Denver is Number 2 on the List of…..

Most expensive cities to live in; not exactly the top of the list a city wishes to be on.

The list is based on a cost of living index having taken into account a city’s median income and having compared it to what it costs for homeowners and renters to live comfortably in the city. These numbers were derived from Go Banking Rates, which was able to ascertain the ideal incomes in major U.S. cities using the 50/20/30 rule.

The 50/20/30 rule suggests you take 50% of your income for necessities (housing, food, healthcare, transportation), 20% for savings and 30% for personal items you don’t need but want.

#10 San Jose, CA

  • Average Ideal Income: $170,586
  • Median Income: $96,662
  • Cost of Living Index: 1.76

#9 Honolulu, HI

  • Average Ideal Income: $157,765
  • Median Income: $80,078
  • Cost of Living Index: 1.97

#8 Boston, MA

  • Average Ideal Income: $124,901
  • Median Income: $62,021
  • Cost of Living Index: 2.01

#7 San Francisco, CA

  • Average Ideal Income: $197,250
  • Median Income: $96,265
  • Cost of Living Index: 2.05

#6 Oakland, CA

  • Average Ideal Income: $136,778
  • Median Income: $63,251
  • Cost of Living Index: 2.16

#5 Long Beach, CA

  • Average Ideal Income: $131,702
  • Median Income: $58,314
  • Cost of Living Index: 2.26

#4 New York, NY

  • Average Ideal Income: $138,500
  • Median Income: $57,782
  • Cost of Living Index: 2.40

#3 Los Angeles, CA

  • Average Ideal Income: $143,300
  • Median Income: $54,501
  • Cost of Living Index: 2.63

#2 Denver, CO

  • Average Ideal Income: $106,128
  • Median Income: $38,991
  • Cost of Living Index: 2.72

#1 Miami, FL

  • Average Ideal Income: $107,245
  • Median Income: $33,999
  • Cost of Living Index: 3.15

Now that you have gotten through the list let me add the following for thought:

As a trained urban and regional planner one significant geographical feature of the cities listed comes to the forefront; 9 of the 10 cities on the list are coastal. Thus their ability to physically expand horizontally is hindered by water. The one exception is Denver which while in a basin can easily expand in all four directions with the major constraint in the future being potable water supply.

Another interesting observation concerns Denver and Miami and the Cost of Living Index. Miami, while having a diverse economy is also challenged income-wise by its higher than average population of retired residents; thus living on fixed or limited incomes. Thus the disparity between housing cost and income can be somewhat justified coupled with a real estate market that is buoyed by out of the region demand from snowbirds of the north to capital sheltering from Latin and South America.

Denver is truly the outlier on the list. Our economy is more diverse than Honolulu but not by much.  In addition Denver is the only city/region on the list without a major seaport concerning trade and commerce.

Denver has been attracting the best and brightest for many years due to our pleasant climate and until recently an affordable cost of living. Yet is our cost of living and lifestyle sustainable longer-term if incomes do not catch up?

While Denver may be attractive concerning companies looking to relocate i.e. VF and others the reality is cost of living and lifestyle can be a determinate concerning corporate relocations. My concern if Denver continues on this trajectory concerning a disparity between income and cost-of-living coupled with competition for our brightest and best from cities such as Salt Lake, Austin, Dallas, Minneapolis, Atlanta and others; should be we concerned?

Yes! Denver historically has been a boom and bust city and while we may be fortunate to ride this wave of in-migration and housing price inflation increasing our wealth effect the same scenario happened in the late 1960’s before the inflation of the 1970’s. Also happened during the oil boom of the 1980’s until jobs fled en masse to Houston and Calgary in the late 1980’s into the early 1990’s.

This time may be different…yet even The Wall Street Journal advises:

For 2019 Graduates: The New Cities for New Grads: Salt Lake City, Pittsburgh and Baltimore. These emerging locales offer hot jobs for young workers—plus reasonable rents.

Next week a home listed in Congress Park that may be an example of Irrational Exuberance catching up with the reality of a charing real estate market.

 

 

 

 

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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.

 

 

 

Why I Avoid Love Letters Attached to Offers

I understand the trend of sending a personalized note when placing an offer on a property especially when there may be a multiple offer situation. I as a broker adamantly refuse to open and review such attachments to an offer and I advise my selling clients to avoid yet it is their decision.

As a listing broker I provide a service to my clients. In the event of a multiple offer situation (which may also suggest the residence is priced below market thus the strong interest) I review the offers, present the offers and will opine which I believe may be strongest and the one to proceed with.

Choosing the strongest offer may include a verifiable pre-approval letter. A larger down payment leading to a potentially easier loan process. Other variants may include a check for the earnest money or down payment provided with the offer versus an IOU i.e. to be tendered three days after mutual execution of contract.

Personally I am not a fan of waivers of appraisal and inspections. Yes such waivers may be attractive to a seller however if issues arise and worse one enforces specific performance there is generally ill will at the closing and worse potential litigation in the future.

Back to Love Letters, I hate them. Again I understand the psychological comfort associated with composing and sending with an offer. I as a buyer have too been tempted but also know as a Broker the strongest offer is the winning offer. As I advise clients in a multi-offer situation; I do not care what is the highest price offered I want the offer that will close.

As a Listing Broker the Love Letter puts us brokers in jeopardy of potentially violating multiple local, state and federal laws concerning Fair Housing. Many letters come with pictures of the prospective buyers. Such letters usually include detailed information concerning occupation, ethnicity, family structure, disabilities and so forth. Such information, even being exposed momentarily, while you may not be bias may alters one’s subconscious decision-making process.  This is why I advise do not open or review Love Letters when working with sellers.

As a Buyer Broker I understand the desire by clients to enhance their position in a multi-offer situation. I always advise buyer clients to have their paperwork done prior i.e. pre-approval if a loan is procured, have inspectors and others lined up prior to be able to offer an expedited schedule and subsequent close and to not have an emotional attachment to real estate as options are always available.

The following distributed by the Colorado Real Estate Commission and Department of Regulatory Affairs transcends boundaries. I have shared the advisory with peer Brokers in both Colorado and New York: Real Estate Broker Licensee Advisory: Buyer Love Letters

Some readers are familiar with my personal journey concerning our present NYC residence. We had actually looked at another apartment that we truly loved. A spacious duplex (2 levels) in a neighborhood we truly desired. I literally walked by the building multiple times day and night checking out our future apartment. Not to provide details but the deal fell apart. Were we feeling dejected? Yes.

However we continued to look and found the apartment we are in at present. We truly love our apartment including the wood-burning fireplace, our building, the staff, management, private courtyard and our neighbors!

I continue to walk by the other apartment building (on way to my NYC office) and now realize beyond the apartment, the building was not as desirable as where we are now. The monthly Maintenance/HOA dues is much higher, staff and management did not seem overly welcoming and we are in the same neighborhood on what many peers suggest is a nicer street with fewer cars and cross-traffic.

While I challenge myself with the mantra “Things Happen for a Reason and Will Work Out in the End”, it is true. In real estate we sometimes get caught up in the emotion and perception of what will make our lives complete, wholesome and happy. I should know, as a real estate broker I am one of those salesmen. I do believe home ownership is important on many facets from wealth generation to stability to tax benefits. However there are always opportunities when you least expect and why we should all keep open minds when working in real estate and please avoid The Love Letter.

 

Foreign Investment in Colorado Real Estate Should we be Concerned

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

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

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

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

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

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

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

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

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

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

Yes There Are Still Bargains in Real Estate. How about $75 PSF

While traveling on the East Coast last week probably one of the most intriguing bargains in the real estate market sold and closed at $75 per square foot! Yes $75 PSF Finished. While many may assume the house is a wreck or was sold for land value or is inhabitable; all such assumptions are incorrect.

Actually the home located at 50 Poplar Drive, Farmington, CT is a bit gaudy for my personal tastes however the home does offer 21 bedrooms and 35 bathrooms, as well as a movie theater, gym, indoor pool and basketball court. The strip club room complete with stage and stripper poles may have alienated some prospective buyers yet one can always renovate. The location; while located in Connecticut, away from the popular  commuter rail lines and inland thus no water views.

Now for the history. The home was once owned by boxer Mike Tyson (who tried to sell the home for $22M in 1997). In 2003 as the national economy was heating up, rapper and entertainer 50 Cent paid $4.1M to Mike Tyson to take the mansion off his hands. Then 50 Cent invested millions into the house concerning renovations.

The real estate market has not been kind to 50 Cent. He first listed the home in 2007 at the height of the real estate boom, one year prior to the Lehman Brothers implosion and the start of the world-wide recession. The downward price adjustments continued soon after:

  • Initial Ask – 2007:  $18,700,000
  • 7/2009: $10,900,000
  • 1/2011: $9,999,999
  • 10/2015: $8,500,000
  • 7/2016:  $5,995,000
  • 12/2017:  $4,995,000
  • 3/2019:  SOLD for $3,900,000 or $75 PSF

In general the larger the home and cost the fewer prospective buyers. Within Denver the largest most luxurious homes usually sell for less on a per square foot basis than smaller homes on the same block or neighborhood. While the average home in the United States has steadily increased in size, there is a limit.

Of note in 1950 the average American home was 983 SF, in 2014 it was 2,657 SF .

While anomolies include the blockbuster sale at 220 Central Park South in New York or the Hongtian Chen residence purchased for $270,000,000 USD in Hong Kong; most real estate experts agree bigger is not always better and the larger the home and pricing and more finite the market. BTW: the Central Park South and Gough Hill Road (where a nice rental is available) homes are priced beyond traditional jumbo mortgage options. 

 

 

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.

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.

 

 

 

 

The Denver Housing Market – Price Appreciation Slowing Inventory Rising So Why is Purchasing Still a Challenge

The news of a slowing housing market is not new. In most markets including Denver inventory is rising, price appreciation is slowing or depreciating and mortgage interest rates remain static and at close to historic lows.

Thus why is it still challenging to purchase a residence in Denver and other popular cities? The folks at LendingTree has provided some guidance based on crunching numbers. “Of the top 10 most competitive cities, only two, St. Louis and Boston, were not in a western U.S. state. High-paying tech jobs, common in places like Oregon, San Francisco and Seattle, likely help fuel market competitiveness in some western cities,” the site reports.

In the most competitive areas, potential homeowners are vying against other buyers who:

  • Are often pre-approved for mortgages.
    • I advised buyers to get pre-approved before even starting to look at properties.
  • Have excellent credit scores.
    • Before we start looking we revise credit reports and if needed work with a vendor I know who can assist with report clean up and offer strategies to increase scores.
  • Are able to offer hefty down payments.
    • This can be a challenge as funds should be seasoned regardless of source. Parents and relatives providing down-payment assistance is quite common.

The following is a list of the 15 most challenging markets to purchase in and spoiler alert, Denver is #1 or the most challenging market at present:

#15 New York, NY: Percent of buyers with good or excellent credit: 58
Average down payment: 17 percent
Median home price: $829,000

#14 San Antonio, TX: Percent of buyers with good or excellent credit: 55
Average down payment: 14 percent
Median home price: $239,990

#13 Milwaukee, WI: Percent of buyers with good or excellent credit: 52
Average down payment: 14 percent
Median home price: $124,900

#12 Phoenix, AZ: Percent of buyers with good or excellent credit: 48
Average down payment: 15 percent
Median home price: $275,000

#11 Minneapolis, MN: Percent of buyers with good or excellent credit: 58
Average down payment: 14 percent
Median home price: $300,000

#10 Boston, MA: Percent of buyers with good or excellent credit: 57
Average down payment: 16 percent
Median home price: $699,900

#9 Sacramento, CA: Percent of buyers with good or excellent credit: 50
Average down payment: 15 percent
Median home price: $312,650

#8 Seattle, WA: Percent of buyers with good or excellent credit: 65
Average down payment: 19 percent
Median home price: $689,950

#7 Las Vegas, NV: Percent of buyers with good or excellent credit: 52
Average down payment: 14 percent
Median home price: $299,900

#6 St. Louis, MO: Percent of buyers with good or excellent credit: 54
Average down payment: 15 percent
Median home price: $145,000

#5 San Jose, CA: Percent of buyers with good or excellent credit: 65
Average down payment: 19 percent
Median home price: $939,000

#4 San Francisco, CA: Percent of buyers with good or excellent credit: 59
Average down payment: 17 percent
Median home price: $1.3 million

#3 Portland, OR:  Percent of buyers with good or excellent credit: 57
Average down payment: 15 percent
Median home price: $449,900

#2 Los Angeles, CA: Percent of buyers with good or excellent credit: 55
Average down payment: 17 percent
Median home price: $799,250

#1 Denver, CO: Percent of buyers with good or excellent credit: 56
Average down payment: 16 percent
Median home price: $459,900

Unconventional Mortgages My Thoughts

Even though housing sales seem to be slowing throughout the country there is still an affordability crisis as asking prices have yet to adjust downward and while interest rates have stabilized (over the past 48 years, interest rates on the 30-year fixed-rate mortgage have ranged from as high as 18.63% in 1981 to as low as 3.31% in 2012) they are higher than the historical lows a few years back. The following bullet points were presented at a conference concerning the increase in unconventional mortgages; as a 2+decade broker having been through multiple market cycles, my thoughts in italics:

Unconventional mortgages–once blamed for contributing to the housing meltdown 10 years ago–are making a comeback as lenders look for new borrowers to drive growth, the Wall Street Journal reports. The reality is when interest rates rise there must be products available to allow for home ownership. These unconventional mortgages generally bring down the monthly payment and thus presented as a gateway to home ownership. Yet historically such mortgages prior to The Great Recession were oriented to more experienced and sophisticated purchasers. Many of these unconventional mortgages can impact the borrower if home prices stagnate or fall i.e. loss of equity, monthly payments can increase i.e. adjustable rate, interest-only can lead to negative equity in a down market and so forth.

The borrowers are typically people who can’t get a conventional mortgage because they have a harder time proving income through the usual documentation such as pay stubs or tax forms. This is the new reality of the gig economy as the generation of long-term stable employment ending with retirement and a pension is long gone. The reality is mortgage lenders and regulators must understand the reality and present options and opportunities for such applicants. Personally I am old school i.e. the higher the risk or less documentation should require a higher down-payment to insure equity as a hedge against default, a simple risk analysis calculation.

Though still a tiny part of the overall mortgage market, these unconventional mortgages offerings are increasing while conventional home loans are decreasing. Not unexpected as by human nature we are chasing the least painful mortgage, the lowest monthly payment. However are we sacrificing prudent financial management i.e. a 30-yr fixed rate conventional loan in which the payments remain static for more exotic products which may look attractive for the immediate term yet detrimental long-term i.e. adjustable rate mortgages in a climbing interest rate environment? 

Lenders originated $34B of unconventional mortgages in the first three quarters of 2018, up 24% Y/Y, according to Inside Mortgage Finance. Overall mortgage originations during that time were $1.3T, down 1.2% Y/Y. Multiple factors at play from the higher-cost of housing to the wealth-effect of the equities market to the basic desires for the lowest monthly payment possible. 

Today’s “nonqualified” mortgages, though, have changed from their pre-crisis predecessors. These new loans comply with “ability-to-repay” rules and underwriting and due diligence are stronger than the pre-crisis era. This is a positive including review of bank statements and related documents. I believe the era of No-Doc Loans are long behind us however I am already witnessing low to no down-payment options, When we have the return of the 125% loan that’s when I start placing short bets on the mortgage marketplace. 

Some regulators, consumer advocates and others still worry that the growth for this type of mortgage and increasing competition to make such loans could lead to higher risks for the housing market. This is a given; history does in-fact repeat itself as if anyone says This Time is Different keep that look of skepticism discreet.

On a personal note when I am working with buyers and if requested I provide a list of at minimum three (3) lenders I know professionally and socially and suggest they contact all three to discuss options and opportunities coupled with additional guidance concerning their future i.e. how long do they plan to be in the home, lifestyle changes on the horizon, employment security and so forth. The reality is a mortgage and one’s home is the largest debt as well as potential wealth accumulation we will have in our life cycles; we need to be more diligent concerning mortgage products and candid about the advantages and disadvantages associated with the options presented. 

Does the Manhattan NYC Real Estate Market Flash Warning Signs for other Urban Markets including Denver

It is no news that the borough of Manhattan within New York City is the most expensive housing market in the United States. It is also borough with a vast diversity of incomes, residents and employment. In addition it is the most attractive market for offshore money to invest in real estate.

Thus last week it was quite a shock to some that the median transaction price for an apartment in Manhattan was below $1,000,000 (barely at $999,000) during the 4thQuarter of 2018.

The concern is the $1,000,000 median was broken in the 4th Quarter of 2015 (the median was $1,150,000 at that time) and has stayed above $1,000,000 for three (3) years only to break below $1,000,000 during Q4 2018.

If one factors for inflation that same  $1,150,000 on December 2015 is worth $1,222,800. Thus the median in real inflation adjusted dollars has adjusted downward just shy of ($225,000).

Let’s look at another statistics:

  • Dec 30th, 2015: Dow Jones Industrials: 17,603
  • Dec 31st, 2018: Dow Jones Industrials:  23,327

Thus during the 3 years period the equities market was strong with a gain of over 25% and the Manhattan apartment market stayed above the $1M median.

Thus is Manhattan a precursor of what is to happen in Denver? My gut is yes. While inventory continues to be strained locally what is on the market seems to be languishing especially in the upper-end of the market i.e. $800K+. In addition we are witnessing more conservative pricing which some would argue is seasonal while others believe we peaked concerning home values 12-18 months ago and now are entering a new phase in the market moving towards a buyers market ever so slowly.

Some would argue comparing Manhattan to Denver is like comparing apples and oranges as the two cities have little in common. However Manhattan is historically the most in-demand housing market in the country. For this market to see a close to 25% reduction in the median (inflation adjusted) sales price in Q4 2018 from three years prior is concerning and may provide the caution sign we should all heed around the country.