Taking a Loss on Real Estate it Happens

With the run-up in real estate prices in Metro Denver since The Great Recession we are finally witnessing the cooling of the market memorialized in the New York Times a few weeks ago in an article titled: Housing Market Slows, as Rising Prices outpace Wages.

While those sellers who have owned their residences for over 3 years are probably fine with selling and gaining  a small profit; over the past few months I have written about a few residential sales which has actually taken a loss via actual recorded sales price and additional losses when factoring in commission and of course inflation which seems to rarely be factored into the transaction.

In the present environment of housing prices adjusting downward, interest rates continuing to increase and signs of instability in the equities markets those taking losses on their residences may become more commonplace depending when they purchased and how motivated they are to sell.

Of note in general a loss on the sale of a home is NOT deductible on one’s income tax. In general a loss concerning real estate is only deductible when the property has been used for business or investment purposes. One tip if a loss may be forthcoming consider turning the residence into a rental and then sell; the property is now considered related to investment. Of course one would need to consult with their professional tax advisor or financial planner to ascertain the legality and proper filing but this is an option.

I predict we will start seeing some losses on homes in the Denver Metro area that had been purchased within the last 12-36 months when the market seems unstoppable concerning price appreciation coupled with historically low interest rates. While it may seem counterintuitive when the employment market is at its zenith that housing should be lagging yet that is generally how the market behaves. This is partially due to interest rate impacts, inflation eroding the value of money and other factors. This is not a new phenomenon; happens with every business cycle. This is why longer-term holds on housing usually generates a hedge against inflation but the key is long-term i.e. 7,10, 20 years out. A few examples if I may including my personal residence.

Two years ago (April 2016) I sold my personal residence for $535,000. The net after commission and closing costs was $520,000 (and no I did not pay myself a commission).

I purchased the house in October 1989 for $140,000 or $266,692 in inflation dollars. Thus my actual net gain was $253,308….no I am not complaining. On a monthly basis I made about $800 +/- and when factoring in taxes, maintenance, upkeep…..lets just say I had a house over my head.

Now when I bought the house in 1989 the Denver housing market was in a deep regional recession two years post Wall Street Crash of 1987. The seller of the house actually bought the residence in 1984 for $200,000 from the developer, another high-point of real estate in Denver that decade, here are the inflation adjusted #’s:

  • 1984: $200,000 (or $238,566 in 1989 Dollars)
  • 1989: $140,000

Thus not including commissions in real dollars the seller not only took a $60,000 loss from his purchase to the sale in 5 years, when factoring in inflation i.e. $38,566 and commission (6% at $140,000 = $8,400) the seller lost $45,000+ or almost a quarter of the value of his home in that 5 year period and the loss was not deductible.

As mentioned I sold the house in April 2016 for $535,000.

The buyers actually resold the house in June 2017 for $560,000 due to a relocation thus even after commissions and closing costs they did OK. From what I understand the new owners plan to reside long-term and thus are somewhat insulated from the pending adjustments in housing prices I believe will be headwinds in the near future.

Denver is not unique in this situation. In New York where I also hold a license there was a major loss on a truly trophy condominium apartment as follows:

The single biggest sale last month (September 2018), at $42 million, was a penthouse covering the entire 77th floor of One57, the vitreous skyscraper in the heart of Manhattan’s Billionaires’ Row, at 157 West 57th Street. Monthly carrying charges are $15,214. The unnamed European seller took a loss, however, having paid nearly $47.8 million for the unit in May 2015. The 6,240-square-foot apartment has four bedrooms and five and a half baths, not to mention breathtaking views.

While a $6M loss is painful when you consider the apartments were delivered with interiors unfinished, at that price-point you bring in your own designers and architects which can easily add $500,000 to $1M+ in finishes AND the monthly carrying charges i.e. HOA fees ranging increasing from $12,500/month to $15,214 at the time of sale that is over $150,000 annually just in common charges or another $500,000 paid during ownership. Thus all losses are relative; as we say on Wall Street you will never sell at the high and buy on the bottom.

A house is a home and should not necessarily be considered an investment or a hedge against inflation, it is shelter first and foremost.

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Denver weather chills as does the real estate market and my visit to Hong Kong

While some brokers continue to suggest the recent slowdown in sales and significant and immediate price reductions is seasonal (and they may be correct) a few outlets are advising the slowdown in the market may be more serious. An article from The New York Times titled  Housing Market Slows as Rising Prices Outpace Wages provided their national and international readership with an interesting overview of Denver which is not flattering. Even during my recent trip to Hong Kong more than one person when realizing I reside in Denver mentioned the article.

Related according to the monthly report from the Denver Metro Association of RealtorsIn September (2018), housing inventory continued to move higher, even though it typically decreases this time of year, and home prices dropped nearly 5 percent since its record-peak highs this past May and June. Good for prospective buyers not necessarily welcome news for sellers.

Some of my readers have advised privately that I am a pessimist as I have been advising a downturn or the moving towards a more stable market. I do not consider myself a pessimist; more a realist. With 20+ years as a broker literally been there and gone through that. While I too have been impressed with the most recent expansion post The Great Recession I have been concerned about headwinds in the market from out-migration to increasing interest rates to incomes lagging housing price appreciation.

On the lighter side Hong Kong was as usual a frenetic, dynamic city which continues to be considered the most expensive housing market in the world. If you are feeling cramped in your residence or being priced out of the local market, the following quote excerpted from an article concerning a participant in the government sponsored Hong Kong housing lottery may change your prospective.  As published in The South China Morning Post

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(Above a housing block in the Quarry Bay neighborhood on Hong Kong Island)

“Feng Xinmei, a 46-year-old part-time construction worker, said she, her husband, two children and mother-in-law rented a 200 sq. ft. subdivided flat for HK $8,000 a month.

To place this in prospective, a undivided flat means the 200 sq. ft. Ms. Feng rents is part of another apartment. Their rent in US Dollars is $1,021/month. The average hotel room in the United States is 325 sq. ft. or 125 sq. ft. larger than the living space for this family of 5!

While I have in general been against the concept of slot homes due to its impact on the existing urban fabric of traditionally single-family and duplex neighborhoods; all of a sudden Hong Kong makes such density look palatable even preferable.

 

Charting the Market in One Property over the Past 5 years the Trend says Caution

Per my past blogs I am not providing the address of the following (I can advise within 1 block of King Soopers and adjacent neighborhood retail) I am using this listing as an indicator of the market and possible predictor of the near future. The residence is a historic 1/2 duplex, part of a grouping of townhomes dating to c. 1908 located in a desirable central Denver neighborhood yet addressed and fronting on a busier one-way Avenue.

With 3 bedrooms, multiple levels, approximately 1,800 SF finished square feet, reserved parking and low HOA/taxes an attractive listing and opportunity for the correct buyer. Personally as a prospective buyer and real estate broker I see challenges from being semi-detached i.e. sharing a common wall to the frontage on a busier roadway to reserved yet uncovered parking but this is the logical side of me.

I decided to look at the history of this listing as I pass it almost daily on my commute from Cherry Creek North to Downtown Denver.

The residence first came on the market as follows listed with a full-service brokerage offering a 2.8% co-op:

  • 7/9/13:          Initial Price:               $360,000
  • 7/9/13:          Price Increase:           $375,000
  • 7/11/13:        Goes Under Contract
  • 8/2/13:          Sold and Closed:        $375,000

The same unit enters the market again with a full-service brokerage offering a 2.8% co-op as follows:

  • 7/13/16:       Initial Price:               $585,000
  • 7/21/16:       Price Reduction:        $574,900
  • 9/11/16:       Listing Expires

Five (5) days later the listing reappears with a different full-service broker and brokerage firm offering a 2.8% co-op yet $35,000 lower asking.

  • 9/16/16:       Initial Price:               $535,000
  • 9/26/16:       Goes Under Contract
  • 11/21/16:     Sold and Closed:        $536,000

Thus the seller who purchased in 8/13 for $375,000 has sold 3 years later for $536,000 or $161,000 gross profit in excess of 40% before commissions, fees and closing costs. Over three (3) years an attractive return coupled with being a nice abode.

Now fast forward to June 2018 or just shy of 18 months after the last purchase. The unit is placed on the market with a fixed fee brokerage and offering a co-op of 2.5%

  • 6/7/18:         Initial Price:               $590,000
  • 6/23/18:       Price Reduction:        $585,000
  • 8/11/18:       Price Reduction:        $575,000
  • 8/30/18:       Listing Expired

If the seller above did sell for $575,000; their gross profit would be $39,000. After the fixed fee commission and the 2.5% co-op to the selling broker AKA the buyer broker their net profit would be approximately $22,000 before closing costs and Title Insurance. Not to shabby for 18 months, basically generating $1,200/month in profit HOWEVER, the unit did not sell.

The unit has been placed back on the market as follows with a full service broker (a firm/broker/team that is quite well-respected and knowledgeable) and a co-op of 2.5%.

  • 9/14/18:       Initial Price:               $575,000

Now let’s assume with the new broker/brokerage and the co-op, let’s assume 5% of the closing purchase price. My gut says the unit will close between $545,000 and $555,000. Let’s see what the net is after commission of 5% sans closing costs and Title Insurance:

  • At $575,000 – 5%($28,750) = $546,250
  • At $567,500 – 5%($28,375) = $539,125
  • At $560,000 – 5%($28,000) = $532,000
  • At $553,500 – 5%($27,675) = $525,825
  • At $545,000 – 5%($27,250) = $517,750

Thus not even considering inflation which is now evident or the Time Value of Money, unless this sellers assuming a 5% commission structure transacts at $565,000 or above a strong possibility of actual net loss over the last 18 months.

I understand the initial listing with a fixed rate brokerage as in a strong sellers market there is this assumption that all full-service brokers due it place in MLS and other distribution channels and wait for the phone to ring. I with 3 decades as a broker can attest this is far from reality, however the perception continues.

Yet consider this, while listed with the fixed price brokerage for three months the seller  I assume was paying on a mortgage, thus those 3 months of payments are not coming back and doubtful much impact towards principal. With the new listing I would not be surprised to see reductions before the end of September.

Granted there may be new prospective buyers who have not seen the listing prior. Yet with continued forecasted interest rate hikes and a general slowing of demand, whether seasonal or I assume more indicative due to a lack of demand I would be surprised if the unit sells at the asking of $575,000.

Again my gut advises the unit will sell for between $545,000 and $555,000 assuming no Fall Surprise in the equity markets; not much more than when sold two years prior and if factoring in closing costs and inflation, an actual monetary loss. Will keep all posted.

 

A Broker Makes a Rational Offer for his Future Residence the Results

My wife and I have been looking for a home (for followers of my blog we sold our primary residence of just shy of 30 years back in April 2017). We have kept our eye on a listing in one of Denver’s most desirable and stable (concerning values over the long-term) neighborhoods. The home we expressed interest in is small (similar houses have been expanded), requires updating to present code including electrical, no garage and the basement shows evidence of past and more recent water damage.  Coupled with all the above information the most recent index by Beracha, Hardin & Johnson Buy vs. Rent Index suggests we would be better of renting than purchasing at present yet as brokers we too sometimes operate on emotion and we are looking longer-term.

While the index does somewhat influence my decision; being a logical broker I conducted my due diligence concerning comparable properties in the same block on the same side of the street. I went back a few years and extrapolated the comparable’s using an inflation calculator to justify our offer.

While I will not disclose the address, the asking based on above grade SF is approximately $625 Per Square Foot (PSF). The comparable properties all have similar lot size and as mentioned on the same side of the street on the same block:

  • Comp 1: Sold – 3/2018:

Sold for $459/PSF Above Grade

Inflation Factor: N/A

-This home is in meticulous shape including the architecturally designed addition on the rear with the expanded kitchen, family room with fireplace, 2-car garage and professionally landscaped front, rear and side.

  • Comp 2: Sold -10/2017

Sold for $417/PSF Above Grade

Inflation Factor: $429 PSF Above Grade

-While I have not seen the inside except from the exterior new lighting, new windows, architect-designed extensions on the rear, garage parking to match. It is a duplex and both sides sold together as one structure. Each 1/2 of the duplex has 3 bedrooms and 2.5 bathrooms, larger than the subject property.

  • Comp 3: Sold – 6/2017

Sold for $532/PSF Above Grade

Inflation Factor: $546 PSF Above Grade

-While used as a pied-a-terre the interior condition is similar. The kitchen was outdated however larger space, has a garage and deep south setback with a lot that is 1,000+ SF larger than subject property.

  • Comp 4: Sold – 7/2015

Sold for $395 PSF

Inflation Factor: $420 PSF Above Grade

The house is very similar to Comp 1 (next door) yet narrower lot and smaller size overall. Excellent design and layout. The rear and upper extension were beautifully designed and executed with functionality i.e. den w/ fireplace, expanded kitchen with breakfast area, 2 car garage made of brick to match the historic urban fabric coupled with a professionally landscaped yard.

Thus concerning the comparable properties using 2018 dollars the prices per square foot above grade range from $420 to $546. While 4 homes do not make a proper statistical average would be $463.50 PSF based on inflation with the $546/PSF sale skewing the average upward do to limited sample size. Of note the Median is $444/PSF.

Many of my peer brokers believe the peak of the market was 6-12 months prior as prices are beginning to slip, inventory is increasing coupled with rising mortgage interest rates.

Based on the $463 PSF average noted the house we made the offer upon should be priced at approximately $625,000 which may even be somewhat aggressive as the comparables are homes that have been extensively renovated or updated and all include alley access garages.

We offered $560 PSF or 20% above the comparable properties identified on a PSF basis.

Our offer was promptly rejected as the seller is asking $625 PSF.

While no fault of the out-of-state seller if /when the residence goes under contract and assuming there is an appraisal there may be a rude awakening. We could have offered full price and use the appraisal and inspection contingencies to eventually close at a lower market oriented price; however that is not our method of operation.

We made a viable offer, provided statistical pricing guidance and was subsequently rejected based on I assume emotion and/or irrational exuberance concerning valuation. I have been incorrect before and the residence may actually sell for asking (of note at present on the market almost two months and one price reduction to date); on this one we like it (we do not love it) however we willing to wait it out or pass altogether as inventory increases and pricing pressures are forecast to be in our (buyers) favor.

 

The Avenues of Valuation Demarcation Concerning Cherry Creek Residential

For many of us experienced real estate brokers there was a time when Cherry Creek residential was literally split into two distinct neighborhoods, Cherry Creek North (north of 1stAvenue) and Cherry Creek East (south of 1stAvenue).

At present brokers and prospective buyers seem to use the term Cherry Creek to represent the area generally bounded by 6thAvenue on the North, Alameda Avenue on the South (from east of the Mall), University Boulevard on the West and Colorado Boulevard in the East.

While the housing styles are similar throughout the greater Cherry Creek neighborhood including duplexes, row houses and more recently condos and a few very pricy single family homes I have been curious from a broker’s perspective concerning demarcations within the neighborhood.

I decided to analyze the Cherry Creek Neighborhood from Steele Street on the West to Colorado Boulevard on the East, an area that is all residential. I decided to use various avenues as demarcations as based on experience residences north of 3rdAvenue (which has become a bypass for 1stAvenue) seems to always be more expensive and inventory south of 1stAvenue due to size and design is the lowest cost in the area. Thus I wished to validate my experience with statistics of what is on the market at present.

From 3rdAvenue to 6th Avenue -On market: 53 residences

-Avg Layout: 3BD/5BA

-Above Grade SF: 2,812 SF

Avg. Asking: $1,839,000 or $527.86 PSF

-Days on Market: 53

-Average Year of Construction: 2005

From 1stAvenue to 3rd Ave -On market: 47 residences

-Avg Layout: 3BD/4BA

-Above Grade SF: 2,404 SF

-Avg. Asking: $1,049,500 or $500.34 PSF

-Days on Market: 47

-Average Year of Construction: 2004

From 1stAvenue to Alameda Avenue -On market: 26 residences

-Avg Layout: 2BD/3BA

-Above Grade SF: 2,047 SF

-Avg. Asking: $877,450 or $459.10 PSF

-Days on Market: 76

-Average Year of Construction: 2006

Some will suggest the new construction north of 3rdAvenue is skewing the numbers upward and the condos south of 1stAvenue bring down prices. Thus I have also included the asking based on above grade Per Square Foot to provide a more accurate representation.

As one traverses north from Cherry Creek (the waterway) towards 6thAvenue there is a continual uptick in asking prices (and sales data).  North of 6thAvenue the urban fabric changes drastically to majority single-family houses of the Congress Park neighborhood, thus not included in the analysis.

Thus if considering buying or selling, the sweet spot east of Steele Street seems to be between 3rdand 6thAvenues.  Even more impressive purchase or sell just north of the Cherry Creek North Business Improvement District i.e. University to Steele, 3rdto 6thAvenues, just be aware older housing stock and longer days on market yet an impressive $600+ PSF:

From 3rdAvenue to 6thAvenue University Blvd to Steele St. -On market: 11 residences

-Avg Layout: 3BD/4BA

-Above Grade SF: 3,043 SF

Avg. Asking: $1,650,000 or $603.02 PSF

-Days on Market: 89

-Average Year of Construction: 1997

Happy House Hunting

 

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

*In 2018 Dollars: $1,050,500

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

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

*In 2018 Dollars: $879,526

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

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

*In 2018 Dollars: $875,540

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

After multiple iterations on the market and price adjustments:

2/24/14: The unit sells for $764,276

*In 2018 Dollars: $812,224

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

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

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

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

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

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

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

Is the Bond Market Forecasting a Recession Sooner than Later

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For Denver:

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

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

S&P 500:

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

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

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

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

 

 

 

 

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

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

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

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

Here are just a few select examples:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

The lessons are simple:

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

Is Your For Sale Residence Instagram Influencer and Hashtag Ready

I just finished an article in The New York Times titled Hashtag Open House concerning brokers hiring influencers to promote their listings. While the trend seems to at present be relegated to Los Angeles and New York City is this a marketing program a seller of a residence or their broker consider?

With a marketing and public relations background; honestly I rolled my eyes while reading the article. While I understand the concept and the desire to secure eyeballs onto a listing; will such a program and the costs associated truly sell one’s residence?

Thus I decided for fun to distill my thoughts and I welcome comments:

  • Influencers: My first question is the influencer presenting and/or penetrating the audience for the listing? Honestly when I see a multi-million dollar listing being splashed across Instagram and other channels, promoted by an Influencer I question the Return on Investment (ROI). Granted if someone can present me with an influencer that is truly targeting the prospective buyers of one of my listings I would entertain the idea. However when marketing a larger, top 2% of the market price point I have to question if the influencer is capturing the demographic I wish to target including high-net-worth, liquidity, professional educational attainment and employment and so on. My personal view is if I am not attracting qualified prospective buyers all I am attracting is voyeurs.

 

  • Voyeurs: Hey I have nothing against voyeurs. Actually I like them as A) I hope I have captured their interest, B) at some time in the future they may be a client either on the buy or sell side and C) more eyeballs mean potential sharing and potentially attracting a buyer. Now for my concern: more eyeballs may also invite nefarious activity. Granted this is nothing new; as brokers we post pictures distributed among various channels i.e. Multilist, the Internet, Social Media and  open houses have been used by those up to no-good to preview a potential opportunity for future theft, squatting, vandalism and so forth.

 

  • Is One Selling a Residence or Selling their Broker: Yes I may be old-school (it happens with 25+ years in the business) yet do such activities sell a residence or sell the broker? In general from discussions with experienced peers it seems very few open houses actually sell the home to a visitor to the open house. Please do not misunderstand; I believe open houses can be a valuable tool for both sellers and brokers including assessment of comments/responses concerning presentation, pricing, interest and so forth. Of course for brokers hosting an open house an opportunity to meet prospective clients, both sellers and buyers.

The whole concept of being Instagram ready is not new. I always suggest a prospective seller consider professionally photographed images as a picture is truly worth 1000 words. In addition for certain listings, staging and related activity may enhance the marketing program. Personally I view staging, as a 3-D advertisement coupled with presenting a fantasy that can becomes one’s reality.

And while the article mentions events and immersive marketing this is nothing new in California! A Builder Hires Model Family to Sell Homes. However even California builders were late to the party as live mannequins have been used in retail (Selfridges c. 1920’s) as well as entertainment i.e. Area in NYC in the 1990’s.

BTW if you wish to see truly challenged listings: http://terriblerealestateagentphotos.com

I will be curious how the Instagram and Influencer marketed listings work out. I comprehend the opportunity concerning new developments, a multi-unit building, rentals, a market with competition within the price-point and so forth. However for exclusive listings, the one’s that are truly unique, bespoke, rarified well……sometimes discretion can be most attractive.