue, a potential over-bought market, signs of weakness ahead i.e. an increase in inventory and days on the market.

While I am not expecting a serious downturn or correction I believe the deluxe and luxury market is advising us the rampant run-up in prices may be receding. I personally am seeing more listings in Cherry Creek North that last year at this time would have come on the market at $1M+ being presented at more realistic pricing. I am also witnessing a glut of larger homes in Denver’s Hilltop, Washington Park East and Country Club neighborhoods hitting the market.

Yet macro market fundamentals have not changed i.e. the stock market while running sideways seems stable, interest rates continue at historic lows and unemployment rates continue to drop. On a macro level Denver now has the lowest office vacancy rate since 1990 and our unemployment rate is the envy of may rust-belt cities.

Thus something is happening in the market and only time will tell. However if a client asks me to predict the next few months, my advice would be unless you truly love the residence, plan to reside in it for a minimum 3-5 years or its just so attractively priced, my view is sit on the sidelines if you are able.

I will be interested to look at this post one year from today.

 

 

Is The Country Club Neighborhood Overheated

DSC_00791I honestly don’t know. However for a client request I decided to run some statistics. I pulled resales through the end of 2015 and compared on a per square foot price to the homes on the on the market at present.

I kept the comparison sample as close a possible as follows:

  • Houses priced/sold below $1,300,000.
  • Using only above grade measurements.
  • Avoid listings on busier streets i.e. Downing St., University Blvd., 1st and 6th Aves.
  • The Results:

The Closed Sales came in at: $446 PSF

Active on the Market at present: $481 PSF

Both on a percentage basis and actual sale price, I have some concerns. For example a 2,000 SF house based on the statistics during the 6 months from summer to today would have gone from $892,000 to $962,000. The difference in a mortgage payment is approximately $345.00/month or over $4,140/yr and .and extra $124,000 over the term of a 30-yr mortgage,

Granted, this is Closed  versus Asking, however sold prices have consistently been close to asking. My concern; will appraisals support the values beings presented during this 1st Quarter of 2016 (in general appraisals look backward not forward). Also, for those buyers purchasing at present will equity appreciation continue?

Of course we are in a low interest environment and while this morning’s unemployment rate was positive for the economy there are questions concerning slipping back into a recession based on world-wide economies.

Anyone who knows me knows I am always bullish on central Denver neighborhoods. I believe in location, location and location. However when I see 8% gains in 6 months and some justifying the gain, I become a bit more skeptical.

 

Country Club Real Estate Recap for 2015

Greetings from Cherry Creek. As you are probably aware 2015 was a banner year for real estate in Central Denver. From the depths of the Great Recession we witnessed a true market reversal. The Country Club neighborhood continued to witness strong growth concerning prices. Of note, the average sales price was just under $1M, a significant amount within Metropolitan Denver. Below is a recap of 2015 real estate activity from our Multilist Service:

Country Club: 1st Avenue to 8th Avenue, Downing Street to York/University Blvd:

Average Home Sold: 4 Bedrooms/3 Bathrooms)

Average Size: 2,373 SF Above Grade / 3,417 SF Total

Average Days on Market: 41

Average Price: $983,520

Of interest, Country Club is truly a collection of smaller unique sub-neighborhoods. In general homes south of 3rd Avenue and east of Gilpin Street commanded the highest prices due to lot and home size coupled with location.

The homes sold in the 400 and 500 blocks from Downing Street to Gilpin St enjoyed serious equity appreciation with a few sales generating 30%+ appreciation from 2-3 years prior sans renovation or updating.

North Country Club considered the neighborhood between 6th and 8th Avenues from Downing to York St. continued to prove popular providing buyers with larger homes and lots when compared to their south of 6th neighbor’s and generating increasing values. Of note from Williams St east includes the 7th Avenue Historic District. In general Historic Districts command higher prices and resale values.