What Usurps Low Mortgage Rates Concerning Housing Activity? Confidence

While I truly understand as a broker the continued optimistic view of housing espoused by my peers; hey its our bread and butter. Yet even with last week’s downdraft concerning mortgage interest rates the housing market did not suddenly spring back to the activity levels of last year and asking prices did not all of sudden increase. There is a fundamental reason why activity did not spike; it’s called confidence or lack thereof.  Let me explain:

  • First: Mortgage rates have been falling sharply over the last three months, which should be incredibly positive for the housing market, but so far reaction has been muted in both home sales and new home construction. Granted part of the drop was due to the inverted yield curve and discussion concerning a Recession on the horizon but the point is…..The average rate on the 30-year fixed is now well below 4%; it was above 5% in November 2018. The drop in rates has not produced a home-buying spree for either new or existing homes.

 

  • Second: The drop in interest rates did have impacts specifically concerning refinancing activity.  This is a mixed message as refinancing may suggest prospective sellers may actually be staying in a home versus selling and moving up or down from their existing residence HOWEVER most who refinance will conduct a cost-benefit analysis i.e. months to recoup the investment and then subsequent savings. Thus due to refinancing one would assume housing availability would be further constrained. However……

 

  • Third: The further drop in mortgage rates did nothing to encourage people to buy, as there was no change in intentions to buy a home, and instead there was a 9 point jump in those that said it’s a good time to sell a house—the most since 1992 when this question was first asked. Of note I am in the same boat as I have literally stopped looking for now and am not enticed by the attractive interest rates.

Consumer confidence fell sharply in August, according to a just-released report from the University of Michigan. The report said consumers felt they needed to be cautious about spending in anticipation of a potential recession. That bled into housing. Again coupled with the gyrations in the equities market, continued volatility concerning tariffs and asking prices that has remained at 2018 levels the Fall season may be worth watching (I suggest from the sidelines) as recession fears and become a self-fulfilling prophecy.

A quote I have used this week with clients both looking to purchase and those looking to sell has been the same: “Sellers believe it is 2018, Buyers believe it is 2020 and at some point the two shall meet in the middle”.

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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.

 

 

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 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.

 

 

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.

 

 

 

Could Greenwich CT be a harbinger of the overall luxury housing market

Greenwich CT. may not be the most familiar community to those of us who live west of the Mississippi. A wealthy commuter suburb for Manhattan, Greenwich has historically been one of the gilded enclaves of wealth and prosperity for multiple generations looking for a beautiful leafy green suburb and attractive state income tax laws. Yet recently Greenwich and other wealthy commuter suburbs of New York City have witnessed challenges to their historical demand for luxury housing.

Over the weekend The Wall Street Journal ran an article titled ” Wealthy Greenwich Home Sellers Give In to Market Realities”. The lead paragraph reads as follows:

After four years on the market, and three price cuts, a stately Colonial-style home on Greenwich, Conn.’s tony Round Hill Road is being sold in a way that was once unthinkable in one of the country’s most affluent communities: It is getting auctioned off. Once asking $3.795 million, the four-bedroom property will be sold May 18 with Paramount Realty USA for a reserve price of just $1.8 million.

Even the wealthy are not immune to price adjustments. According to Realtor.com there were 45 properties in Greenwich priced at more than $5 million that had their price reduced by 10% or more in the 12-month period between April, 2018, and March, 2019. Not to worry Greenwich continues to be one of the wealthiest communities in the United States and its reputation is intact.

However there are winds of change that may be longer-term concerning wealthy suburban enclaves and their demand for the upwardly mobile and those who have attained status of being counted within the wealthiest 1% of earners.

Property Taxes: The revised federal tax code reduced deductions concerning real estate taxes. While many pundits believed the revision was to penalize the New York Tri-State region where many suburban communities have tax bills exceeding $10,000 annually even on a modest home, the reality is here in Metro Denver the $10,000+ real estate tax bill is becoming more common in neighborhoods such as Denver Country Club and in suburbs including Cherry Hills Village and Castle Pines.

Changing Lifestyle: While the pinnacle of affluent home ownership used to be a large home with acreage surrounding for croquet and lawn tennis more and more affluent are flocking to the inner-city i.e. Billionaires Row in New York City, One Hyde Park and even here in Denver high-rises such as The Four Seasons in Downtown Denver as well as homes in Cherry Creek North known for their enormous size on lots more akin to a postage-stamp.

Concerning Greenwich the news gets worse: The median price for a home in Greenwich dropped by 16.7% last year to $1.5 million in the fourth quarter of 2018. On the luxury end of the market, characterized by the top 10% of sales, prices dropped by 18.8%. 

In addition, the average time a luxury home sits on the market in Greenwich is 357 days from its most recent price adjustment. The only segment of the market performing well appears to be smaller, entry-level homes close to the train station, which are being snapped up by a new generation of buyers. The lowest priced condos currently on the market in that area start at around $330,000, according to Zillow.

Should we be concerned in Metro Denver? Maybe. The blockbuster sales of 2016 and 2017 have not been replicated in 2018 and 2019.  In prior blog posts I have provided evidence based on public sales records how some sellers are taking real dollar and inflation adjusted dollar losses on their luxury homes in the most in-demand neighborhoods of Central Denver and Cherry Hills Village.

Of note with the stock market continuing to gain value and the economy seemingly running on all 8 cylinders seems to defy logic that luxury real estate should be lagging. While I do not read tea leaves I do review sales data; if I were considering dropping a few million on a home in Metro Denver at present I may want to take a breather.

Foreign Investment in Colorado Real Estate Should we be Concerned

A few weeks ago local Channel 7 news ran a story about foreign investment in Colorado Real Estate titled: Foreign investors continue their real estate spending spree in Colorado. I am glad the producers included the word “continue” in their story as this is not a new phenomenon. Back in the late 1980’s my thesis for undergrad in Political Science was titled Direct Foreign Investment in Downtown Denver an era when Canadians were slowly divesting from commercial real estate downtown and surprisingly Europeans, specifically Germans were purchasing. Of note this was a time when our local economy was on the skids post oil boom in the mid 1980’s.

Also foreign investment in real estate within our mountain resorts is goes back to the development of our modern ski resorts with Vail and Aspen starting the trend and foreign investment can be seen throughout our mountain resorts.

Of note the article seems to focus on Denver and how foreigners are purchasing real estate at above market rates and thus placing additional stress concerning demand and by simple economics pushing prices higher. However the story did not look at the pitfalls of such investments concerning our local economy.

While many will suggest to look at Vancouver as a cautionary tale concerning foreign investment I could not agree more. With a large influx of Mainland Chinese buyers using Vancouver real estate as both an investment and monetary shelter it is not uncommon to see homes and flats vacant for most of the year. Yet due to this purchasing activity Vancouver has become unaffordable to many of the locals. The local government is pursued a speculation tax to address the issue. Other popular attractive destinations around the world including New Zealand seem to be following Vancouver’s lead to try to dissuade foreign buyers.

Yet on the flip side foreign buyers can also have disrupt segments of the market with nothing to do with affordability. In New York City condo towers presently under construction on Billionare’s Row* AKA West 57th Street believed the demand from foreign buyers specifically Russian and Chinese was sustainable; it’s not and losses happen. Related in New York City there is support for a pied-a-terre tax to provide capital for the city’s aged mass-transit system.

Even Mansion Global an influential read for those in the luxury housing market advises in a recent article how to attract foreign buyers in a slowing demand marketplace: Strategies for Sellers as Chinese Buyers Scale Back on Foreign Real Estate Investment.

Granted there are other macro economic forces at play as well including the value of the US Dollar against other currencies i.e. when the US Dollar is weak our real estate looks even more enticing to foreign buyers just as US based buyers flock to Mexican real estate when the Mexican Peso is weak.

Back to Denver; I would be concerned. At present we may have pockets of foreign money purchasing residential rental properties and thus may be adding stress to our already over-heated housing market (based on the divergence between local housing costs and local income levels). My concern is more macro i.e. if the US Dollar continues to strengthen or if there is a world-wide recession; foreign money can take flight as easily as it comes in.

While I do not believe foreign investment in Denver’s residential real estate market is a concern due to the limited capital investments against the full local real estate economy there are places in China now known as Ghost Cities where speculation’s negative extranalities are on full display.

* Full disclosure, I used to reside part-time in a co-op located adjacent to Billionaire’s Row. Our building actually sold our air-rights to the developer of adjacent 220 Central Park South. In the 13 years of ownership, when sold generated a profit of just shy of 500% partially due to timing and mostly due to luck.

First Time Home Buyer In Denver…..May Wish to Reconsider

I know I am a realist; I guess that comes with the three decades in the business and having been through three regional boom and bust cycles. Personally I was fortunate concerning the housing market; I bought my first house in 1989 for the grand sum of $140,000 ($285,000 in 2019 Dollars) the seller had purchased 5 years prior during an up-cycle i.e. the oil and gas boom of the 80’s before the S&L crisis had paid $200,000 ($238,000 in 1989 Dollars, $486,000 in 2019 Dollars) for the house. When I purchased the home, the seller still owed $160,000 on the mortgage and a 6% ($9,600) brokerage commission at the time of the sale. Yes I was fortunate concerning timing and insights i.e. in 1989 it was more advantageous for me to purchase based on the mortgage payment coupled with tax benefits (15 yr mortgage with 20% down) than the monthly rental of a comparable residence.

Thus it was disheartening to review the following article in this past weekend’s New York Times titled The Best Places to Be a Buyer – and the Worst. Spoiler alert, Denver was at the top of the list; for worst places to be a buyer followed by Los Angeles.

Denver was once a city and region which attracted the brightest and motivated with its mix of affordable housing, varied styles/neighborhoods, great climate and many more attributes, to many to list. Yet in the span of one generation housing has become not necessarily shelter but more of an investment. We also have collectively short memories i.e. the mid 1990’s when the Wednesday HUD foreclosure listings in The Rocky Mountain News were as thick as the newspaper itself and more recently The Great Recession of 2008-2010.

My gut is Denver will always be an attractive place to live and attract the brightest, most talented and entrepreneurial. However if we do not witness prices return to levels in-line with regional incomes and move beyond housing speculation we will be at risk of “Killing the goose that laid the Golden Eggs“.

The reality is there are a lot of cities in the Midwest, South and Southwest that would welcome the young, best and brightest coupled with a much lower cost of living. If our housing prices and challenges to ownership continue unabated the outcome may not be what we collectively desire.