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.

Is the Spring Selling Season a Bygone Memory

Historically the selling season for residential real estate in the United States was the start of Spring usually mid to late March. The timing was traditionally due to various factors including:

  • Post Spring Vacations (usually associated with families with school aged children).
  • Gardens awakening from the winter doldrums.
  • The opportunity to move and be settled prior to the school term starting in August and September.

The traditional selling season started to erode a few years ago with some markets moving to a year-round staggered school calendar, the desire of buyers to view inventory before others pounce and of course economics i.e. the most recent and severe recession forced sales regardless of season.

However it appears The Internet has upended another tradition (as it has with bricks and mortar department stores, travel agencies and others). Offering marketing and exposure 24/7 from the comfort of one’s own home; seasonal factors have suddenly become moot. Even the New York Times opined on the trend: The Right Time to Sell is Anytime.

In Denver I too have noticed this trend. One of my listings had been withdrawn from the market (and REColorado) due to the December holidays and the historical pattern of home buyers not wanting to tread through the cold and snow to look at homes.

During the holiday season and into early January I have received multiple inquiries to view the listing (of note, some sites never adjusted the asking price which was reduced). One was from a broker; their client had viewed previously. The other inquiries were what we term “buyer-direct”; prospective buyers who viewed the listing on one of various channels dedicated to real estate sales i.e. Zillow, Redfin, Movoto and others which link distribution to the REColorado service. Of interest, while the listing was technically withdrawn the distribution channels continued to promote (of note the listing is coming back on the market officially in a few days).

For buyers there may be an advantage including less competition concerning viewings and easier showing schedules. For sellers, the advantage is simply less inventory on the market. Granted the properties that will sell are those that are priced correctly for the market, show well and so forth. Thus some traditions do not change.

However if you are considering buying or selling, sooner than later may be prudent; as the saying goes “The early bird gets the worm” and avoids additional interest rate hikes.

 

 

Interest Rates Begin to Rise as Expected

For the past months I have been advising/forecasting the potential rise in mortgage interest rates. Based on the activity of the markets coupled with the Federal Reserve mandate most agreed Federal Reserve interest rates would in fact rise by December 2016 and thus impact mortgages.

Well, what a difference an election can make!

Posted on #Bloomberg News a few hours ago there has been a spike in mortgage rates: Spike in Mortgage Rates Throws Wrench into US Housing Market

We have all witnessed the increase in investment interest rates tied to the 10-Year Treasury Notes. While not getting too technical usually mortgage interest rates follow in tandem. In addition bonds from Germany, Japan and Switzerland which were in negative interest rate yields have since gone positive signaling the possibility of inflation on the horizon.

As an experienced real estate broker and one who has witnessed such cycles, now is not the time to panic or worse make a short-sighted decision; sellers and buyers have to keep the following in mind:

Rates Still At Historic Lows: even at 4 to 5% interest rates are still at historic lows. Some would argue including myself the record in home resale prices in the Denver metro area can be somewhat attributed to the low cost of borrowing also known as buy a payment regardless of the underlying value.

Some Inflation is Positive: The Federal Reserve desires a 2% inflation rate. While inflation can be a frightening term it is preferable to deflation/stagnation and recession which continues to be an issue in Japan and parts of Europe.

Time-Frame: If you plan to hold your purchase for 3-5 years and beyond with a fixed mortgage most likely interest rates will be of limited effect especially if within a conforming loan which is Denver is presently at $468,000.

Higher interest rates do in fact reduce affordability i.e. higher cost of borrowing/debt service.

Yet during periods of interest rate hikes, housing prices may remain stable or trend downward to compensate for the increased cost of borrowing.

The reality is we have been in a low-interest rate environment for way too long and some inflation may be expected and desired to balance growth and avoid another speculative bubble or similar.

My prediction is housing demand in metro Denver will slowly cool off. I believe in the upper-end of the market the pinnacle was reached during the early Spring of 2016 and since prices and demand have fallen off. I believe the rest of the market will begin to adjust to the reality of potentially higher rates and seasonal slowdown. At present the average annual income in Denver is already stretched concerning average sales price.

What will be interesting is Spring 2017. No one knows where interest rates or the economy will be. We have been in a long expansion coming from the depths of a serious recession. A cooling off is not to be unexpected and I believe welcoming as we do not wish for a repeat of the early 2000’s i.e. speculation, sub-prime mortgages and low down-payment products.

We have witnessed rental rates slowly drop due to increased supply and reduced demand. On the upper-end of the sales market prices seem to have leveled coupled with longer days on market and price reductions. Construction costs once rising seem to be leveling off as well.

Interest rates are just one indicator of the economy. It is important to look at the bigger picture, longer-term horizon and assessing the various scenarios concerning housing over the next few quarters. Historically housing matched inflation; only within the last generation have we witnessed housing as an investment vehicle and one that has outpaced inflation. Assuming business cycles have not ended, nothing to fear, just plan accordingly.

 

 

 

Is NYC Real Estate a Predictor for Denver

Early this morning the 3rd Q 2016 real estate market update for New York City provided by Douglas Elliman (and old line firm in conjunction with Miller Samuel Real Estate Appraisers) and the news is somewhat sobering.

The report noted in 2015 there were bidding wars concerning Manhattan real estate, recently the trend seems to have reversed. According to the report during the same period in 2015, 31% of listings sold for above the asking price, in 2016 the percentage has dropped to 17.4%. Yet more insightful is the listing discounts rising from 2.2% of listings during the 3rdQ of 2015 to 2.9% during Q3 of 2016. Add to this an 8.2% increase in inventory.

I am the first to advise (and being licensed in NY and CO) NYC is a unique market and much of the excess inventory is segregated in the high-end of the market with new construction, a general reluctance on the part of foreign buyers concerned about the world economy and new federal rules concerning disclosure and tracking of funds concerning purchases over $3M.

While the mean price of an apartment in Manhattan is $1M+ which would buy a very nice residence in Denver, we may be seeing trends in the Denver market a few months behind New York.

Listings above $468K in the Denver market seem to be sitting on the market for longer periods. Of note $468K is the conforming loan limit in Metro Denver. For sale signs in the tony neighborhoods of County Club, Cherry Creek and Washington Park seem to be growing exponentially coupled with continued new construction as cranes dominate the skyline in Cherry Creek North. While new listings continue to come on the market with what some consider inflated prices, older listings continue to see downward price adjustments especially pronounced in the Highlands where there has been a glut of upscale luxury developments and the absorption rate seems to have slowed.

A trend we are witnessing in NYC and I believe in Denver as well is movement to the suburbs and within Denver proper to the outlying neighborhoods away from the central business district. While one may suggest in Metro Denver the expansion of rail is partially the catalyst the reality is affordability. The NYC suburbs continue to boom as buyers who have been priced out of the city look to the suburbs for affordable options. A similar pattern is taking hold in Denver.

While I am not clairvoyant I am concerned about the activity in central Denver. While we may be heading into  seasonal slowing; with continued low interest rates sales should be continuing unabated.

Historically when interest rates rise, prices for houses falls inversely i.e. less affordability. Denver at present is at record highs concerning pricing (beyond the highs reached in 2007 even factoring in inflation). While an immediate rate hike may in fact spur transaction activity, the longer term trend may be more troubling i.e. if interest rates continue to rise to combat future inflation, houses prices may rise to match inflation however will probably not exceed and underlying affordability will be challenged in the higher interest rate environment.

 

 

New Mortgage Disclosure Rules Take Effect Today

If you have purchased real estate with a mortgage in the United States you most likely were inundated with various disclosure forms prior to and at the closing. The documents included the Good Faith Estimate, Truth In Lending and a personal favorite, the HUD-1 (a dual-column page for which a magnifier glass and a dictionary should have been included).

In a nod to simplicity and less complex disclosures, the documents are being replaced. Starting today buyers will be introduced to a a simpler loan estimate and closing disclosure under the ” Know Before You Owe” program developed by the Consumer Federal Protection Bureau.

Bid farewell to the good faith estimate, two truth-in-lending forms and the complicated HUD-1. Replacing them are a simpler loan estimate and closing disclosure under the ” Know Before You Owe” program developed by the federal Consumer Financial Protection Bureau.

The immediate beneficiaries of the program are borrowers. In addition to the new forms offering a sense of simplicity, the standardization of the forms will allow borrowers to compare loan offers on an apples to apples basis. For many borrowers, interest rates and loan terms fairly competitive, the variations and added fees and closing costs are now more apparent and easy identifiable.

Yet from personal and client experience one of the new rules, i.e. the final disclosure must be in the borrow’s possession three days before closing is a benefit. The old rules required the disclosure to be provided 24 hours prior to the borrower. The new rule allows more time for scrutiny and additional time to rectify any issues.

I believe the new forms will be beneficial for all parties involved HOWEVER a few caveats:

Learning Curve: While the mortgage industry has been aware of the revisions and the original implementation was scheduled to be over the summer, the reality is there will be some confusion during the 4th quarter of the year. Thus most brokers I know are pushing contract signing to closings to 45 days for transactions inclusive of financing just to add a bit of cushion to the process.

Being Aware of the 3-Day Disclosure: This could be more of an issue for lenders and mortgage brokers as the past disclosures were due 24 hours prior to closing. Thus I am advising my clients to consider closings on Thursday or Friday to allow proper disclosure delivery during the work week.

Last-Minute Credit Reports: Historically lenders would pull a borrower’s credit report the day before or day of the closing to make are there have not been any substantial revisions. While usually not an issue as most brokers advise buyers to avoid large purchases prior to closing, a revision to one’s credit rating can in turn change the interest rate offered and any change within the 3-day disclosure restarts the disclosure clock thus adding a minimum of 3 days to the closing. In addition to the mortgage documents, the transaction contracts would have to be amended by both buyer and seller and if the transactions are contingent or stacked, there could be a domino effect.

Once all parties work with and become familiar with the new disclosure documents will be a definitive benefit to consumers. Yes the learning curve will be steep and I would assume over the next few weeks there will be delayed closing (and full disclosure I am attending a closing on Friday 10/9 representing a family member as their Attorney-In-Fact and I hope not to be delayed).

Most brokers I know have become familiar with the new disclosures and subsequent documents as many of us have taken classes concerning the revisions during the Spring assuming a summer implementation. As a broker I am pleased as explaining a Hud-1 was always a challenge (even with reading glasses) and having the 3-days prior to review, allows me to take clients to lunch and review documents versus a quick coffee and a highlighter.

Additional Links for your review:

Loan Estimate Explainer

Sample Closing Disclosure Explainer