The Time of Year to Winterize Personally

While NOAA suggests winter 2018/2019 if forecast to be mild in Colorado we can never truly be prepared for what winter can bring us from a Thanksgiving Blizzard to wet snow measured in Feet in March. Thus it is never to early to personally “winterize”. I am not going to go into details concerning cleaning of gutters, heat tapes and so forth, instead the following is to make the season of cold and dark more palatable for your personally.

If you do not read the full blog be sure to consider the following hand-cranked radio and USB power: FRX3 Rechargeable Hand Crank AM/FM/NOAA Weather Alert Radio.

Shovels: In The City and County of Denver if you own or rent a home you are responsible for clearing the sidewalk of snow and ice within 24 hours of the snow stopping (4 hours for commercial properties).  Personally having had a driveway bisected by a sidewalk AND an additional sidewalk on the rear of my house I had literally double-duty concerning clearing snow AND as a dog person I try to avoid using salt or related chemicals. A suggestion for a snow shovel: The True Temper 18” Ergonomic Mountain Mover. On a few occasions I did consider purchasing a snow blower but with lack of storage space and with the few major snow dumps receive in Denver I could not justify.

Insulation:The reality is one is not going to install full house insulation post construction however any opening to the exterior i.e. windows, doors, vents and so forth allows cold air in and warm are to escape. Even in my circa 1984 house with R-33 Walls and Ceilings I still went through every fall checking window seals, door frames and vents to see where I could seal against the elements with weather stripping, door sweeper/draft buster caulk, plastic sheeting and so forth. While you may not notice the savings on your gas bill you will be more comfortable. The following video from Lowe’s concerning window weather stripping is helpful and most items can be found in any hardware store from local to national chains.

Power Loss:  Even though most of Metro Denver uses gas for heat and can have demand, electrical is more vulnerable due to overhead lines being weighed down post heavy snowfalls i.e. limbs of trees taking down the lines.  While in my future home I plan to install a back-up generator at present in my condo situation not a viable plan.  In the two years I have resided here I have been through three (3) power disruptions including one that lasted in excess of 6 hours.

An accessible flashlight is a must. I have a few that are rechargeable and plug into a wall outlet thus in the dark easy to find. While used for outdoor pursuits for prolonged blackouts an LED lantern is a great option and safer than candles, just make sure batteries are fresh. Consider a head lamp if planning to be outside i.e. walking the dog. When there is a power outage the darkness sans streetlamps and porch lights can be uncomfortable. Also the headlamp will make you more visible to others including those in cars.

A portable USB and larger USB Battery Pack is invaluable. The portable is perfect for cell phones as many towers have battery back up. Granted your Wi-Fi will probably be down but you can use your cell signal for news and information. The Of note and I know old fashioned a cheap battery powered radio can be an invaluable resource when all the new technology is rendered useless due to a power outage. The larger USB Battery Pack is a better option for Tablets and Computers.

Finally a Cooler, you know the one in your garage that needs to be rinsed our and disinfected. Personally I keep gel ice packs in my freezer at all times. In addition to use makes the freezer run more efficiently. However during a power outage the combination of the ice packs and a cooler may save your perishable foods and extend their freshness and avoid spoilage. Remember open and closing the refrigerator will only exacerbate the loss of cooling AND the light inside will not work.

Finally mentioning fashion in the Headline, if converting your closets to the season and have extra coats not planning on wearing please consider donating to Coats for Colorado or a similar entity to provide to those in need. As my wardrobe skews towards business attire I also donate to Step 13 in Downtown Denver

Next week back to real estate activity…..

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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.

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.

 

For Sale Sign and No Information on the MLS I am Mystified

Last week I was walking to Trader Joes on Colorado Boulevard and detoured slightly seeing a For Sale sign on a home at the northeast corner of 8th Avenue and Jackson Street in Denver’s Congress Park neighborhood. So what do I immediately do; I pop the address into my Engel and Volkers App and nothing comes up!

Now I am mystified so I put the address within www.REColorado.com our MLS service, again nothing shows up!

Finally I took a picture of the sign, looked up the contact information for the firm and sent an inquiry concerning the listing as per traditional services not to be found.

I did receive the following via email the next morning.

Screen Shot 2018-09-17 at 6.42.12 PM

I am not going to opine on REX Real Estate which proudly boasts they purposely do not upload listings to the MLS as per the following from a trade periodical: a full-service brokerage that eschews the MLS, uses technology to displace traditional agents, and charges home sellers a set 2 percent listing fee. Now I understand why the listing did not show up in any of my go-to searches.

Again I am not disparaging any new firm or start-up. I actually encourage and am intrigued by such businesses; while the real estate trade is somewhat old-school and may need some disruption, how is an issue I prefer not to discuss at present..

Now concerning 800 Jackson Street, the asking is $650,000. Based on the condition and my comparable knowledge, I would put the correct valuation closer to $525-$535,000.

On their site if you scroll down there is an option for comparable’s and it lists three(3) as follows:

747 Cook St:              Sold for $815,000 or $245PSF

823 Monroe St:         Sold for $811,000 or $402 PSF

811 Cook St:              Sold for $781,000 or $311PSF

Thus based on their generated comparable’s this makes 800 Jackson Street look like an absolute bargain at $650,000 or $269 PSF. Yet…..

  • The three comps provided by Rex Real Estate are on better blocks with stronger housing stock and urban fabric
  • Their homes are south of the actual Congress Park.
  • All three homes are in better condition inside and out.
  • All three homes are mid-block where as 800 Jackson Street is on a corner abutting a one-way west-bound arterial and literally ½ block west of commercial development and Colorado Boulevard including a gas station less than 500 feet to the east.

So being a broker you may ask what would I use as a comparable?

I would use 601 Cook Street for the following reasons:

  • Similar neighborhood.
  • Adjacent to 6th Avenue, a one-way arterial east-bound.
  • Similar lot size and design.
  • In better overall condition.

The sales price on 601 Cook: $540,000 or $213 PSF within the last year.

My gut is if or when 800 Jackson Street does in fact sell I believe the sale price will be closer to the low to mid $500’s, this is just my prediction. Now someone may absolutely fall in love with the house, the location the layout and so forth and pay the asking however assuming they may be working with a full-service knowledgeable real estate broker, I assume that broker will provide comparable’s that are more alike and will of course assuming financing order an appraisal.

I will be keeping an eye on this one, just not via the MLS will use Assessors Records.

Of note, next Monday October 1, 2018 I will not be publishing as I will be in Asia. Will post the following week.

 

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

 

 

 

 

 

Denver Real Estate Market seems to be slowing yet irrational exuberance has not been tempered just yet

Preparing for the Next Cycle

Earlier this week REColorado AKA our Multilist service advised of a “Summer Cooldown” in Metro Denver. Anecdotally we are witnessing an increase in available inventory, longer periods between on market to under contract and pricing that seems to be adjusting to the new reality of lessening demand coupled with higher interest rates.

Thus I was amused to see a new listing in my neighborhood of Cherry Creek, which seems to defy conventional logic. I am not the broker, I am not the owner/seller and I have no idea what the motivation or rationale concerning pricing is HOWEVER I will keep an eye on this one just for my own edification.

While I will not disclose the exact address, the residence is within the 300 block just north of the Business Improvement District aka Cherry Creek North. Many could consider this block prime (I am mixed as it has a concentration of condominiums, curb-cuts and cut-through traffic but I am also trained as an urban planner thus I see what many prospective buyers do not).  Thus owners are literally a few hundred yards away from a wine bar, artisanal coffee, restaurants and so forth. Thus true urban lifestyle with a suburban design and space.

Concerning pricing, here is the history of the residence:

  • February 1999:         Sold for $620,000/$146 PSF ($937,837 in 2018)
  • May 2006:                 Sold for $950,000/$223  ($1,187,527 in 2018)
  • -Of note top of the market, yet good for the seller, 53% gain in 7 years.

 

  • October 2015:           On market for $1,595,000/$376PSF ($1,695,868 in 2018)
  • Did Not Sell: if sold would be a 68% increase over the last sale at the top of the market during the last up-cycle.

 

  • November 2015:       Price reduced to $1,495,000/$352PSF ($1,589,544 in 2018)
  • -Did Not Sell
  • July 2018:                  Place on market for $1,650,000/$388PSF

At $1,650,000 I wish the sellers the best of success. If they are indeed successful selling at asking they will have matched inflation, which is commendable considering, they purchased at the top of the market. Of course when factoring in upkeep, taxes, interest on the mortgage and so forth the calculus changes however they have also had a roof over their heads.

Just for fun I compared the returns above against the S&P 500 with dividend reinvest and not considering inflation, just in real dollars:

Between February 1999 and May 2006

  • The residence appreciated 223%
  • The S&P 500 appreciated 15.5%

Thus residential real estate was the way to invest over those years.

Between May 2006 and June 2018 (most recent S&P Calculator month)

  • The residence (assuming a sale at asking) appreciated 75%
  • The S&P 500 appreciated 172%

During the post Great Recession period we have witnessed the values of real estate and equities rise in tandem. Based in the period from 1999 to 2006 real estate was the better investment. Yet from the Great Recession to today we have witnessed equities and real estate both escalate in tandem. While I am not an economist some would argue bubbles are forming or have formed.

In a Continuing Education class this past week we were collectively discussing the return of non-conforming loans; the ones that brought on the last recession i.e. non-income verification, low or no money down mortgages and other exotic mortgage vehicles. Granted most mortgages are repackaged and sold to investors through various channels.

With interest rates going up and inflation a distinct possibility not to mention trade wars, currency issues (see the Turkish Lira) and investors chasing more aggressive returns…..my advice, sit on the sidelines or better hedge and buckle your seat belts as the old adage goes History Repeats Itself and we all have short memories.

 

 

 

 

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…..

 

How did The Brady Bunch do in The Real Estate Market

Remember The Brady Bunch the iconic television series of the late 1960’s. Well the famous house (the façade shown in the opening and closing credits) is up for sale; the first time since 1973.

Now I always questioned why Mike, an architect would design the children’s bedrooms to be triple occupancy and share a Jack-and-Jill or a Greg-and-Marcia bathroom. Mike and Carol’s bedroom had an en-suite and Alice had her room (see floor-plan link below). Yet the children ensconced in their shared bedroom until Greg had the brilliant idea to convert Mike’s study and later the attic to his own pad including beads and mood lighting. And those kids having to play in the yard with fake grass. I assume Mr. Phillip’s; Mike’s boss was paying him well.

Floorplan of the fictional Brady Residence

The Listing as presented on Zillow: 11222 Dilling Street, North Hollywood, CA 91602

Do to the popularity a low fence had been installed: Brady House Then and Now

Back to the real estate. While the home’s façade was famous the actual filming of the series was on a lot and not in the house. Now the house has not changed much since 1973 as the interior shots show via Zillow.

I was curious on how the fictional Brady’s would have done if they actually owned the house. Now realistically the kids would have moved on by now, or so I hope. Or Jan stayed at home with the parents to take care of them. Greg and Carol would probably be challenged to install a stair-lift on the contemporary staircase. And Alice’s room would probably now be the room of their live-in aid or Jan’s abode.

  • In 1973 the house was purchased for $61,000
  • Adjusted for inflation, that $61,000 would be $346,200 today.
  • The asking price is $1,885,000.

Thus not a bad windfall. The sad news is most likely the next owner may consider razing the home due to its 12,500 SF lot in Studio City, which is a geographically most attractive area of West Los Angeles. If one were to renovate to today’s code and tastes, most likely $400K or higher. Of note being the most photographed house in the United States only 2ndto The White House (the house is surrounded by mature shrubs which has not dissuaded visitors) you are guaranteed all day voyeurs.

Thus The Brady’s at asking will net over $1.5M in 2018 dollars before commissions.

If you may be interested my firm affiliation  Engel and Volkers does have shops in the Los Angeles area.

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.