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.

 

 

 

 

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Why One in Three Millennials may be making a serious mistake when purchasing a home

It was not so long ago when one purchased a home with the rationale of not only having a roof over’s one head but also a vehicle to keep up with and even better beat inflation and have enjoy some added tax deduction benefits.

While the above value concept may have been eroding for some time:

  • Assuming a residence can only increase in value (the Great Recession shattered that myth).
  • Using equity in one’s residence as leverage (the House as Personal ATM).
  • Limitations on the deductibility concerning real estate taxes.

As a broker I completely understand the desire for a home purchase especially when we see markets with low inventory and continued historically low-interest rates. Yet are Millennials setting themselves up for future challenges?

Yes most millennials went through the Great Recession and while experienced may not have been in the workforce or owned a residence. They may not have witnessed the job losses, foreclosures and the evaporation of paper wealth over that period. While the economy has come roaring back (even though I question the longevity of this bull market) as I always advise past performance is not indicative of future returns.

This is why a recent survey from The Bank of the West truly concerns me as follows:  “The fact that nearly one in three millennials who already own their homes have dipped into their retirement nest eggs to finance their down payment is alarming. With careful financial planning, millennials can have it all – the dream home today, without compromising their retirement security tomorrow.” Ryan Bailey, Head of the Retail Banking Group at Bank of the West.

Basic reality; a mortgage is debt, plan and simple. While a long-term mortgage with a low monthly payment and a fixed interest rate may be attractive and definitely can be a hedge in an inflationary environment, it is still debt.

Yes the mortgage payment may in fact be less than comparable rent (yet did the buyer factor in the down-payment).

While there are tax advantages including mortgage interest and real estate tax deductions, are the benefits truly appreciable concerning one’s income? The debt to income ratio can be an eye-opener.

Unlike retirement investing which is usually liquid and easily revised depending on market conditions, a residence is truly illiquid and can incur major costs when trying to sell i.e. commissions, preparation to sell and so forth.

Home ownership can be a foundation for a lifetime. This is not necessarily a positive attribute. What happens if the homeowner decides to entertain an employment opportunity elsewhere? What if the market during that time is a buyer’s market?  What if market rent would NOT cover the monthly PITI? In such scenarios one may be losing precious investment opportunities while covering the monthly payment coupled with an inflation reduced asset.

Mortgages do provide leverage and equity via one’s down-payment HOWEVER during the recession the terms negative equity, short-sales and foreclosures entered the vernacular and unfortunately we all have collective short-memories. Just last week I viewed a home on S. Monaco in the Southmoor neighborhood. While needing some cosmetic updates the home is in good condition and state of repair. Lowest priced home in the area concerning both asking and on a PSF basis. The asking $475,000 yet this is a short-sale with a loan balance of $515,000. Yes in the present sellers market a short-sale!

In addition to all of the above what concerns me locally here in Denver is the type and location of residences millennial’s are purchasing. I am seeing a proliferation of townhouse style residences as well as condos and similar attached multi-family construction in all the most desirable neighborhoods i.e. Golden Triangle, LoHi, Highlands, Sloans Lake and others. Concerning affordable, think again, many are $500K+ some pushing 7 figures. Yet I am seeing younger buyers purchasing with the assumption that 1) housing will continue to appreciate,  2) they plan to live in or potentially rent if they move or lifestyle change and 3) using monies allocated for retirement and/or using family capital to assist in purchase with the belief that inflation coupled with low mortgage loan rates is a winning combination.

While these new homes are beautiful and contemporary and perfect for the single or young DINK (dual-income no kids) couple; lifestyles change. Are these buyers considering children in the future? Are the local schools the caliber they desire for their offspring? Is there a risk of a glut in the area when the market adjusts course? How deep is the rental market for their unit style? Will rent cover their PITI?

I recently worked with a couple and this was their course concerning home ownership over the past decade and my forecast for their future:

  • Years 1-4: First Purchase: Smaller Home in West Washington Park
  • Years 4-8: Sold West Washington Park Home. Purchased in Stapleton as one child heading to elementary school and another on the way.
  • Year 10: Sold out of Stapleton, purchased in Littleton, house triple the size of Denver and large lot, literally 1/2 the cost of anything within 8 miles of downtown, more attractive school system yet more challenging commute (both work in downtown) however easy access to light-rail and Santa Fe Drive.
  • ————————————————————-
  • Year 10-15: Forecast – Will stay in Littleton until youngest goes off to college.
  • Year 16: Forecast – Sell Littleton home, move to Cherry Creek North.

I am a firm believe one’s first home can be a great foundation for future success from lifestyle to investing. However I also feel one’s first home should not be over-extended i.e. live within one’s means, consider allocating some housing expenditures to the equities market to take advantage of compound interest and if planning so change jobs, careers, locations be realistic as if changes are happening in 3-5 years the potential loss of equity concerning one’s home can happen. Ask all the buyers in 2006 which sold between 2008 and 2013…..

 

$60,500 in 2014 sold for $199,000 in 2018 Would You Take That Return

Compelling yes; however what about the person who purchased in 1998 and 10 years later lost the unit to foreclosure.

Earlier this week I closed the seller-side of a condo at Monaco Place in SE Denver.  From a previous blog post I suggested this complex represented the Denver Real Estate Market of the past decade.

This is a complex with a stellar location i.e. 1 block east of I-25 and Hampden Avenue. Excellent walk score, units ranging from 1-2 bedrooms in various configurations. Ample open areas professionally landscaped. Amenities include an indoor pool, workout facility and the HOA provides both heat and air-conditioning.

The complex was built in the early to mid 1970’s. Stacked 2-3 stories most units included wood burning fireplaces. Top floor units have vaulted ceilings. There are communal washers/dryers and some units have stackable units installed.  Each unit comes with one deeded carport parking space and guest parking is ample. The units did fall on hard times from decay of the exteriors to investment units outnumbering owner-occupied (of note at present 63% owner-occupied and climbing).

Thus the unit I am going to profile I believe represents the Denver market and may be an indicator of where the market is going. Spoiler alert, softening yet not a crash landing.

Being respectful of the seller and buyer I will not disclose the actual address and unit #. I can advise the unit is a 2BD/1.75BA top floor condo. My seller during his tenure did various cosmetic and mechanical upgrades totaling approximately $15,000 over his time of ownership during which time the unit was rented.

Based on Denver Assessor Office Records:

  • 9/30/98:       Purchased for $59,000
    •            -$91,210 in today’s dollars
  • 7/9/08           Foreclosed upon by Bank of New York
  • 9/5/08           Placed on market by Bank of New York asking $29,500
    •                -$34, 526 in today’s dollars
  • 10/30/08      Unit sells and closes for $36,375
    •             -$42,573 in today’s dollars
  • 2/14/14        Placed on market for $69,000
  • 2/24/14        Sold for $60,500
    •            -$64,400 in today’s dollars
  • 6/6/18           Placed on market for $209,900
    •             – Asking based on comps selling for $209-$216 within prior 3 month
  • 6/17/18        Asking reduced to $199,000
    •             -Prior week 4 showings no offer
  • 7/23/18        Sold for $199,000 minus $3,000 Concession
    •            Net Sale $196,000

Thus looking at the history, the 10 years between 1998 and 2008 were not kind to the owner of this unit including a foreclosure during the Great Recession.

The next owner did well i.e. in 6 years of ownership enjoyed a gain of $24,000 or $4,000/year equity appreciation. Of note the seller was attending college in the area, thus owning not only comparable to rent yet also enjoyed equity appreciation of $4,000/year.

However my seller literally knocked it out of the ballpark with a gain of $135,500!

In addition to the rental income i.e. $1,200/month – HOA fees of approximately $450/month, my seller was netting $750/month on his initial $60,500 investment.

Over the 4 years and 3 months of ownership:

  • Initial Investment     ($60,500)
  • Net Rental Income    $38,250
  • Upkeep and Maint.   ($15,000)

Thus just from rental income over the 4 years 3 months of ownership my seller netted literally half his initial investment.

And he sold the unit for $196,000 after seller concession.

Thus once calculating all the numbers, his net gain over the 4 years and 3 months excluding commissions:

$158,750 or a staggering $3,100/month during his ownership tenure.

My view is a follows:

  • Such gains will NOT be replicated for the foreseeable future if ever.
  • When we priced at $209,900 was based on market, had to reduce to $199K to sell.
  • Market may be softening due to higher yet still historically low interest rates.
  • Rents seem to be retreating coupled with additional inventory.

At $199K w/ 30 year fixed including HOA and taxes comparable rent i.e. similar unit asking $1,495/month. Factor in tax benefits and potential equity appreciation still an attractive opportunity for the buyer.

While I am not an economic forecaster I do believe within the next few years we will witness a softening of the market in real estate coupled with the potential of a mild recession. Further out I am more concerned with another Great Recession or potential Depression gripping the world economy around 2030.

My prediction is based on economic cycles, tax cuts which will balloon our deficit, rising interest rates worldwide to tame potential inflation, higher oil and overall commodity prices and I have not even considered the potential impacts of a trade war waged with tariffs.

BTW: I am not alone in my thinking: Dr. Alan Beaulieu, President of ITR Economics

The following article is great reading: 2019 Recession/2030 Depression

 

 

 

 

The Whipsawing of the Real Estate Market, an example in Cherry Creek North

The 200 block of Harrison Street in Cherry Creek North is an interesting block and one I have some familiarity with as I resided on it for 27.5 years. The east side abuts Colorado Blvd, the west side somewhat sheltered from the traffic. Yet old-time brokers know Jackson St and Harrison St. were always more challenging due to their proximity to Colorado Blvd. Yet in recent years developers have found opportunities on these blocks for redevelopment and advantages with the higher natural topography allowing for unobstructed mountain views.

With interest I have been watching 235 Harrison St, the south side of a duplex. Constructed during the tail end of the boom in the mid 2000’s I always appreciated the contemporary design. While most of the block is of traditional design including a bungalow, the expansive glass and landscaping truly set this duplex apart.

The unit is presently on the market and seems to have been struggling to find a buyer thus I decided to look at the history (please see inflation adjusted to 2018 dollars as noted by the *):

  • The unit came on the market on 4/26/18 for $1,100,000
  • The most recent price adjustment happened on 6/8/18 down to $950,000

Thus I decided to look back at the history a little further:

4/30/08:Comes on the market as new construction for $899,000.

*In 2018 Dollars: $1,050,500

-Of note the beginning of The Great Recession is happening.

1/13/09:Sells for $750,000

*In 2018 Dollars: $879,526

-Basically 6 months later and a $149,000 price reduction from initial asking.

2/09/12: Comes onto market at $799,900

*In 2018 Dollars: $875,540

-$49,000 above last resale 3 years earlier does not sell!

After multiple iterations on the market and price adjustments:

2/24/14: The unit sells for $764,276

*In 2018 Dollars: $812,224

Thus from January 2009 to February 2014 the unit in real dollars increased $14,000 and based on inflation has lost $60,000+.

  • 4/28/18: The unit comes on the market at $1,100,000
  • 5/16/18: Asking reduced to $1,050,000
  • 5/23/18: Asking reduced to $1,000,000
  • 6/08/18: Asking reduced to $950,000

As mentioned this is a lovely residence perfect for the buyer who wishes to own a contemporary residence with mountain views and a roof deck. However as astute buyers, sellers and investors we usually desire our real estate holdings at minimum keep up with inflation and even better exceed inflation coupled with various tax advantages (which are usually negated by maintenance and upkeep).

Thus for 235 Harrison Street the past decade has not been a wise investment. Historically buyers and sellers have come close to breaking even yet when factoring in inflation, which has been historically low over the past decade the ownership, has in fact lost money.

Most economists believe inflation will be making a comeback as we witness low unemployment, increased pricing for basic goods and services from gasoline to commodities coupled with potential trade disputes all coupled with rising mortgage interest rates and a possible recession.

What is interesting I have been watching similar designed row houses going up on Harrison Street south of First Avenue; units with a more pronounced impact from Colorado Boulevard and south of 1st Avenue. Will be interesting to see how the market reacts to those units. Granted new construction does have a premium.

Concerning 235 Harrison as a broker, unless one can get a better price on the purchase consider renting or if making an offer present the information from this blog. Good luck out there.

Is the Bond Market Forecasting a Recession Sooner than Later

On more than one occasion when discussing the Denver housing market I have heard “This time is different”. While we have experienced an unprecedented bull market concerning housing and equities since coming out of the Great Recession; it is never different. Unless I missed the memo, business cycles have not ended.

So why this blog today? Well a couple of reasons:

The Bond Market May Be Advising A Recession is Not Far Off:  While I am a real estate broker I do keep an eye on the bond markets as they influence mortgage interest rates. It is well-known interest rates on mortgages have been ticking upwards from historic lows and still, historically are quite attractive at sub 5%. To be honest mortgage interest rates are not what is worrying me, it is what is called The Yield Curve.

While I can probably explain The Yield Curve the following from The New York Times is an excellent simple description:

“The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.

Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.

At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.”

What is worrisome, on the 21stof June (a few days ago) the gap between two-year and 10-year United States Treasury notes was roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years. Of note the Yield Curve fell below zero in late 2007 and the Great Recession started soon after.

Ok, so there is a risk of a recession. A layperson may argue the Yield Curve is not accurate HOWEVER it has predicted recessions over the last 60 years as noted by research conducted by the San Francisco Federal Reserve which can be found via the following link https://www.frbsf.org/economic-research/files/el2018-07.pdf

However to be fair interest rates on long-term bonds have been somewhat manipulated downward due to worldwide central bank interventions i.e. long-term bond buying to shore up economies and keep interest rates low. Thus one could suggest and I partially buy into the idea that the flattening yield curve may be somewhat artificial and not truly representative of the economy’s future course.

Case-Shiller Housing Index: One of my favorite monthly reads and this month’s numbers are nothing new as the same cities continue to hold the top spots: Seattle, Las Vegas, and San Francisco continue to report the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 13.1% year-over-year price increase, followed by Las Vegas with a 12.7% increase and San Francisco with a 10.9% increase.

Yet what intrigues me (and I hope the readers of my blog) is the historical perspective coupled with factoring in inflation as noted from the most recent report in italics as follows:

Looking back to the peak of the boom in 2006, 10 of the 20 cities tracked by the indices are higher than their peaks; the other ten are below their high points. The National Index is also above its previous all-time high, the 20-city index slightly up versus its peak, and the 10-city is a bit below. However, if one adjusts the price movements for inflation since 2006, a very different picture emerges. Only three cities – Dallas, Denver and Seattle – are ahead in real, or inflation-adjusted, terms. The National Index is 14% below its boom-time peak and Las Vegas, the city with the longest road to a new high, is 47% below its peak when inflation is factored in.

Thus if you were a buyer in Denver even during the peak in 2006 and managed to hold onto your home through the Great Recession to today, you are actually ahead concerning real and inflation adjusted dollars.

However I have provided evidence of real estate purchased within the last few years when adjusted for inflation actually losing value.  Thus I decided to look at the annualized return on housing within Denver in a style similar to how mutual funds are profiled i.e. 3, 5 and 10 year annualized returns:

For Denver:

  • 3 Years: 8.17%
  • 5 Years: 9.06%
  • 10 Years: 5.20%

Based on the above-annualized return the last 3-5 years have been a great time to buy and sell. However 10 years ago when the recession started as you can see from the above the annualized return was 5.2%. Yes this beats inflation which we all desire, however when compared to the S&P 500:

S&P 500:

  • 3 Years: 7.30%
  • 5 Years: 7.07%
  • 10 Years: 6.76%

Over the longer term equities continue to beat the housing market.  My message is simple; I believe we may be in an inflated housing market in Denver. As I have provided evidence in past blogs the luxury market seems to be showing signs of resistance to upward prices as evidenced with price reductions coming on line sooner and days on market longer even in what should be peak selling season.

Even the middle and lower end of the market seems to be reacting to the interest rate environment with price increases not as dramatic as higher interest rates reduce affordability.

Between the whipsawing of economic news concerning tariffs/trade, the potential for an inverted yield curve, a slow down in the Denver housing market possibly due to interest rates or buyer fatigue due to lack of inventory based on anecdotal observations or just a bull market that is getting long in the tooth; maybe it is time to take profits and if in cash, maybe time to sit on the sidelines and chill.

 

 

 

 

Is the Market Slowdown Seasonal or an Indicator of Future Activity

As I have always advised clients one will rarely sell at the top of the market or purchase at the bottom. It happens as does winning Powerball i.e. right time, place and lot’s of luck.

Within the last month I have witnessed challenges to the market. At first I thought it was anecdotal based on eyeballing activity on the MLS, the proliferation of For Rent and For Sale signs and in discussions with peers. Yet it finally hit home on a listing I have.

Monaco Place is a popular condo complex located close to I-25 and Hampden Ave. The complex went through some rough times including the infamous shooting of a Denver Police Officer in 1997. During The Great Recession units were being foreclosed on a regular basis. The buildings also fell into disrepair related to the facades, roofs and common areas (most of the complex was built in the early to mid 1970’s). During the period from 2009-2014 one and two bedroom units were selling for under $65,000, this was not an anomaly.

Of course astute buyers saw the value in the complex including a great location, units with wood burning fireplaces (a rarity), low taxes and an HOA fee which includes heat and air-conditioning coupled with large open common areas, deeded covered parking and other positive attributes.

Earlier this year two two-bedroom units sold for new records for the complex:

In March of 2018 3307 S Monaco Parkway Unit C was asking $200K and sold for $215K after just 5 days on the market.

One month earlier in February 2018 3319 S Monaco Parkway Unit A was asking $200K and sold for $216K after just 4 days on the market. Of note, there was a $1,500 concession, thus the true sold price was $214,500.

In April of 2018 3311 S Monaco Parkway Unit C came on the market at $199,900 and closed at $209,500 after 4 days on the market.

The three sales were impressive and many brokers including myself thought those two sales would set a benchmark for the upcoming spring/summer sales season. All three were nicely updated and of similar quality. Based on averages, the three units sold for just over $213,000 with an average 4.3 days on the market before going under contract.

May 2018 saw little activity within Monaco Place, which was surprising with 2oo+/- units and a price point and location that is in high-demand including walking distance to shops, restaurants, supermarket, light-rail, two bus lines and easy access to I-25.

Fast forward to early June 2018. I am asked by a client to place his unit on the market 3351 S Monaco Parkway #F. A nice 2BD/2BA on the top floor of one of the south-central buildings adjacent to parking, steps from the indoor pool/workout facilities and the coin-op washers/dryers just steps from the entry.

The unit was renovated including new paint, flooring including wood and carpeting, replacement of the hollow core with solid doors, kitchen renovation including tile backsplash, granite counters and stainless steel appliances. The bathrooms also remodeled with granite and wood and all updated electrical. The unit, a top floor also offers vaulted ceilings and views onto the open-space surrounded by mature trees thus insuring privacy.

Based on the sales comps we wanted to be fair yet aggressive thus on June 6th we placed on the market for $209,900. The asking was based on the prior 3 sales as noted earlier in the blog.  Showings were limited and little interest. We were surprised again based on recent re-sales.

After 2 weeks we adjusted the price to $199,000 coming in just under $200 PSF. Showings have increased and multiple brokers have advised offers will be sent in the immediate future.

I am confident we will have the unit under contract before the end of the week.

My concern is as follows:

  • Were we overly aggressive pricing at $209,900? While the other three units came on at $199,900 and $200,000 they all sold for above $210,000 or more than 5% over asking. Even at $209,900 we were priced lower than at the price the past 3 re-sales closed.
  • Did the 5% price reduction open the floodgates? Again, based on past re-sales which are within the public domain one could argue instant equity even at the higher asking.
  • Did mortgage interest rates play a role? In Feb 2018 the average 30 yr. mortgage was at 4.32%. In May the rate was 4.61%. As of today (June 19th, 2018) Wells Fargo is quoting 4.75%.

Thus interest rates may be one factor i.e. higher rates increase one’s payment and subsequently can impact housing prices downward over longer periods.  Yet historically interest rates continue to be at record lows.

While the economy continues to gain steam nationally is Denver still experiencing the influx of buyers? At a recent closing in conversation with the title company closer she mentioning having two deals close earlier in the day; both sellers native to Denver moving out of state to buyers moving to the state flush with cash from their out-of-state sale. It seems the blockbuster pace in in-migration may actually be slowing and out-migration increasing as noted in the Denver Post last year: More Coloradans Moving Out….

I have provided statistical evidence in previous blogs concerning the slowdown on the upper-tier of the market. While the sale of $1M+ homes may have set records on a pure transaction basis, the reality is prices on the upper-end are stagnating and adjusting downward as days on market are increasing. And while the overall market set records for average and median home prices during the beginning of the 2ndquarter was that the top?

Monaco Place by most measures is an affordable opportunity where one can purchase with a monthly payment that is less than comparable rent.  Yet to generate activity my seller had to reduce his asking by 5% now at 7.5% less than comparable sales in the 1stand beginning of the 2ndquarter.

Is this a seasonal shift i.e. summer vacations or a signal that the market is plotting a new course? Only time will tell. However while the spring season used to be known for sizzling activity so far this season like the weather has been cool and mild.

Will keep you posted when the listing closes and what the final sales price will be.

Wish me luck.

 

 

 

 

 

If At First You Do Not Succeed; Relist and Hope for the Best

While I do not necessarily believe the following quote is attributable to Einstein in the context of this blog I find it most appropriate:

 Insanity: doing the same thing over and over again and expecting different results.

I use the above quote to characterize some aspects of the real estate market in Metro Denver that I am witnessing as both a broker and observer. To distill the niche of the market for which this quote is appropriate are the select listings which enter the market, do not sell, are withdrawn or expired and come back on the market at the same or higher price.

Here are just a few select examples:

100 Lafayette Street: A sprawling 2-story post-war suburban style home in the desirable Country Club neighborhood on an expansive lot.

  • 4/2/16          Listed at $1,350,000 – subsequently withdrawn or expired
  • 3/9/17          Listed at $1,300,000 – subsequently withdrawn or expired
  • 5/18/17        Listed at $1,300,000
  • 6/6/17          Price Adjustment to $1,280,000
  • 7/18/17        Price Adjustment to $1,250,000 – subsequently withdrawn or expired
  • 3/18/18        Listed at $1,250,000
  • 4/18/18        Expired
  • 4/19/18        Listed at $1,199,000

This residence will have been on and off the market for 2 calendar years. During that time, while there has been at the most recent resisting a $150,000 price reduction or approx. 9% the residence continues to search for a buyer. Yet the pricing over the past year had remained static. Yes, one may argue inventory for the neighborhood continues to be challenged and just waiting for the correct buyer. I will continue to watch as while the residence has many positives i.e. finished square feet and larger lot; much of the interior could use a cosmetic update and the residence is adjacent to 1stAvenue at a partial motion intersection; while designed correctly i.e. south garage will continue to be a challenge.

600 High Street: A large sprawling large brick potential duplex configuration sitting on a coveted 100’ x 125’ lot. Personally I have had my eye on this one for potential redevelopment HOWEVER I too cannot make the numbers work yet its pricing history continues to baffle me:

  • 8/26/14:      Listed at $1,495,000
  • 8/26/15:      Price Adjustment to $1,445,000
  • 11/20/15:    Price Adjustment to $1,395,000
  • 1/9/16:        Price Adjustment to $1,345,000 – under contract and active again
  • 4/8/16:        Relisted at $1,150,000
  • 10/8/17:      Price Adjustment to $1,250,000 (yes adjusted upward)
  • 10/27/17:    Price Adjustment to $1,150,000  (1.5 years to get back to that price)
    •                         -Goes under contract multiple times and falls through
  • 12/11/17:    Price Adjustment to $999,000 (under contract and falls through)
  • 3/23/18:      Relisted at $999,000
  • 4/15/18:      Goes Under Contract
  • 4/26/18:      Back on market at $999,000

At of April 2018 this residence has been on and off market for 3.5 years. While there had been a substantial price reduction from the original $1,495,000 to a more realistic $999,000 the home has still not sold.  I will not get into the details of Time Value of Money and Inflation. Yet I will suggest the history of this house seems to repeat itself, look at the sales history:

  • 7/13/1995:   Sold for $670,000
  • 2/20/1997:   Sold for $670,000
  • 6/15/2002:   Sold for $625,000

Thus between 1995 and 2002 the home actually lost $45,000 (more if factoring in inflation) and now with 3.5 years on the market continues to look for a buyer. While there may be a buyer willing to pay $999,000, when factoring in inflation and rising interest rates is it worth the wait not even considering maintenance and carrying costs.

140 S Claremont Street: This is a home I have watched as I walk by weekly when looking at options in Hilltop. With its coveted location within 2 blocks of Graland as well as Cranmer Park coupled with great curb appeal I have literally watched this home bounce around concerning pricing as follows:

  • 6/15/16:       Listed at $2,375,000
  • 8/30/17:       Price Adjustment to $2,275,000 – Subsequently withdrawn
  • 1/12/17:       Listed at $2,275,000
  • 4/10/17:       Price Adjustment to $2,175,000
  • 6/14/17:       Price Adjustment to $2,075,000 – Subsequently withdrawn
  • 8/7/17:         Price Adjustment to $1,999,000
  • 10/4/17:       Price Adjustment to $1,900,000 – Subsequently withdrawn
  • 4/1/18:         Relisted at $1,950,000
  • 4/27/18:       Goes Under Contract

During its almost 2 years on the market there were multiple price adjustments coming down to $1,900,000 in October 2017 only to be placed back on the market in April 2018 at $50,000 more. Again, I understand spring selling season yet I guarantee you any good broker representing a buyer will review the history of the listing and share with their client. As of last week, went under contract; I assume the broker representing the buyer has shared the pricing history.

Back to the definition of insanity. While I am not suggesting the above examples are insane. I believe it is more a function of the market or the perception of the market i.e. unabated demand, low supply and continued low interest rates. Yet the markets are a changing i.e. interest rates are ticking up, inflation is on the horizon and the equity markets are buoyant yet the charts are showing a slow downward trend from their peak on 1/28/18 of 26,616 (while composing this blog the DJI is trading at 24,288 or 9% off the high of 3 months ago.

I do not fault the brokers or their clients i.e. the sellers…..this has happened to me as a broker! This was back in 2012 when the market has just endured the Great Recession and was just beginning to show signs of a activity. I will not disclose the address as the home has since been sold and closed however the neighborhood was Cory-Merrill.

The house a pop-top first sold after renovation in October 2005 for $810,000. 2005 we were 1.5 years before the peak of the market; the buyers in retrospect over-paid for the residence. In addition to being in the house for $810,000, they added an additional $40K in cosmetic upgrades to the interior, thus their in the house for $850,000.

I am contacted in early 2012 concerning listing the residence. The sellers are retiring and moving and desire to leave Denver. I go over to the residence with a peer broker armed with comparable’s and camera. My co-broker and I confer and suggest an asking of $715,000. And now the saga begins as follows:

Per the seller the house is listed in April 2012 for $819,000! Yes, $819K

  • 4/25/12:       Listed at $819,000
    •   -3 weeks, one showing off an open-house.
  • 5/15/12:       Price Adjustment to $739,000
    • -Seller still believes this is the selling price regardless of our $715,000 suggestion a month earlier.
  • 10/4/12:       Relisted with another broker for $739,000
  • 11/2/12:       Price Adjustment to $725,000
  • 12/14/12:     Sold for $710,000

In addition to the loss between the $810,000 paid in 10/2005 to the $710,000 paid in 12/12 or $100,000 over the 7 years during my 10 months as broker the seller’s paid in excess of $40,000 in mortgage and carrying costs only to sell the residence for what my peer and I suggested 10 months earlier.

While I did not share the following with the seller; based on inflation the $810,000 paid in 2005 equaled $952,250 in 2012; thus their loss was even more severe.

 

The lessons are simple:

For sellers, even in a hot “sellers market” be realistic.

For brokers, while a listing may look attractive, if it does not sell, it is a challenge both financially and psychologically for all parties.

Finally from Wall Street we say “Do not fight the tape”…..the DJI is off 9% from its high, interest rates are going up, inflation is an actual concern and wages while ticking up are still considered stagnant for now.  My humble suggestion, price correctly and sell immediately, the Goldilocks market conditions can change to a Papa Bear in a moment’s notice. Sell like its 2016 not 2005.

 

 

 

 

 

 

 

 

 

 

 

 

If at First You do not Succeed Re-list

While I do not necessarily believe the following quote is attributable to Einstein in the context of this blog I find it most appropriate:

Insanity: doing the same thing over and over again and expecting different results.

I use the above quote concerning the some aspects of the real estate market in Metro Denver that I am witnessing. To distill the niche of the market for which this quote is appropriate are the select listings which come on the market, do not sell, are withdrawn or expired and come back on the market at the same or higher price.

Here are just a few select examples:

100 Lafayette Street: A sprawling 2-story post-war suburban style home in the desirable Country Club neighborhood on an expansive lot.

  • 4/2/16           Listed at $1,350,000 – subsequently withdrawn or expired
  • 3/9/17           Listed at $1,300,000 – subsequently withdrawn or expired
  • 5/18/17        Listed at $1,300,000
  • 6/6/17           Price Adjustment to $1,280,000
  • 7/18/17        Price Adjustment to $1,250,000 – subsequently withdrawn or expired
  • 3/18./18        Listed at $1,250,000

As of today this residence will have been on and off the market for two calendar years. During that time, while there has been a $100,000 price reduction or approx. 8% the residence continues to search for a buyer. Yet the pricing over the past year has remained static. Yes, one may argue inventory for the neighborhood continues to be challenged and just waiting for the correct purchaser i.e. one who desires a larger home at a below comparable PSF pricing. I will continue to watch as while the residence has many positives i.e. finished square feet and larger lot. However being adjacent to 1st Avenue, even with a sound/privacy wall will be a challenge for many prospective buyers (I know the challenges;  I have transacted residences along the 200 Block of Colorado Boulevard).

600 High Street: A sprawling large brick potential duplex configuration situated on a coveted 100’ x 125’ lot. Personally I have had my eye on this one for potential redevelopment HOWEVER I too cannot make the numbers work (due to pricing, location adjacent to 6th Avenue and Historic District inclusion) yet its pricing history continues to baffle me:

  • 8/26/14:       Listed at $1,495,000
  • 8/26/15:       Price Adjustment to $1,445,000
  • 11/20/15:     Price Adjustment to $1,395,000
  • 1/9/16:          Price Adjustment to $1,345,000 – under contract and active again
  • 4/8/16:          Relisted at $1,150,000
  • 10/8/17:       Price Adjustment to $1,250,000 (yes adjusted upward)
  • 10/27/17:     Price Adjustment to $1,150,000 (1.5 years to get back to that price)
  •                       -Status to under contract multiple times and falls through
  • 12/11/17:     Price Adjustment to $999,000 (under contract and falls through)
  • 3/23/18:       Relisted at $999,000

At present this residence has been on and off market for 3.5 years. While there had been a substantial price reduction from the original $1,495,000 to a more realistic $999,000 the home has still not sold. I will not get into the details of Time Value of Money and Inflation. Yet I will suggest the history of this house seems to repeat itself, look at the sales history:

  • 7/13/1995:   Sold for $670,000
  • 2/20/1997:   Sold for $670,000
  • 6/15/2002:   Sold for $625,000

Thus between 1995 and 2002 the home actually lost $45,000 (more if factoring in inflation) and now with 3.5 years on the market continues to look for a buyer. While there may be a buyer willing to pay $999,000, when considering in inflation and rising interest rates is it worth the wait coupled with maintenance and carrying costs including real estate taxes.

140 S Claremont Street: This is a home I have watched as I walk by weekly when looking at opportunities in Hilltop. With its coveted location within 2 blocks of Graland as well as Cranmer Park coupled with great curb appeal I have literally watched this home bounce around concerning pricing as follows:

  • 6/15/16:       Listed at $2,375,000
  • 8/30/17:       Price Adjustment to $2,275,000 – Subsequently withdrawn
  • 1/12/17:       Listed at $2,275,000
  • 4/10/17:       Price Adjustment to $2,175,000
  • 6/14/17:       Price Adjustment to $2,075,000 – Subsequently withdrawn
  • 8/7/17:          Price Adjustment to $1,999,000
  • 10/4/17:       Price Adjustment to $1,900,000 – Subsequently withdrawn
  • 4/1/18:          Relisted at $1,950,000

During its almost two years on the market there were multiple price adjustments coming down to $1,900,000 in October 2017 only to be placed back on the market in April 2018 at $50,000 more. Again, I understand spring selling season yet I guarantee you any good broker representing a buyer will review the history of the listing and share with their client before making an offer.

Back to the definition of insanity. While I am not suggesting the above examples are insane. I believe it is more a function of the market or the PERCEPTION of the market i.e. unabated demand, low supply and continued low interest rates. Yet the markets are a changing i.e. interest rates are ticking up, inflation is on the horizon and the equity markets are buoyant yet the charts are showing a downward trend from their peak i.e. 10% off the high of 3 months ago.

I do not fault the brokers or their clients i.e. the sellers…..this has happened to yours truly!

My awakening began in 2012; the market has just experienced the Great Recession and was beginning to show signs of activity. I will not disclose the address of the residence as it has since been sold and closed, however the neighborhood is the NW quadrant of Cory-Merrill.

The house a pop-top (first and to this day the largest on the block) sold after renovation in October 2005 for $810,000. While 1-2 years before the peak of the market the buyers in retrospect over-paid for the residence based on the opinion of myself and other brokers. In addition to purchasing the house for $810,000 the buyers added an additional $40K in interior cosmetic upgrades while neglecting the rear-yard (usually a strong selling feature for most buyers), thus in their house for $850,000 in 2005 Dollars.

I was contacted in early 2012 about listing the residence. The sellers planned on retiring and relocating beyond Denver. I visit the residence with a peer broker armed with comparable sales data. My co-broker and I confer and suggested based on empirical data i.e. sales comps an asking of $715,000. Now the saga begins; per the seller’s request the house is listed in April 2012 for $819,000! Yes, $819K or $100K+ over what we suggested.

  • 4/25/12:       Listed at $819,000
  •                      -3 weeks, one showing off an open-house.
  • 5/15/12:       Price Adjustment to $739,000
    • -Seller still believes this is the eventual selling price dismissing our $715 suggestion based on verifiable comparable’s one month earlier.
  • 9/30/12:      A mutual termination concerning the listing and I am thankful as endured  50+ showings and not one single offer.
  • 10/4/12:       Relisted with another broker for $739,000
  • 11/2/12:       Price Adjustment to $725,000
  • 12/14/12:     Sold for $710,000

In addition to the $100K loss i.e. $810,000 paid in 10/2005 to the $710 paid in December 2012 over the 7 years, during my 10 months as broker the seller’s paid in excess of $40,000 in mortgage and carrying costs only to sell the residence for what my peer and I suggested 10 months earlier.

On a more technical basis, here are the inflation adjusted #’s: The $710,000 in 2005 was actually $834,673 in 2012 Dollars, thus their real dollar loss was closer to $225,000.

The lessons are simple:

  • For sellers, even in a hot sellers market be realistic.
  • For brokers, while a listing may look attractive, if it does not sell, it is a challenge both financially and psychologically for all parties.
  • For buyers, trees do not grow in the sky, they need soil and moisture.

Finally from Wall Street: “Do not fight the tape”…..the DJI is off 10% from its high of 26,616, trading at 24,037 as of this posting, interest rates are going up per the Federal Reserve Minutes, inflation is an actual concern on the horizon and wages while ticking up are still considered stagnant.

My humble suggestion, price correctly and sell immediately, the market conditions known as Goldilocks can change to Papa Bear in a moment’s notice.

Sell like its 2016 not 2005.

Another Luxury Listing Shows Stress on the Upper End of Market

OK, I am the first to admit on occasion I drive down 7th Avenue from Cherry Creek to Corona Street so I can access the Safeway at 6th Avenue and Corona Street easily (yes I am still mourning the loss of my neighborhood Safeway). I drive at a leisurely pace taking in the majesty and prestige of one of Denver’s finest parkways. West of Williams Street when the Avenue becomes a standard width roadway the houses still continue to impress.

That is why I have been intrigued with 1433 East 7th Avenue. A home, which exudes gravitas. A nice corner lot, raised from the sidewalk coupled with mature landscaping can easily be at home in a many pre-war cities in the Northeast of for those who have relocated from the Bay Area, think Pacific Heights lite or if from Los Angeles, Beverly Grove.

With just shy of 6,000 SF finished including the basement and a manageable 7,250 SF lot (honestly I have mixed opinions concerning corners) larger than what I was and continue to search for but as mentioned from the exterior, gravitas. The stately yet manageable interior is perfect for many prospective buyers in this broker’s opinion from the center-hall plan to the upscale kitchen to the preservation of design details including wood beams and so forth. Updated yet respectful of its history.

I have kept my eye on this house since I first watched it come on the market in April 2011 as the Denver market was finally awakening from the reckoning of the Great Recession. At the time up-market listings continued to struggle to find a buyer however if priced correctly, they sold and some very astute buyers have probably done quite well on paper to date.

  • In April 2011 the home sold for $1,655,450 off an asking of $1,750,000.
  • In 2018 Dollars: $1,824,189

 

  • In August 2015 the home sold for $2,195,000, its asking price after being on the market for approximately two weeks and no seller concession! Many would argue that summer was the beginning of the major ascent of the market from realistic pricing to exuberant listing prices.
  • In 2018 Dollars: $2,295,481

Thus in a span of 4 years the sellers pre-commission made $539,550 not accounting for inflation. Even considering broker commissions (assume $130,000 at 6%), the sellers most likely netted approximately $400,000 of $100,000/yr concerning their residence.

I do not know if the sellers renovated or did other improvements, as I have not toured the home in years. However based on images and broker comments I am assuming any updates made were minimal.

Let’s fast forward to May 2017, just shy of 2 years later the home reappears on the market asking $2,500,000. Of note the home was purchased for $2,195,000 two years prior or asking for a $300,000 gain in 2 years of $150,000/year. In August the home is re-priced at $2,395,000 and the listing eventually expired.

As of January 2018 the house is back on the market with a revised asking price of $2,299,000, $96,000 less than the previous ask.

Let’s assume the seller does indeed get $2,299,000 for the sale price. When factoring a 6% commission ($137,940), their net is approximately $2,161,060.

 In my analysis a few issues arise as follows:

Seller paid $2,195,000 in August 2015. Assuming it sells for asking (doubtful as already 52 days on market), after commission their net is below their purchase price 2.5 years prior; a recap:

  • August 2015: Paid $2,195,000
  • January 2018: Asking $2,299,000
  • Commission 6% ($137,940)
  • Net at Asking: $2,161,060
  • Thus seller would walk away with a $34,000 Gain!

 Yet the gain of $34,000 assumes an at asking closing price. Again after almost two months on the market, doubtful but it could happen.

Now two additional issues:

Inflation: When purchased on 2015 for $2,195,000 based on 2018 Dollars that would translate to $2,295,481, thus based on inflation, already a real-dollar value loss even if sold at asking.

Real Estate Taxes: When the home first came on the market in 2011 the taxes on the house were listed at $8,127 or $677/month. At present the taxes in the house are listed at $13,779 or $1,148.25/month, a difference of $471.25/month. Granted at this price-point should not be an issue for the buyer (except the issue concerning tax deductibility of real estate taxes but will not go there in this blog post).

One of my friends from the East Coast is a stock trader and refuses to purchase a home in his suburban New York City community. His rationale; he can earn more money in the market versus his primary residence which he views as a money-losing proposition or at best matching inflation over the long-term and coupled with exorbant real estates taxes,he prefers to rent. So I asked him the following:

If one bought $2,195,000 of the Dow Jones ETF (basically a vehicle that tracks the DOW which I understand is not the best gauge of the stock market but is one of the most recognized) in August 2015 what would it be worth today?

  • In August 2015 the DJ ETF was trading at $166.35 / 13,195 Shares
  • On February 27th, 2018 the DJ ETF was trading at $255.33
  • The 13,195 Shares today would be worth $3,369,097
  • Total Gain: $1,174,097 or close to $42,000/average per month increase. Yes we are all aware of the gains over the past 12 months skewing the valuations.

My analysis tells me the follows:

  • The upper-end of the market is showing weakness and fatigue and thus slowing.
  • The belief that housing values can only increase is a fallacy as the upper-end is usually the first market segment to show signs of impending weakness.
  • The pinnacle of housing market values is behind us.

Now for my peer brokers who will advise but one needs a residence to live in; I cannot agree more both as a broker and one who is actively looking for a residence to purchase HOWEVER, let’s do the math:

The gain of $42,000 month is commendable yet most likely an anomaly as many argue the market is overheated and a respected wealth manager I know advises: “Trees do not grow in the sky” thus such oversized gains should be viewed within context.

However, that $42,000/monthly gain if generating 4.5% would equate to approximately $1,900 month. While one could not rent 1433 East 7th Avenue for $1,900/month. Yet when generating $42,000/month in gains, I assume one could dip into the monthly for a similar home in the $5,000-$7,500/month range and still have a nice return on investment.

Please know I am NOT a pessimist. However I have personally been through three (3) business cycles during my time in Denver and have watched real estate values rise and fall. While I do not except an across the board dramatic downtown of valuations; with the potential for rising interest rates for both mortgages and bonds, realignment of equity valuations to more traditional patterns, potential inflation and out-migration of population from Colorado, a 10%-20% downward valuation concerning housing valuations may not be out of the norm, it has happened before and history can repeat itself. Again, just one humble brokers opinion.

 

 

 

 

Is it Just Me or are the Optimistic Headlines Pointing to Concerns

Ok, I am a pessimist! Well not really but I have been accused of being too conservative concerning finance and investment. Granted most recently some of my portfolio was stopped out during the flash crash only to come roaring back within two weeks. And yes housing in Denver is still in-demand with limited supply and it seems overly eager buyers. However today’s headlines concerned me as follows:

US housing starts total 1.326 million in Jan, vs 1.234 million starts expected

  • New home construction increased to more than a one-year high in January.
  • The market was boosted by a rebound in the construction of single-family housing units.
  • Building permits soared to their highest level since 2007.

On the surface I should be thrilled as housing starts are beginning to mirror our economy which continues to defy conventional cycles and this expansion looks never-ending HOWEVER review last line of the bullet points:

Building permits soared to their highest levels since 2007” Yet just around the corner in 2009 we were in the depths of The Great Recession teetering on the edge of a Depression.

Concerning housing, most would agree our low-interest rate environment has been somewhat responsible for consumer demand i.e. many purchasing based on the amount of their monthly payment versus equity basis. If planning for the long-term hold this is not necessarily an issue as housing usually exceeds inflation. Granted the buyers from 2004-2006 who sold between 2009 and 2011 may have a different opinion. Yet, what happens if interest rates rise another 65 basis point to 5% which is still a low mortgage rate when looking at a historical chart.

According to Redfin: A 5 percent rate would cause more than a quarter of today’s homebuyers to slow their plans and housing affordability is starting to take a hit. The report goes on to advise buyers will still be house hunting however if one’s PITI increases will wages match? At present we have the signs of inflation yet wages remain stagnant.

Concerning employment and wages the good news is we are at a 17-year low concerning unemployment. The bad news the unemployment rate before the great recession was only 0.5% higher than it is today.

January 2018:          Unemployment Rate at 4.1%

January 2007:           Unemployment Rate at 4.6%

Of note the Recession officially started in December 2007 with unemployment rising to 5% that month and at its worst during The Great Recession, unemployment was at 9.5%

On to consumer sentiment i.e. how the average consumer feels about the economy:

January 2018:           Consumer Sentiment 95.7

January 2007:           Consumer Sentiment 96.9

For the remainder of 2007 the Consumer Sentiment stayed relatively strong hovering in the 80’s and 90’s yet by November and December of that year the Sentiment Index dropped into the mid 70’s as the recession began.

And finally an interesting article quoting an apartment developer:

Major apartment developer: ‘There is an acute crisis headed our way’

  • The luxury market is largely overbuilt, while there is a shortage of affordable rental housing.
  • Lower and middle-income households are spending proportionally more on their rent, says apartment developer Toby Bozzuto.
  • Nearly half of all renter households pay more than 30 percent of their income for housing.

As you have probably noticed in downtown and Cherry Creek the crane has again become the “official bird” of the Front Range. Yet many experts are cautioning the cranes are associated with the building of luxury apartments. Of note, multifamily construction is now at a 40-year high; the trouble is, developers are putting up the wrong kinds of buildings. The luxury market is largely overbuilt, while there is a shortage of affordable rental housing, and developers are hamstrung by the now record-high cost of construction.

The statistics are suggesting a potential for an overbuilt/supply coming soon as apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.

I am not necessarily sounding the alarm but as a real estate broker with a few decades under my belt AND one who has a good memory of business cycles I remain concerned. My gut feeling is we will begin to encounter inflation which while necessary I believe will exceed the Federal Reserves 2%. Couple this with rising interest rates yet wage increases being stagnant we can run into serious complications leading to a recession. If it is a soft landing or a violent correction, that remains to be seen.

Again based on a traffic signal my light is Yellow and the countdown to Red is fast approaching, thus speed up and if conservative brake now and wait for the light to change and maybe avoid a potential collison.