What a Hole in the Ground May Indicate About the Health of the Real Estate Market

I have lived in the Cherry Creek North neighborhood long enough to watch our neighbors to the south i.e. Cherry Creek East blossom into a diverse neighborhood from rental and condo high-rises to townhomes, mid-height rentals, an assisted living facility and oh so many townhomes built usually as rows versus the duplexes you see north of 1t Avenue (as most of Cherry Creek East is zoned Planned Unit Development).

On my walk this afternoon I was stopped in my tracks at The Cassidy (basically S. Harrison Street between Cedar and Bayaud Avenues). I had watched over the past weeks as the earthmovers excavated for the foundation with the assumption of full ceiling height basements. The units directly to the south seem to have sold and thus now a larger lot with plans for 37 units and a well-known broker who represents many new developments in the area as listing broker and sales point person.

What stopped me in my tracks was not the glossy marketing sign; it was what someone attached to it. Someone had cut out and highlighted the foreclosure notice on the property dated 9/28/17 from The Denver Post. Yes, the foreclosure notice.

The Cassidy Foreclosure Notice
Someone posted the foreclosure notice as published in The Denver Post (9/28/17) on the marketing sign.

While foreclosures were front and center during the Great Recession of a few years back, lately all we see are cranes on the horizon and continue talk about growth and the desire for Amazon to locate HQ2 to Denver.

Yet maybe it is irrational exuberance rearing its ugly head or our desire not to confront reality. I have been forecasting a downturn documented in this blog for months. Even the Wall Street Journal mentions rent-concessions and other activities, which may suggest not only is the boom loosing steam but also we may be moving into an overbuilt scenario.

Yes record prices were recently paid for the Steele Creek Apartments in Cherry Creek (of note the original developer Eric H. Bush who assembled the land on which Steele Creek was developed recently committed suicide). While I am not suggesting any nexus, I would just be concerned when we have record sale prices and 7 blocks east a foreclosure on massive lot on which 37 for-sale units were proposed.

Just food for thought.

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Why Continued Positive Comments About the Housing Market Scare Me

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As a Buyer What Your Broker Wants You to Know

As the real estate market in Metro Denver slows or as many of us believe moves towards a more balanced market between sellers and buyers, choices and opportunities will expand for all in the marketplace. In discussing market conditions with peer brokers we began to discuss what we desire the buyers we represent to know before and during their house hunt.

Knowing One’s Budget and Realistic Expectations: One of the issues related to historically low interest/borrowing rates is buyers are looking at a monthly payment versus actual valuations. Coupled with low down payments in an up valuation market this is not an issue. However in a traditional market when a 2% appreciation may be considered healthy i.e. matching inflation such a pro-forma can be an issue when one believes homes should rise 10%, 15% or 20% per year as the norm and may be projecting such a forecast into their future planning.

What most brokers (including me) suggest is to immediately us a home affordability calculator. While not perfect this tool will allow prospective buyers to have a general baseline concerning affordability i.e. a budget and price range. The second step we suggest is to secure a mortgage pre-approval letter; a process involves a lender reviewing a client’s finances and determining how much it’s willing to loan for a home. No matter the market listing brokers and their clients i.e. sellers understand a pre-approval (not to be confused with a pre-qualified) letter shows intent and seriousness. Finally we look at smaller yet potential challenges i.e. real estate taxes, upkeep/maintenance costs and lifestyle i.e. condo, single-family residence and other factors which may not be part of the initial calculus concerning home ownership.

Do Not Contact the Listing Agent: As brokers we know with the Internet and other marketing tools information about a listing is ubiquitous. And yes the Listing Agent would probably be the most knowledgeable about the residence he/she is selling. Of note, the information provided on the web through various distribution channels is only as accurate as the original input.

Yet the Listing Agent is the advocate for the seller. As a buyer it is important to communicate through your buyer-broker whose fiduciary interest is to you. By allowing us, your buyer broker to interface with the selling broker we are showing A) you are represented by a knowledgeable and competent professional and B) We have a strong working relationship. When one contacts the listing broker directly this can undermine the working relationship AND place a buyer in a secondary position with the Listing Broker whose fiduciary duty is to their seller (unless one becomes a Transaction Broker which is rare).

 Silence is Golden: On the rare occasions I host an open house I am always amused at the conversations I overhear. It is similar to the home-flipping shows in which a hidden camera and microphone are set up to capture before and after comments (I will not opine on the ethics of such actions). Yes as brokers we ask probing questions i.e. are you working with a broker? How many houses have your looked at? Any general impressions you would like to share and so forth. If I am listing the house I am representing the seller and the questions I am asking will facilitate my marketing efforts. However the answers may provide insight concerning the prospective buyer; information you may not wish to share except with your buyer broker i.e. motivations, budget, timing and so forth. This is truly proprietary and should only be shared with your buyer broker.

Thus (and a lot of brokers will be angry with me), when attending an Open House please keep your comments beyond ear shot at a minimum. In WWII there was a quote “loose lips sink ships”; while not as dire, go against human nature and discuss the home outside or be sure you are out of hearing range of the broker or their confederates. Even better see if your buyer broker is available to attend with you or set a private showing with your broker so you can discuss the home sans others overhearing.

Trust Your Broker; The Internet is Not Truly WYSIWYG: I actually enjoy when my client’s forward listings they have found on the Internet and I am one of the few. Their actions suggest to me they are serious and doing research. Yet I also understand the frustration of brokers. Many clients will send every listing within a 50 mile radius or similar. A few tips:

  • WYSIWYG: Known as What You See Is What You Get is not necessarily true. Listings on the Internet like most marketing channels are promoting the finest attributes of the property. Do you really believe the listing broker is going to post a picture of the freeway adjacent to the home or the junkyard across the alley? Of course not! Tip: if there are a limited number of pictures or pictures of the neighborhood dominate I would be more skeptical. Even the smallest of residences have a wealth of images available. The reality is your broker probably knows the neighborhood, possibly the residence and has access to information from title companies, assessors records and other sources to provide a truly balanced picture of the residence on the market.

 

  • Billboarding: It is amazing when you input an address of a home for sale and the results include every broker in the market showing the listing. With today’s technology when a listing is loaded into the local multilist service with few exceptions the information is distributed to multiple channels. Thus the information is now in the public domain. Of note my firm is even more proactive as we have a company intranet, which promotes our our listings to our offices worldwide if we wish. The issue is the information presented in the public domain may be inaccurate.

For example my personal residence, which I sold and closed in April 2017 continues showing as “For Sale” on multiple sites including one of the most popular valuation sites 5 months after closing. I once had a listing which was presented on a “Owner Will Carry” site sans my permission; all the calls I received were from prospective buyers looking for a specific product i.e. an owner will carry option, unfortunately a financing method my client would not entertain. The service billboarding the listing was doing a disservice to their clients many who paid for access to this supposed proprietary list of residences available with a seller who is willing to carry a mortgage.

  • Your Broker is In the Know: Your broker will have access to the most up-to-date information and as mentioned prior is your advocate and communication channel with the listing broker and their seller client. Even if a property is Under Contract your broker can inquire if the seller is entertaining back-ups, if the existing contract may fall through and so forth. Thus use your broker and their experience and expertise to your fullest advantage.

Fear of Commitment: I am probably one of the rare brokers who has not continually bought and sold during their career for their own account. Readers of my blog know I was in my previous residence for 27.5 year! This has to do more with not a big fan of change and it was and still is a great residence yet my lifestyle changed. I do, as most brokers do understand the purchasing of a house is a big commitment and not one to be taken lightly.

Buying a house, especially one’s first residence is a big step and commitment. As part of our client review and why we request pre-approval letters and so forth is a sense of commitment from our clients as in general brokers are not compensated unless a transaction closes. We also understand life presents us all challenges as no one’s employment is ironclad and other issues can question one’s commitment concerning home purchase into doubt. Yet with careful planning and foresight coupled with communication, commitment phobia can be curtailed.

As I advise clients a residence is not necessarily a ball and chain (and trust me there is the same look every one has when they review the mortgage repayment schedule at closing, I call it the Ball and Chain look). There are always options from resale to rental to refinancing and so forth.

An acquaintance I met while walking in my neighborhood one day mentioned a unique situation; she is single, a senior citizen with a larger home yet straddled with a sub-prime mortgage and job loss. If she sold her home; even with a strong market the proceeds would just cover the outstanding mortgage and penalties accrued over the past 6 months. Thus her credit report would be healthier yet she would be homeless.

As an acquaintance and not a broker we discussed and I suggested checking out the following blog on Seniorly concerning programs for seniors looking for roommates or housing. The upside for the owner of the home, the opportunity to collect some income, dig herself out of the financial hole and have a peer in residence. While not for everyone a viable alternative to selling and having no equity to fall back on or worse, foreclosure and being forced from the house.

As Brokers we are truly your advocates. As there some bad apples out there? Of course just as in any profession. However the vast majority of brokers I know and trust are those who truly look out for their client’s best interest and desire to build long-term relationships and a referral network based on honest quality service.

Happy House Hunting.

Is Irrational Exuberance Giving Way to Rational Behavior

I recently enjoyed a conversation with a friend who is about to list their residence in one of Denver’s most affluent neighborhoods (of note I was NOT in the competition for the listing). He mentioned what they plan to list the home at. I asked if they were planning to use the broker whom they have a personal relationship with and they advised no as what they wish to list the home at, the broker would not take the listing feeling the asking price was overly aggressive. Another broker has since been retained to market and sell the home.

Full disclosure, the home is spectacular from a conservative design perspective including solid pre-war construction, beautiful curb appeal, and a park-like oversized lot professionally landscaped and so forth. Of course there are some minor deficiencies yet nothing insurmountable. However when I was advised of the asking price my immediate reaction based on my experience in the present market was “Good Luck”.

I personally went through a similar situation with clients in 2011. Due to a change in employment status and other factors including owning the largest home on the block purchased at an inflated 2006 price, a challenging layout  and across the alley from a primary school  the sellers and this home had multiple challenges. At the Listing Presentation with a peer broker in attendance we advised the seller the asking price should be between $710,000-$720,000. The seller requested I place the house on the market for $839,000 (their purchase price was over $800K plus interior upgrades leading to a cost-basis in excess of $840,000). As a friend first and broker second (and I have since learned my lesson) I did as requested. After one month, multiple open-houses and two formal showings the sellers agreed to lower the price. The new asking $739,000, still above what was advised the prior month. Fifty yes 50 showings later and 9 months on the market not one offer! We decided to part ways. The seller hired another broker, within one week did a price reduction and subsequently sold the residence for $715,000.

It took the seller ten(10) months to sell for $715,000 which I had advised, from day one AND at $4,000/month mortgage, do the math, $40,000 before interest deduction, not exactly the most brilliant strategy.

Thus based on the above examples and seeing signs of a slowing market and for my own edification I decided to look at market activity both present and looking back at Sold Activity over the past 6 months.

Let’s start with Country Club (the borders are from Downing St. to west-side of University Blvd, 1st Avenue to 6th Avenue).

Sales Activity over the last 6 Months Country Club Neighborhood of Denver:

  • # Of homes sold: 7
  • Avg. Finished SF: 3,510 SF
  • Avg. Total SF: 4,482 SF
  • Average Sold PSF Finished: $568.38
  • Average Sold PSF Total: $445.01
  • Average Days on Market: 24 Days

On the Market at Present:

  •  # Of homes on the market: 8
  • Avg. Finished SF: 3,186 SF
  • Avg. Total SF: 4,419 SF
  • Average Sold PSF Finished: $557.31
  • Average Sold PSF Total: $424.36
  • Average Days on Market: 68 Days and counting

Based on size the differences between the Sold’s and on market is marginal and same concerning the Price per Square Foot however what is telling is Days on Market (DOM). The Sold’s over the last 6 months on average sold in 24 days. Yet those on the market today is average 68 days and counting. The difference, over one month, almost a month and a half.

I admit one could argue the homes on the market at present may have challenges from location to upkeep however as asking prices based on a Per Square Foot basis stayed relatively the same, the issue is the longer on market time. Number of days on market has more than doubled. Yes there are seasonal factors however many pundits argue the selling season is now year round.

My personal view is market demand is softening and asking prices are yet to adjust to the new market realities.

Of note, Country Club is a small, insular neighborhood with limited inventory and limited turnover. Thus I also looked at Cherry Creek North (1st Avenue to 6th Avenue, University Blvd to Colorado Blvd) to provide a more balanced view, granted however balanced one of the metro’ area’s most affluent neighborhoods can be. However with the diverse housing stock and density, a clearer picture may emerge.

Sales Activity over the last 6 Months Cherry Creek North Neighborhood of Denver:

  •  # Of homes sold: 53
  • Avg. Finished SF: 2,396 SF
  • Avg. Total SF: 3,335 SF
  • Average Sold PSF Finished: $436.10
  • Average Sold PSF Total: $332.28
  • Average Days on Market: 53 Days

On the Market at Present:

  •  # Of homes on the market: 94
  • Avg. Finished SF: 2,393 SF
  • Avg. Total SF: 3,416 SF
  • Average Sold PSF Finished: $595.36
  • Average Sold PSF Total: $412.07
  • Average Days on Market: 95 Days and counting

Again as with Country Club based on size the differences between the Sold’s and on market is marginal and same concerning the Price per Square Foot however what is telling again is Days on Market (DOM). The Sold’s over the last 6 months on average sold in 53 days. Yet those on the market today is average 95 days and counting. As with Country Club the difference is almost a month and a half.

Conclusion: In both neighborhoods asking and closed prices have stayed somewhat status quo. However in a hot housing market the number of days on market is telling. Granted one could use the seasonal differential argument. Maybe; however in both neighborhoods we are seeing the Days of Market mirror each other i.e. almost a month and a half difference.

I may be incorrect and I admit when I am however I believe the market is definitely showing signs of slowing based on Days on Market coupled with levels of inventory. Yes the two markets are considered luxury markets yet what happens at the upper-end of the market historically trickles down to other market segments. What will be interesting is when we will begin witnessing price adjustments.

It seems the pinnacle of the market may have been 6-12 months prior and the market is now possibly taking a well-deserved breather or maybe showing signs of a changing business cycle.

Considering interest rates have remained stable; actually still close to historic lows, the stock market continues to flirt with record highs and the recent issues with N. Korea are too recent to influence the housing market.

I believe the optimists will advise it is a natural seasonal shift, me being the conservative pessimist would advise, hang tight if you can it may be a bumpy ride ahead.

 

 

 

 

 

July 2017 Statistics Show The Denver Real Estate Market Is Cooling

And this is not necessarily negative. Recently I have been blogging both statistical and anecdotal information about the Metro Denver housing market. I have predicted a slow down as I noticed activity in the upper-end luxury tier of market i.e. $1M and up was softening. From experience this segment of the market is usually first to show signs of the direction of future trends as it is the segment of the market that is least dependent on external influences including mortgage rates, liquidity, household income, employment levels and inventory issues.

In addition there haven been signs of a possible formation of a bubble concerning real estate in metro Denver including continued rising prices and a wider divergence concerning affordability and inventory.

One of my first reads each morning is the REColorado.com site  (an excellent source the most accurate information for both consumers and brokers) which is the Multilist service and keeper of statistics for Metro Denver Real Estate. The following is copied from their site in “italicized quotes“:

The latest data from REcolorado shows the eleven-county Denver metro real estate market experienced a summer cooldown across most major housing indicators.”

Granted a summer cool down is relative as while average prices dropped one(1%) percent from the prior month Metro Denver prices are still 10% higher year over year. And while inventory expanded (6 weeks of inventory, up one week) it is still at close to historic lows and we are witnessing more activity in the upper end of the market with homes at $700K+ accounting for 9% of the market (which in turn skews the average sales price which would be lower if upper-end sales were less of a factor concerning volume). While one month does not make a viable trend line the signs of movement towards a flattening or potential adjustment of the overall residential real estate  to the downside are not deniable.

Home prices in the greater Denver Metro area decreased for the first time since February. In July, the average sold price of a single-family home was $444,108, one percent lower than last month. Average home sale prices are still 10 percent higher than this time last year. As compared to last month, the average price of a single family detached home remained relatively unchanged, while the average price for a condo/townhome decreased by nearly three percent.

In July, we saw a seasonal decrease in sales, which is typically brought on by the July 4th holiday and summer vacations. Throughout the month, 4,697 homes sold, down 20 percent as compared to last month and 11 percent lower than this time last year.

Home sales were strongest in the $300,00 to $500,000 price range, where nearly half of all July home sales took place. Sales of higher-priced homes are becoming more common across the greater Denver Metro area. In July, sales of homes priced $700,000 and above comprised nine percent of all sales.

Inventory levels remain tight, as new listings of homes for sale fell 15 percent from June and were down four percent from a year ago. Still, the number of available homes for sale is maintaining at levels we saw earlier this year. July ended with 6,450 active listings of homes for sale, seven percent lower than the 2017 peak, which was reached in June.

At the current sales rate, there is six weeks of inventory, up one week as compared to June.

Homes continue to move quickly, especially in the counties with average home prices in the $300,000 to $400,000 price range. In July, homes spent an average of 22 days on the market, two days more than last month. In Adams and Arapahoe Counties, homes were on the market an average of just 17 days. Broomfield County saw the lowest days on market, at 15 days.”

Is A Real Estate Bubble in Colorado’s Immediate Future

Many of my real estate peers continue to bask in the glory of this continued bull market in Metro Denver. I understand this as both personally and professionally I too am frustrated with the lack of inventory; a marketplace which continues to show a demand side bias seemingly unabated.

Yes I have been accused of being a pessimist. As I advise I have been in this business for 20 plus years AND been a resident of the State of Colorado since 1984. Thus I have been through a few business cycles and was fortunate to purchase the home I just sold back in 1989 as Denver was coming out of a commodities influenced regional recession which was a catalyst for Denver’s now more diversified economy.

This morning, during my scan of the headlines a story came across the wires; this one relates to states with potential real estate bubbles. Posted on AOL Finance the article mentions 8 states in which a real estate bubble may be forming.

Per the article and quoted as follows it is important to understand “Today, most experts agree that, on a national level, we are not in a real estate bubble. The absence of nationwide or statewide housing bubbles doesn’t mean they’re not forming, however, or that they don’t already exist within some states on a more local level.”

The States mentioned in the article are California, Texas, Florida, Washington Tennessee, Colorado Oregon, and Nevada. On the national level due to changes in mortgage requirements and desires for home ownership we have witnessed income to house value ratios increase. Historically from 1950-2000, median home values have been roughly 2.2 times the median income. Today, that number is roughly 3.36 times higher, 50 percent higher than the historical average. Granted there are more choices concerning mortgage instruments and our society in general has collectively accepted the concept and use of leverage. We now know leverage and inflated valuations led to the most recent Great Recession. Unlike the Depression of the 1930’s which was particially caused by a bubble in tradable equities, The Great Recession began with a housing bubble as housing was and continues to be viewed as an investment vehicle and thus being leveraged.

Driving through Cherry Creek North and Downtown and seeing the cranes on the horizon coupled with the frenzied construction activity all along the Front Range from the Foothills to the Plains, I am starting to be concerned. A low-interest rate, high-demand environment must at some point correct, when is the question:

The following is excerpted from the AOL Finance article:

Colorado’s housing market is overvalued, according to Fitch Ratings. But why is overvaluation important to real estate bubbles?

People believe that the asset, often real estate, is going to become more and more valuable in the future. If it becomes more valuable because it produces more income, that is one thing,” said David Reiss, a real estate expert and law professor at Brooklyn Law School. But if it becomes more valuable just because people think it is going to become even more valuable, that is another. At some point, the merry go round stops and the current owners are left with an asset worth less than what they purchased it for.

In Colorado, home prices in major markets like Fort Collins and Boulder are not just overvalued, they’re more overvalued than they had been at their peak during the 2005-2006 housing bubble, hardly an encouraging sign. Making matters worse, incomes are failing to keep up with rising price.

Several Colorado metro areas are seeing price-to-income ratios above both the national level and their historic averages. The median home price in Denver and Fort Collins are roughly five-times the median income. In Boulder, the home price-to-income ratio is even higher at 6.6 and is more than 100 percent higher than the historic average.

To be clear, high home prices don’t necessarily equate to a bubble, said Jeff Shaffer of McKinley Partners, a real estate private equity firm. “A typical bubble starts with high prices causing capital to start flowing quickly into that space because of attractive returns. So high housing prices may spur a bubble down the road, especially in markets like Denver, where you see a lot of new home development in the pipeline to open up,” he said.

According to RealtyTrac, a real estate information company and an online marketplace for foreclosed and defaulted properties, Denver County has the nation’s lowest affordability index as of second quarter 2017, meaning it has the least affordable prices compared to historical averages. Adams County and Arapahoe County, both in the Denver metro area, also rank among the worst for housing affordability.

Personally I am more concerned about the Front Range versus the State of Colorado. Yes our resort communities are very dependent on real estate transactions for transfer taxes and so forth. However I am not seeing the frenzied activity west of the Continental Divide that I see on the Front Range. Thus if a bubble is forming, I believe it may be Front Range specific and while impacting the whole state if it bursts, the damage I believe will be most acute along the I-25 corridor from the Wyoming border to Pueblo.

Beige Book, Case-Shiller and Local Price Reductions. What’s Going On?

Nationally we still seem to be in a Goldilocks economy. The Beige Book evidenced positive economic indicators; The Federal Reserve indicated due to the continued momentum of the economy an increase in the Fed Funds rate is imminent. Interest rates on mortgages continue to bounce around yet continue to hover at historic lows.

So what is happening in Denver?

Well, a lot. The Case-Shiller Index advised the Denver area has fallen to #4 concerning price appreciation behind Seattle (12.3%), Portland (9.2%) and Dallas (8.6%). Of note Denver’s Year over Year appreciation was 8.4%. This is a positive as gains are still above national averages yet the cooling off concerning appreciation may indicate movement towards a market more oriented towards equilibrium.

For homeowners price appreciation may be a positive, yet when we have a continuing disparity between average income/wage growth coupled with higher prices; this is not sustainable and leads to potential corrections down the road including housing prices and employment attraction as many businesses will reconsider relocation if the cost of living is excessive.

And yes I have been told by some to look at New York (4.1% Year over Year) and San Francisco (5.1% Year over Year) as markets, which historically continue to increase in value. However both those cities have geographic constraints and higher demand leading to exorbitant pricing by Denver standards and strict rent-control programs, which impact the market, issues we do not have in locally.

While statistics can be interpreted any which way one desires; readers of my blog know I focus on the upscale neighborhoods of Denver. Specifically I believe the upscale neighborhoods are a leading indicator of the future of the overall market. Granted not scientific concerning methodology yet anecdotal evidence coupled with 20+ years as a broker makes me a bit concerned.

I have been keeping my eye on the Country Club Neighborhood of Denver, specifically are area bounded by Downing on the West, University on the East, 8th Avenue on the North and 1st Avenue on the South. While historically expensive the neighborhood has been the pinnacle concerning prestige and address within Central Denver for generations.

Suddenly there seems to be an increase in available inventory. Couple this with a section of listings that have endured price adjustments between 10%-25% to the downside, what is going on?

Granted some of the listings may have been overpriced to begin with. As brokers we advise our clients pricing options based on past sales, demand and other factors. Yet at the end of the day it is the seller who dictates the asking price. Thus some listing may have sellers believing their residence is valued higher than the market would dictate and thus the price reductions.

Yet there is another factor, which I call irrational exuberance of investment gains. A few listings I have watched include a selection that are asking 50%-100% return over their purchase price within the last 3-5 years. Granted some have been renovated/updated yet others are in similar condition when last sold and are asking for returns which are just not rational. Granted if the seller gets the asking price, all of a sudden it is rational.

However let me use the example of a home within the western section of Country Club south of 4th Avenue, a prime neighborhood that sold within the last 12 months and is NOT presently on the market.

The house sold in late 2001 for between $310,000 – $330,000

In early 2002 the home resold for $530,000 – $550,000*

Thus in real #’s gross #’s not taking into account commissions and closing cost the house appreciated $200,000+* or over 60%

*During that short period some improvements were made to the house yet far from a full gut renovation, mostly cosmetics and some mechanicals.

The next resale of the home was in early 2006 for between $640,000 – $660,000

Between 2002 and 2006 (4 years) the house appreciated $100,000 or approximately 19% still quite respectable for housing, on an annualized basis 5%, which was below gains in the stock market during the same period.

The new owners who purchased the home in 2006 bought at the pinnacle of the housing market during that period of expansion. Within 1.5 years we would witness the bubble burst with the shut down of Lehman Brothers and the subsequent Great Recession and Housing Crisis, which were soon to follow.

In late 2016 the house sold between $745,000 – $765,000, an approx. 16% gain yet took 10 years for this gain to happen.

Overall the home in the above example has done well yet also provides insights concerning timing and overall market conditions. In pure #’s between 2002 and 2016 the home went from between $530,000 – $550,000 to $745,000 to $765,000 or approx. $225K or 40%, quite respectable and beating inflation yet also took 14 years to achieve the 40% gain or under 3% annualized which matches inflation which housing (beyond select coastal markets) usually mirrors. 

Are we to assume Denver is now suddenly an outlier like New York, San Francisco and Los Angeles OR are we in a period of concern as our housing appreciation historically matched those of other inland regional cities.

To be honest I do not know but as many clients are sitting on the sidelines waiting to see what the market does. My view is business cycles have not ended and while not in a bubble, if I were looking to buy and resell within 12-36 months, I would be a bit hesitant to sign the mortgage.

April 2017 Statistics Are in the Books

While the news on the housing front continues to paint a rosy picture as we continue to be in a sellers market; statistically we may be entering a phase of normalicy concerning market conditions. While prices remain elevated and there is continued concern that average metro Denver incomes cannot keep up with the inflated housing market we are seeing signs of slowdowns concerning price appreciation and possibly an uptick in inventory coming to market.

Personally I enjoy looking at statistics. When combined with historical personal perspective i.e. lived through it there are insights and trends one may be able to extrapolate.

I was reviewing April 2017 market conditions:

In April 2017, there were 5,361 Active Listings in the metro area.

(Of note, the historical average # of listings in April is 15,710 based on statistics gathered between 1985 and 2016 also related usually the start of the Spring sales season).

Thus our average # of listings continues to be constrained especially when considering the increase of housing stock which has come on-line since the end of the great recession coupled with our population increase

Concerning sales prices:

The year-to-date average sales prices in April 2016 increased 6.05%.

In April 2015 that same statistic was 9.53%.

In April 2014 that same statistic was 12.9% (of note coming out of the recession).

Thus we are witnessing a slowdown in price appreciation (a good thing), slight increase in inventory (a good thing) and overall a potential plateau in the market.

Yes sales prices are stabilizing and getting closer to matching inflation and inventory is beginning to loosen HOWEVER couple this with the stock market at record highs, unemployment at record lows and no appreciable inflation or major interest rate hikes; we may be seeing signs of a housing slowdown in the metro area.

On the luxury side of the market while there have been some blockbuster sales of late, homes priced at $1M and over seem to be languishing on the market for longer periods coupled with price reductions. Granted some inventory came on market overpriced to start however price reductions are happening sooner and price cuts is more severe.

In my local Cherry Creek neighborhood which I admit is far from a barometer for the metro area the inventory of listings seems to be increasing and sales transactions are taking longer to close and usually after a price correction. Granted there has been a uptick in inventory south of 1st Avenue and much of the for sale inventory north of 1st Ave is east of Steele St. which some buyers consider less desirable yet the number of active listings continues to increase. As of this writing there were 41 active listings ranging from $215,000 to over $10M (of note both the lowest and highest price listings are condominiums).

Having been in the real estate brokerage business for a few decades now I am used to witnessing Metro Denver go through 5-7 year cycles concerning increased demand and then stability. While I do not believe we are in for a major correction, I do believe we will continue to see additional inventory come on-line and price appreciation slow to the inflation rate or a few ticks above which is the historic norm.

In the luxury market, which I track, I would be a little more concerned regarding price stability.

In the starter and move-up market baring a serious interest rate hike I am not concerned as demand will continue to outstrip supply. I would be hesitant concerning starter inventory in the exurbs as those markets are dependent on low fuel prices.

As I am advising clients at present:

Sellers: Consider putting on the market now as its low inventory and attractive interest rates.

Buyers: While rates are low, a good opportunity to lock in a fixed mortgage HOWEVER should consider waiting a few months to a year or two as inventory will continue to increase and while interest rates may tick up prices usually do the inverse.

Renters: Rents seem to be stabilizing and with the introduction of additional luxury inventory do not be surprised to see landlord concessions. Thus if in a rental consider resigning for another 6 months with an escape clause and if looking to rent, shop around and look for incentives to bring your net effective rent down.

 

 

Does the Seller Really Want to Sell

While the metro Denver market continues to hum along and there are a few “blockbuster” sales on the upper-end, anecdotally I am seeing signs of stress especially on the upper-end of the market. Some listings are coming on at inflated/fantasy prices and within 1-2 weeks a price reduction. Granted some reductions are more symbolic i.e. still priced above market and I never fault anyone for holding out hope of that blockbuster sale. However as an experienced broker I look for various signs showing that a seller is serious and motivated.

Yet first some signs advising the seller may not be so serious:

Will Not Close until Replacement Property Secured: In such a situation the seller is driving the transaction. You as buyer are in a holding pattern literally beholden to the seller and their timing and wish-list concerning finding a replacement property which in a hot market may not be so easy. In commercial transactions this can be a common occurrence and is a tactic used in 1031 Exchanges. Concerning traditional residential I would be more cautious. Not to dissimilar from a reverse contingency i.e. usually buyer will purchase contingent on the sale of their existing property. Instead here the seller will sell and close once their replacement residence is secured.

Holdover or Leaseback in Excess of 30 days: Holdover i.e. occupancy once the house is sold and closed is not so uncommon. I usually suggest 30 days or less; there is even a pre-printed Colorado Real Estate Commission Form known as the Post Closing Occupancy Agreement for such an event. For longer periods (and again if you are an investor the criteria may be different) I would be more cautious. Basically the seller is looking to cash out and lease their house back. I have been involved with situations concerning relocation when this is quite accepted. However barring a relocation situation my immediate concern is for the buyer. The seller is desiring to cash out and lease back. Again in commercial real-estate not uncommon, in residential may indicate seller may believe market is adjusting downward and desires to cash out at prevailing market conditions and assumes paying rent is safer than a mortgage associated with a downward trending asset. Yes the seller may need the cash out of the house; there are additional options from HELOC’s to Reserve Mortgages, thus a sale is more drastic.

Again the above are basic guidelines, not the gospel and each situation is truly unique.

The signs seller is truly serious:

Buy Me: Even in a hot market a property may go through multiple price reductions. Granted this could be an indicator the listing was over-priced to begin with. However when coupled with other indicators i.e. priced well-below market value, being offered “as-is” or desiring a cash transaction can possibly construe the seller is very serious.

Of note, be forewarned as some brokers will purposely list a property at below-market to instill excitement of prospective buyers and more importantly bids and offers. In a hot market such a tactic can be a benefit to the seller. However in a market trending downward such a strategy may place the seller in a losing situation i.e. full price offer at the below-market price and by not accepting barring contingencies the broker may demand a commission if seller does not sell.

Curb Appeal or Lack Thereof: Anyone who has owned a home knows landscaping takes time and money (even DIY’s i.e. materials, water, maintenance). While brokers usually advise an investment in curb appeal, a seller who may not have the time or capital to attend to the landscaping may be showing signs of motivation by their inaction and lack of investment. Such signs I look for include:

  • Overgrown or dead lawn/shrubs/flower beds.
  • Weeds and other decay i.e. trash, dead leaves, and overgrowth.
  • Newspapers that have not been picked up and/or fliers in the door.

Such signs could also point to an absentee owner, landlord or similar situation. I have used such visual cues to procure listings by researching public records and other databases.

Interior is Half Lived In: Hey I am all for staging and a staged house usually suggests a motivated seller i.e. the investment in staging. However dig deeper especially if you believe the house continues to be owner/seller occupied. Are the closets ½ empty? Is the furniture mismatched or haphazardly placed? Are walls showing signs of art having been removed and not replaced? Such indicators may indicate divorce, destitution, already moved out or similar. Usually when a home is in such condition, the seller is motivated. Please note there is a difference between purging and having moved on.

Of note, in Japan in the 1980’s some listings were not only staged but also included a live multi-generational family pursuing their daily routine during open-houses to show how the home functions and meets the needs of a multigenerational family as buyer. Trust me somewhat disturbing seeing children doing their homework during an open house yet also true early adopters of the precursor to virtual reality.

Family Dynamics have Changed: I see this quite often; the signs may include a child’s crib in one of the social rooms i.e. living, dining, home office or similar. Or on other side of the spectrum oxygen tank or other medically oriented items. Such indicators may suggest a new addition(s) to the family from a child to an aging parent or illness. This may be a situation where the owners desire to move for more space to accommodate and thus at present a not optimum living situation.

Estate Sale: Usually estate sales are when the owner passes and/or the present sellers are by descent. Such sellers may be more motivated to unload the property for various motivations from estate tax liability to not desiring the upkeep and maintenance. In the Denver Multilist there is a check box for type of seller and one option is Estate. If your locale does not indicate such type of seller and it is a deed of trust state, investigate what type of deed is being offered. Is it a Personal Representative Deed or similar? May be an estate. Of course some experienced brokers review obituaries and similar to look for listings; an old pastime in New York City which is practiced to this day (not to mention treating estate lawyers to lunch).

Providing Too Much Unrequested Information: In Colorado we have what is known as the Seller Property Disclosure, a 7+ pages form executed by sellers to provide information to the best of their knowledge concerning the residences condition and state of repair. Of note I advise seller clients to be truthful and honest as its both a legal and ethical course of action not to mention most buyers will engage the services of a home inspector prior to closing.

However some clients can be more forthcoming and mention issues and potential remedies before being prompted. In general I usually caution sellers to be circumspect in what they mention i.e. “We were going to install an on-demand hot water heater but went with the conventional as it was cheaper and we did not want to invest any additional money into the house”. This tells a buyer the seller while preparing for sale went for near-term economics versus cost-savings over the long-term. I am guilty of this myself. In the sale of my house I advised the sellers concerning a secondary bathroom; if they ever plan to renovate to consider changing the dual knobs to a single-lever. Was I disclosing too much? Maybe; however I advised since we did not use that particular bathroom we never did the upgrade; something to consider for their larger household and lifestyle.

The House Is Empty: Rarely do homes show better when vacant (that is why we have staging as an image is worth 1,000 words). In reality an empty property may indicate the seller has moved on. Yet continuing to retain ownership the empty home does incur carrying costs even if there is no mortgage i.e. real estate taxes, upkeep, insurance and so forth. Thus the seller may be willing to be more flexible knowing their for-sale asset is depleting capital while on the market.

Granted some homes are staged and again this may be a sign the seller is serious as staging is not inexpensive. In some markets we are now witnessing virtual staging i.e. computer generated staging to the benefit of on-line marketing, again a picture is worth 1,000 words. One company has brought the cost of staging down with inflatable furniture; just don’t sit on the props. Of note, a broker trick to show the scale of a bedroom, set up four to six boxes for support, add a camping air mattress, cover with a bedspread and pillows. The result an instantly staged and scaled bedroom.

Happy House Hunting

To Buy or Rent that is the Dilemma

As a practicing real estate broker you would assume I would be an evangelical advocate for purchase. In general I am HOWEVER as a seasoned real estate broker I am a bit concerned about the existing market conditions in the Denver Metro area. In some neighborhoods I have witnessed prices and sales volume up 50% in 3 years and some 100% gains since the depths of the Great Recession. Of note Denver was NOT as hard hit as Las Vegas and Phoenix where such gains after an over-sold condition may be warranted.

Thus the following are the 5 questions I usually ask of prospective buyers and not only 1st time buyers. Of note I personally am going through a similar exercise as I am under contract to sell my residence, which I have called home for 28+ years. Due to the inflated (in my humble opinion) market and lack of inventory; the 5 questions are hitting me personally. Here you go and I must advise please be honest as the questions are also a self-assessment of sorts:

How long are you planning to stay in the Home/Neighborhood/Area?

The reality; it is unlikely we will witness the gains we have had during the past three years. Simple economics would argue median incomes cannot match the gain in housing prices especially in the upper-tier of the market. Thus I advise clients unless they plan to stay in their residence a minimum 3-5 years (assuming this is not a fix and flip situation), may wish to reassess purchases.

The purchase and selling of a residence is not only time consuming, it is also capital intensive. Costs usually associated on both sides include brokers fees (usually paid by the seller in Denver), mortgage applications/origination, appraisals, title insurance (usually paid by seller) and so forth.

In general the longer you retain your residence the more time you have to recoup costs and based on dollar cost averaging (yes values can decrease), the more opportunity you have to enjoy an overall increase in value. Of note for those who retain a house for less than two years and if there is an increase in value, must factor in capital gains taxes (sometimes can be offset by expenses incurred concerning the divesting of the residence).

In the question I mention neighborhood and area. Do you have young children or planning on having children? School districts are a major motivator concerning one’s residential address. When childless; the gentrifying neighborhood may be the hip choice yet when the children come into the picture and Kindergarten is around the corner all of a sudden the school district and distance to school is of paramount concern.

My opinion, if planning to stay 3 years or less, consider renting.

House Prices Always Go Up, Right?

How we have short memories. While the market slide beginning in 2007 may be recent memory and quite severe, it was not an anomaly. When I purchased in 1989, the seller had purchased the home in 1984. Five years later he sold it for 30% less than the purchase price 60 months earlier (not accounting for inflation). The seller brought cash to the closing table to satisfy the mortgage and compensate the brokers. This was an era before the term short sale and “jingle-mail” entered the popular lexicon.

More recently, the median home price in the United States dropped nearly 13% between 2007 and 2009, falling from $247,900 to $216,700. In some overheated markets, such as Las Vegas prices declined as much as 62% from their peak.

Before buying a home, consider how your personal finances would fare if your house’s value increased slowly or not at all. With 3% annual price appreciation, a $250,000 (considered a starter in Metro Denver) house would be worth more than $337,000 in 10 years. With a 1% annual price increase, the same house’s value would grow to just $276,000 over the same time period. Barring a recession, nominal inflation of 2% would keep up however due to the added expenses concerning home ownership; one could envision a scenario of flat and potential decrease of value. For my economic pundit peers, yes during inflationary times, houses in general increase in value HOWEVER with high interest rates associated with the taming of inflation, transactions become muted as affordability becomes more challenging).

I provide the above scenario as I have witnessed some buyers placing all their eggs in the housing basket assuming the gains will outpace other investments. Trust me I am the first to argue a home is a place to sleep at night; the brokerage firm holding your stocks or the bank holding your CD’s are not leaving the light on for your arrival to bed down for the night.

Shelter is needed I agree. However one should not look at their house as their sole investment or worse an ATM i.e. Home Equity Lines of Credit. I view a residence as shelter and if there is an increase in value an added bonus.

If I Rent I am 1) Throwing Away Money and 2) Making my Landlord Rich?

On the surface such an argument does have some merit. Also I will avoid getting into the issues concerning home ownership restricting mobility concerning employment opportunities. I understand the line of most brokers i.e. owners are building equity in a valuable asset that can boost their long-term net worth whereas renting is spending not saving.

Home ownership has additional costs beyond the Principal and Interest on a loan.

Taxes: While metro Denver has in general low property taxes, it is still a recurring monthly expense. In the upper-tier of the market i.e. $500K and above, one can easily allocate $500/month just on real estate taxes.

Insurance: Home Owners Insurance in Colorado can be costly due to our climate i.e. hail, wind, heavy snow and other perils. While we do not have to worry about earthquakes; insurance rates in Colorado continue to escalate due to weather, cost of labor, materials and related factors; such rates rarely go down over time.

Basic Maintenance: I tell my clients to consider budgeting at minimum 1%-2% of their homes value towards maintenance and upkeep. This does not necessarily factor in unforeseen costs i.e. new hot water heater, roof repairs, HVAC and so forth. Condo owners you are not exempt, this is what monthly HOA fees are for.

In a rental such costs are borne by the landlord. However I will advise if renting do consider “Renters Insurance”, usually inexpensive and offers piece of mind. While you may have budgeted for your Principal, Interest, Taxes and Insurance, there are always other costs that can be budgeted for as well as surprises.

If I rent am I missing out on the tax benefits?

To be honest many homeowners do not realize the mortgage interest deduction is oriented towards larger mortgages and financial outlays. First as a homeowner you must itemize your deductions when claiming the mortgage interest deduction.

With the existing low-interest rate environment (and yes rates are still at historic lows) your itemized deductions should exceed the $12,600 standard deduction for married couples? This is OK if you have an upper-tier house with a large mortgage. Yet the reality is each year that goes by your deduction decreases as a larger portion of your monthly payment is allocated towards principal. Thus the deduction over time will decrease. (Of note, there are interest only mortgage instruments, unless truly financially savvy or blessed by your CFP or similar, I suggest avoiding).

When Does Buying Truly Makes Sense?

I always look at a rent versus buy scenario and run numbers accordingly usually in conjunction with a client’s financial and/or tax advisor. Yet sometimes I take the simple approach, which is basically, is it cheaper to purchase than to rent?

Beyond the down-payment (and please note I am not trivializing this, however when loans are available with 5% or less down, saving for a down payment is not as onerous as when I purchased my primary residence in 1989 and had to come up with 20%+) I look at basic monthly outlay after answering the prior questions.

Let us assume in metro Denver you are interested in a home that after the down payment the monthly PITI/Mortgage is $3,200. Now what if you could rent a similar property, apples to apples for $2,850/month?

One could argue for $350/month extra or $4,200/year you can have the security (and expenses) associated with home ownership.

Yet one could also argue that $4,200/yr. can be invested after taxes into a Roth IRA or similar instrument. For the uber conservative that person could buy bonds and secure a safe 2% return. For the more aggressive; there is the potential to be investing with returns of 5% or higher annually over a longer period; not unheard of (coupled with dollar cost averaging) and with a Roth monies going in post tax, comes out tax free. There are also options to use the monies for a down payment, however there are some tax implications, which are best, discussed with a tax advisor.

I also advise clients at the beginning of their home search consider using a price-to-rent ratio calculation. Price-to-rent ratio is calculated by dividing the home value by the annual rent amount. Generally speaking, if the price-to- rent ratio is less than 20, buying might be a better option. However, if the ratio is greater than 20, renting might be better. Needless to say, any ratio or comparison is meaningful only if you are comparing similar properties.

In closing I am just throwing our scenarios and “food for thought”. I am in a similar situation. As mentioned I am in the process of selling the residence I have been in for 28+ years and have enjoyed immensely. However due to the physical design and other factors it is time to move on. Assuming I close, I will be, guess what living in a rental! Yes I will be paying rent.

My personal view at present; I am more comfortable having the proceeds from the sale liquid and when the correct residence comes available for purchase at a price I feel is appropriate, I can proceed sans the restraints of trying to sell my residence and/or using a contingency clause which is never popular. In the interim, the money from the sale of my residence post taxes will be invested in short-term bonds throwing off income while retaining a margin of safety of the underlying principal.