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.

 

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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.

 

 

 

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.

When Future Housing Value Forecasts Disagree    

A while back I posted a blog concerning Zillow and how their valuation of a specific home was off by 20% as their valuations are based on data from public sources yet does not necessarily account for tangibles including specific location, neighboring uses, traffic impact and so forth. Here is the link: https://denverrealestateinsights.wordpress.com/2017/11/13/the-internet-says-my-house-is-worth/

Thus I was intrigued when Zillow predicted a 4% gain for the Metro Denver Housing Market for 2019 yet the Colorado Association of Realtors (CAR) predicts a loss for the same market.

Let me be clear I do not know the methodology of Zillow or CAR. However I am inclined to go with the CAR forecast.

  • Anecdotally we as brokers witnessed a slowdown in the market concerning both sellers and buyers.
  • CAR using local MLS data including market activity i.e. price increase, decrease, withdrawals and so forth probably has a more accurate prediction of the market.
  • Houses entering the market at present may have languished prior, taken off the market and placed back on; a micro indicator of market conditions i.e. did not sell, try, try again
  • All of the above coupled with slowing in-migration.

Even a 1% loss is not worrisome as the housing market continues to outpace inflation. Also the run-up we have witnessed since the end of the Great Recession while impressive if you are a homeowner or seller has various negative externalities.

Back to the forecast; while data mining and algorithms are important and valued the reality is local and regional knowledge based on eyes and ears on the local scene is generally more accurate.

When did the tide turn? I believe we need to go back to the Savings and Loan crisis of the late 1980’s to 1990’s. Before the era of mega-banks that crossed state lines mortgage origination and appraisals were handled locally. The local bank would actually offer and service the mortgage. In the purchase process the local bank would hire the local appraiser and so on. The end result realistic valuations and risk assessment based on local conditions.

Yet the Savings and Loan crises in part began with banks lending beyond their markets thus beyond their local/regional market intelligence, using appraisers that were not familiar with the local/regional market and the desire to secure highest and best returns without assessing risk.

Does not sound much different than the Great Recession of 2008/2009 when real estate markets such as Las Vegas, Phoenix and others boomed based on speculation versus true market demand from employment and in migration and other factors that influence a local housing market.

Personally I can share two examples when appraisers not familiar with the local market showed how lack of knowledge of the local market can truly under-value and at times over-value a subject property.

  • Lexington Avenue versus Fifth Avenue, NYC: The two apartments were identical i.e. building design, floor plan, interior condition, date of construction and so forth. Yet the 5thAvenue apartment was on the market for 50% more than the Lexington Avenue sale within the prior 6 months.
  • The appraiser used the Lexington Avenue apartment as a comparable and based his appraisal of the 5thAvenue apartment on the prior sale. HOWEVER the Fifth Avenue apartment not only has a direct view of Central Park, 5thAvenue is considered one of the most highly valued and sought after residential streets in the world on par with Eton Square in London, Avenue Foch in Paris and Peak Road in Hong Kong.  Needless to advise the appraisal was challenged.

Locally here in Denver when selling a row house in Cherry Creek North I had to supply the appraiser with comparable and subsequently challenge his valuation. While the property was located in Cherry Creek North he was using comparable sales from Congress Park and The Hale neighborhood i.e. within one mile of the subject property. Also he was using condos and townhomes yet the row house had an individual land plot and thus was unique in that respect and more valuable. Finally he used a comparable in the complex yet the subject property went through a gut renovation one-year prior interior and exterior including windows, mechanicals and related. The comparable adjacent in the original condition and state of disrepair from 1984.

Granted appraisers only have access to so much information usually provided via the MLS and pictures. However as brokers we literally deep dive and understand market nuances that may not be evident in pure market statistics or within an algorithm. Thus while I am a fan of technology, AI and all the opportunities coming down the pipeline, considering real estate, I am old school and realize humans while flawed can actually make subjective judgments that are more accurate versus objective data driven information.

Tuesday’s Real Estate News Should Signal Caution Now and in the Immediate Future

OK, I am the first to admit I have an alert concerning local real estate. I usually receive updates from The Denver Post, The Denver Business Journal, BusinessDen and other local sources of business news. However Denver and Colorado are not an island in a vast sea and at times we seem to forget we are part of a larger country and may be missing signals concerning the overall national housing market.

Last week a grouping of news came out on the same day that cause me to suggest proceed with caution. Granted many of my peers suggest I am a pessimist, however with almost three decades in the real estate business I have witnessed everything from exponential growth in prices to foreclosure listings offered by The Department of Housing and Urban Development (HUD) when published in the newspaper secured their own pullout multipage section.  Thus when the following news hit the wires last week I said to myself “The Dow is at 26,000 however the tea leaves concerning housing seem to be advising caution”. The following is a longer than average blog post for me, thus highlights are in BOLD and there are various links as well.

Home DepotThis retailer is actually one of my favorite indicators concerning the housing market. In flush times Home Depot’s stock is in-demand due to being a favorite supplier for independent contractors, homeowners and related entities. This is a stock so sensitive to housing that when a Hurricane hits a populated area not surprisingly Home Depot stock price rises and the company has its own Hurricane Command Center.

On Tuesday 2/26 Home Depot reported fourth-quarter earnings and sales that missed analysts’ expectations and offered a weaker-than-anticipated outlook for fiscal 2019. With U.S. home sales and prices under pressure, fewer shoppers are heading out to buy materials for home projects and renovations. For much of last year, confidence in the U.S. housing market soared, benefiting Home Depot and Lowe’s. But with mortgage rates climbing, attitudes have since started to turn sour. This may lead to home prices rising at a slower rate and the market cooling down, which has sparked some fears for the sector.

Housing Starts: The number of homes being built in December 2018 plunged to the lowest level in more than two years, a possible sign that developers are anticipating fewer new houses to be sold this year. The Commerce Department said Tuesday (2/26/19) that housing starts fell 11.2 percent in December from the previous month to a seasonally adjusted annual rate 1.08 million. This is the slowest pace of construction since September 2016.

Over the past 12 months, housing starts have tumbled 10.2 percent. December’s decline occurred for single-family houses and apartment buildings. Builders have pulled back as higher prices have caused home sales to slump, suggesting that affordability challenges have caused the pool of would-be buyers and renters to dwindle.

The S&P/Case-Schiller Index: I have profiled the Case-Shiller Index in past blogs and is one of the statistics that I am most interested in and intrigued by as it offers an immediate snap-shot of the market’s health as well as historical reference and thus while somewhat complex concerning its data; the empirical information provided is invaluable.

Home prices increased 4.7 percent annually in December 2018, down from 5.1 percent in November, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index.That is the slowest pace since August 2015. The 10-city composite annual increase came in at 3.8 percent, down from 4.2 percent the previous month. The 20-city composite rose 4.2 percent year over year, down from 4.6 in the previous month.

Las Vegas, Phoenix and Atlanta reported the highest year-over-year gains among the 20 cities. In December, Las Vegas prices jumped 11.4 percent year over year, followed by Phoenix with an 8 percent increase and Atlanta with a 5.9 percent rise.Three of the 20 cities reported greater price increases in the year ending December 2018 versus the year ending November 2018. Of note impressive gains for Las Vegas and Phoenix; two cities that represented the irrational exuberance of real estate speculation during the 2000’s only to be the symbols of foreclosures and negative equity during the Great Recession.

In addition affordability is at the lowest in about a decade, and home sales were sharply lower at the end of 2018. Prices usually lag sales, so it is likely price gains will continue to shrink until sales make a move decidedly higher.

According to the National Association of Realtors sales of existing homes were 8.5% lower in January 2019 compared with January 2018, Homes are now sitting on the market longer and sellers are cutting prices more frequently.

 I am the first to admit anyone can manipulate statistics yet it seems there is a convergence of cautionary news out there. I do not see myself as a pessimist, more of a realist. Yes real estate is emotional, it is not liquid like equities and for most of us it represents the largest purchase and subsequent debt servicing of our lives. Thus why I suggest proceed with caution and be rational.

 

 

 

 

Month over Month showing Weakness

Late last week I posted a screenshot of the November 2018 sales statistics for Metro Denver. While the state economists today suggested 2019 should be a positive year for Colorado’s economy concerning job and wage growth across all sectors with a mild slowing;  the housing market may be advising differently.

Let me preface we have headwinds. While Denver may trail Seattle, San Francisco and Las Vegas concerning year-over-year price appreciation in percentage terms let us face the following realities locally and regionally:

  • Our housing market did not go into a free-fall unlike Las Vegas and Phoenix.
  • We have been in a 5+-year expansion concerning housing prices.
  • Wages are not keeping up with housing costs in Metro Denver.
  • New construction did not keep up with demand over the last 5 years.
  • Our economy is not Seattle and San Francisco nor is our population as noted below or geography i.e. available hinterlands versus coastal (Statistics from varied sources including Federal and Regional Census Data):

San Francisco:

  • Metro Population: San Francisco–Oakland–Hayward MSA: 4,335,400
  • San Jose–Sunnyvale–Santa Clara MSA: 1,837,000
  • Average Income: $96,600 / $110,000

Seattle:

  • Metro Population: Seattle–Tacoma–Bellevue, WA MSA: 3,867,000
  • Average Income: $78,612

Denver:

  • The 12-county Denver-Aurora-Boulder Combined SA: .3,150,000
  • Average Income: $71,926

In general housing costs in San Francisco and Seattle are more expensive then Denver HOWEVER their average incomes are higher and by geography their ability to expand and build outward is limited.

While housing prices in metro Denver were on what seemed like an exponential trajectory I have suggested prior and statistics may be validating we peaked a few months back. While sales prices continue to climb, inventory is increasing, days on market are increasing and eventually prices may begin to adjust downward or keep with inflation and not show oversized gains.

The November 2018 #’s are interesting and showing an impressive gain on a year-to-year basis and while month-over-month does not show a trend I suggest the real estate market is looking outward and showing some hesitation similar to how the stock market projects out 6-12 months.

What will be interesting in to see what November 2019 stats show. My gut is we will see prices either static or lower. Inventory will be higher and days on market will also increase.

This is not necessarily negative, as markets should over time trend back towards normalcy. For too many years we have been in a seller market and it is time to move back to equilibrium of sorts.  In high-end neighborhoods there seems to be a glut of expensive homes waiting a buyer or rental signs as owners wait our the market conditions. While there continues to be some blockbuster sales they are more of an anomaly versus weekly updates. Two recent high profiles sales in Cherry Creek North and Belcaro were to out-of-state buyers relocating as part of VF Corp. relocation to Denver.

My concern is for our local and regional population of move up and move down buyers. At present 1sttime homebuyers continue to be challenged in the market and even as prices may be stabilizing; interest rate increases negate the opportunity of lower pricing.

Move-up buyers are being challenged in finding suitable inventory. This is worrisome as families outgrow their first home or desire more space find inventory challenged in central Denver and will migrate to the suburbs/exurbs or worse leave the state. Move-down buyers those who may be downsizing can take advantage of the sellers market HOWEVER again their inventory for replacement is challenged and thus may consider regional relocation or out of state.

As a 20+year broker in Denver as mentioned prior I have been through these cycles including:

  • 1987-89: Downturn
  • 1991-1995: Upswing
  • 1996-2001: Pricing matching inflation
  • 2002-2006: Irrational Exuberance
  • 2007-2012: Downturn, depths of Great Recession and Foreclosure Crisis
  • 2013-Present: Upswing potential leveling off

While I am not predicting a severe downtown I would not be surprised to see a 5%-10% correct concerning housing prices over the next year across Metro Denver. I believe there are segments i.e. the luxury housing niche i.e. $750K and above that will see more severe adjustments.

Let’s just use this blog posting as an opportunity to revisit in one year.

The Time of Year to Winterize Personally

While NOAA suggests winter 2018/2019 if forecast to be mild in Colorado we can never truly be prepared for what winter can bring us from a Thanksgiving Blizzard to wet snow measured in Feet in March. Thus it is never to early to personally “winterize”. I am not going to go into details concerning cleaning of gutters, heat tapes and so forth, instead the following is to make the season of cold and dark more palatable for your personally.

If you do not read the full blog be sure to consider the following hand-cranked radio and USB power: FRX3 Rechargeable Hand Crank AM/FM/NOAA Weather Alert Radio.

Shovels: In The City and County of Denver if you own or rent a home you are responsible for clearing the sidewalk of snow and ice within 24 hours of the snow stopping (4 hours for commercial properties).  Personally having had a driveway bisected by a sidewalk AND an additional sidewalk on the rear of my house I had literally double-duty concerning clearing snow AND as a dog person I try to avoid using salt or related chemicals. A suggestion for a snow shovel: The True Temper 18” Ergonomic Mountain Mover. On a few occasions I did consider purchasing a snow blower but with lack of storage space and with the few major snow dumps receive in Denver I could not justify.

Insulation:The reality is one is not going to install full house insulation post construction however any opening to the exterior i.e. windows, doors, vents and so forth allows cold air in and warm are to escape. Even in my circa 1984 house with R-33 Walls and Ceilings I still went through every fall checking window seals, door frames and vents to see where I could seal against the elements with weather stripping, door sweeper/draft buster caulk, plastic sheeting and so forth. While you may not notice the savings on your gas bill you will be more comfortable. The following video from Lowe’s concerning window weather stripping is helpful and most items can be found in any hardware store from local to national chains.

Power Loss:  Even though most of Metro Denver uses gas for heat and can have demand, electrical is more vulnerable due to overhead lines being weighed down post heavy snowfalls i.e. limbs of trees taking down the lines.  While in my future home I plan to install a back-up generator at present in my condo situation not a viable plan.  In the two years I have resided here I have been through three (3) power disruptions including one that lasted in excess of 6 hours.

An accessible flashlight is a must. I have a few that are rechargeable and plug into a wall outlet thus in the dark easy to find. While used for outdoor pursuits for prolonged blackouts an LED lantern is a great option and safer than candles, just make sure batteries are fresh. Consider a head lamp if planning to be outside i.e. walking the dog. When there is a power outage the darkness sans streetlamps and porch lights can be uncomfortable. Also the headlamp will make you more visible to others including those in cars.

A portable USB and larger USB Battery Pack is invaluable. The portable is perfect for cell phones as many towers have battery back up. Granted your Wi-Fi will probably be down but you can use your cell signal for news and information. The Of note and I know old fashioned a cheap battery powered radio can be an invaluable resource when all the new technology is rendered useless due to a power outage. The larger USB Battery Pack is a better option for Tablets and Computers.

Finally a Cooler, you know the one in your garage that needs to be rinsed our and disinfected. Personally I keep gel ice packs in my freezer at all times. In addition to use makes the freezer run more efficiently. However during a power outage the combination of the ice packs and a cooler may save your perishable foods and extend their freshness and avoid spoilage. Remember open and closing the refrigerator will only exacerbate the loss of cooling AND the light inside will not work.

Finally mentioning fashion in the Headline, if converting your closets to the season and have extra coats not planning on wearing please consider donating to Coats for Colorado or a similar entity to provide to those in need. As my wardrobe skews towards business attire I also donate to Step 13 in Downtown Denver

Next week back to real estate activity…..

Denver weather chills as does the real estate market and my visit to Hong Kong

While some brokers continue to suggest the recent slowdown in sales and significant and immediate price reductions is seasonal (and they may be correct) a few outlets are advising the slowdown in the market may be more serious. An article from The New York Times titled  Housing Market Slows as Rising Prices Outpace Wages provided their national and international readership with an interesting overview of Denver which is not flattering. Even during my recent trip to Hong Kong more than one person when realizing I reside in Denver mentioned the article.

Related according to the monthly report from the Denver Metro Association of RealtorsIn September (2018), housing inventory continued to move higher, even though it typically decreases this time of year, and home prices dropped nearly 5 percent since its record-peak highs this past May and June. Good for prospective buyers not necessarily welcome news for sellers.

Some of my readers have advised privately that I am a pessimist as I have been advising a downturn or the moving towards a more stable market. I do not consider myself a pessimist; more a realist. With 20+ years as a broker literally been there and gone through that. While I too have been impressed with the most recent expansion post The Great Recession I have been concerned about headwinds in the market from out-migration to increasing interest rates to incomes lagging housing price appreciation.

On the lighter side Hong Kong was as usual a frenetic, dynamic city which continues to be considered the most expensive housing market in the world. If you are feeling cramped in your residence or being priced out of the local market, the following quote excerpted from an article concerning a participant in the government sponsored Hong Kong housing lottery may change your prospective.  As published in The South China Morning Post

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(Above a housing block in the Quarry Bay neighborhood on Hong Kong Island)

“Feng Xinmei, a 46-year-old part-time construction worker, said she, her husband, two children and mother-in-law rented a 200 sq. ft. subdivided flat for HK $8,000 a month.

To place this in prospective, a undivided flat means the 200 sq. ft. Ms. Feng rents is part of another apartment. Their rent in US Dollars is $1,021/month. The average hotel room in the United States is 325 sq. ft. or 125 sq. ft. larger than the living space for this family of 5!

While I have in general been against the concept of slot homes due to its impact on the existing urban fabric of traditionally single-family and duplex neighborhoods; all of a sudden Hong Kong makes such density look palatable even preferable.

 

Denver Real Estate Market seems to be slowing yet irrational exuberance has not been tempered just yet

Preparing for the Next Cycle

Earlier this week REColorado AKA our Multilist service advised of a “Summer Cooldown” in Metro Denver. Anecdotally we are witnessing an increase in available inventory, longer periods between on market to under contract and pricing that seems to be adjusting to the new reality of lessening demand coupled with higher interest rates.

Thus I was amused to see a new listing in my neighborhood of Cherry Creek, which seems to defy conventional logic. I am not the broker, I am not the owner/seller and I have no idea what the motivation or rationale concerning pricing is HOWEVER I will keep an eye on this one just for my own edification.

While I will not disclose the exact address, the residence is within the 300 block just north of the Business Improvement District aka Cherry Creek North. Many could consider this block prime (I am mixed as it has a concentration of condominiums, curb-cuts and cut-through traffic but I am also trained as an urban planner thus I see what many prospective buyers do not).  Thus owners are literally a few hundred yards away from a wine bar, artisanal coffee, restaurants and so forth. Thus true urban lifestyle with a suburban design and space.

Concerning pricing, here is the history of the residence:

  • February 1999:         Sold for $620,000/$146 PSF ($937,837 in 2018)
  • May 2006:                 Sold for $950,000/$223  ($1,187,527 in 2018)
  • -Of note top of the market, yet good for the seller, 53% gain in 7 years.

 

  • October 2015:           On market for $1,595,000/$376PSF ($1,695,868 in 2018)
  • Did Not Sell: if sold would be a 68% increase over the last sale at the top of the market during the last up-cycle.

 

  • November 2015:       Price reduced to $1,495,000/$352PSF ($1,589,544 in 2018)
  • -Did Not Sell
  • July 2018:                  Place on market for $1,650,000/$388PSF

At $1,650,000 I wish the sellers the best of success. If they are indeed successful selling at asking they will have matched inflation, which is commendable considering, they purchased at the top of the market. Of course when factoring in upkeep, taxes, interest on the mortgage and so forth the calculus changes however they have also had a roof over their heads.

Just for fun I compared the returns above against the S&P 500 with dividend reinvest and not considering inflation, just in real dollars:

Between February 1999 and May 2006

  • The residence appreciated 223%
  • The S&P 500 appreciated 15.5%

Thus residential real estate was the way to invest over those years.

Between May 2006 and June 2018 (most recent S&P Calculator month)

  • The residence (assuming a sale at asking) appreciated 75%
  • The S&P 500 appreciated 172%

During the post Great Recession period we have witnessed the values of real estate and equities rise in tandem. Based in the period from 1999 to 2006 real estate was the better investment. Yet from the Great Recession to today we have witnessed equities and real estate both escalate in tandem. While I am not an economist some would argue bubbles are forming or have formed.

In a Continuing Education class this past week we were collectively discussing the return of non-conforming loans; the ones that brought on the last recession i.e. non-income verification, low or no money down mortgages and other exotic mortgage vehicles. Granted most mortgages are repackaged and sold to investors through various channels.

With interest rates going up and inflation a distinct possibility not to mention trade wars, currency issues (see the Turkish Lira) and investors chasing more aggressive returns…..my advice, sit on the sidelines or better hedge and buckle your seat belts as the old adage goes History Repeats Itself and we all have short memories.

 

 

 

 

Why Continued Positive Comments About the Housing Market Scare Me

As a broker I make my living assisting clients purchasing and divesting of their real estate holdings. In this market of ever seemingly positive news I should be thrilled. Yet as a 20+-year broker licensed in two states I have some serious concerns on the macro level, which truly reverberates beyond home sale statistics.

At present the Denver market as well as the US market looks very healthy. Demand is high, employment and wages are growing, and mortgage rates are low.

However based on reports out this past week, if one reads between the numbers and taking into account history and growth trends, the market is quite challenged. Not at present but longer term we may be setting ourselves up for a dramatic shift in the economy and wealth accumulation.

There is continued strength in the overall national housing market with prices 6% higher than the same period one year ago. Some local markets continue to show double-digit growth in prices. Metro Denver’s year over year was 7.9%. Such numbers are driven by the simple law of supply and demand and specifically the limited supply at the lower end of the market. Thus lower end homes are witnessing significant price appreciation due to more competition while higher end listings are languishing or having price reductions (see my last blog).

While I have mixed feelings on Zillow and similar sites, their insights and digesting of data is always an interesting read: “It sets up a situation in which the housing market looks largely healthy from a 50,000-foot view, but on the ground, the situation is much different, especially for younger, first-time buyers and/or buyers of more modest means,” wrote Svenja Gudell, chief economist at Zillow in a response to the latest home-price data. “Supply is low in general, but half of what is available to buy is priced in the top one-third of the market.”

So why is the inventory and supply on the lower end of the market so challenged? A few reasons and many can be seen in your local neighborhood:

Conversion of Inventory from Home Ownership to Rental: During the Great Recession which many of us brokers also call “a housing crash”, investors from large hedge funds to Ma and Pa purchased 100’s of thousands of foreclosed properties. While some were fix and flips, the vast majority became income-producing rentals. At present according to the U.S. Census there are 8 million more renter-occupied homes than there were in 2007.

Granted some renters may be scared off from purchasing and while the investors could cash out and after paying simple capital gains have a nice windfall, at present the cash-flow on rentals is one of the most attractive investments in the market coupled with the underlying equity appreciation of the real estate; thus the motivation to sell is limited. In turn lower end and moderate homes are not coming on the market in meaningful volume.

New Home Sales are Down: In August 2017 there was a 3.4% monthly drop concerning new home sales. If demand is so strong shouldn’t new home sales be booming? Well, it is again simple economics and in this case pricing.

In August just 2 percent of newly built homes sold were priced under $150,000, and just 14 percent priced under $200,000.

Builders advise they desire to build more affordable homes yet profit margins or the lack of is causing constraints. Builders blame the higher costs of land (exurbs with lower cost land is falling out of favor with 1st time home buyers who desire to be closer to urban centers), labor, materials and regulatory compliance i.e. building and zoning codes (and this is before the hurricanes decimated Houston, southern Florida, Puerto Rico and the US Virgin Islands which will demand laborers and materials to rebuild leading to eventual inflation in those industries and supply chains.

One could argue that market forces will eventually realign the housing market. Yet when this will happen is anyone’s guess. Considering we are still in a “Goldilocks economy for housing i.e. jobs and income continue to grow, interest rates remain at historically low levels, financing rules have become more flexible and inflation remains tame at below 2% annually. So what is the problem?

At present our inventory of new and existing homes is static with numbers similar to those found in the mid 1990’s a full 20+ years ago HOWEVER during those 20+ years the country’s population has expanded by 60M. Couple this with a mismatched market as home prices will not come down as long as there are buyers out there willing and able to spend more and more money for less and less house as we have witnessed in hot markets i.e. San Francisco Bay Area, The Northeast and other markets.

Longer term is my concern. We have witnessed locally in Denver our market moving from purchasers to renters. Good for investors not so good for individuals concerning personal wealth. Homeowners are known for making big-ticket purchases i.e. appliances and upkeep and maintenance sustains the construction sector i.e. additions, roofing and so forth.

If we move towards a renter oriented housing market fewer Americas will be able to save and grow their money associated with the ownership and upkeep of a personal owner-occupied residence. Due to demand rents may continue to rise (as less inventory on the market) and thus renters will have less disposable income to spend which will ripple through the economy beyond housing.

Yet Denver may be the litmus test for the national economy as follows:

Upper-End of the Market: is slowing dramatically as prices rose to fast and thus not sustainable. Upper-end buyers are usually market savvy and thus will be more cautious entering the market. Even in the Country Club neighborhood I have witnessed price-drops and re-listings at lower prices all in an effort to generate activity; would have been rare one year ago

Lower-End of the Market: Supply is outstripping demand with the average home in Metro Denver over $410K; yet incomes/wages have not kept up as the average worker is slowly being shut out of the market and thus will be a perpetual renter,

Rentals: The vast majority of new rental buildings are priced at luxury levels (just look at the cranes in Cherry Creek North). Yet that market is slowing and many of the existing buildings are struggling to attract tenants and now offering rental incentives. Yet additional buildings continue to come out of the ground.

Zoning and Entitlements: In Denver while zoning has allowed additional density and not without controversy i.e. slot homes in Cherry Creek, while beneficial to rental development, most rentals are oriented to single and couple households, with few exceptions most new multi-family buildings are not designed for families or larger households.

The above is just some food for thought. Add an existential crisis and this housing “House of Cards” may come to an ugly resolution. While I am not predicting another housing crash, the off-balance market is not sustainable and the overall repercussions to the overall economy have not been considered, quite dangerous.