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.

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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.

Millennials Understand Opportunity Truly Knocks Beyond Central Denver

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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