Why Continued Positive Comments About the Housing Market Scare Me

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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As a Buyer What Your Broker Wants You to Know

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

Happy House Hunting.

Is Irrational Exuberance Giving Way to Rational Behavior

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

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

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

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

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

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

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

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

On the Market at Present:

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

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

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

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

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

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

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

On the Market at Present:

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

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

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

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

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

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

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

 

 

 

 

 

Opportunity Knocks in Cherry Creek North

Even in an overheated market opportunity knocks.

Every day I scan www.REColorado.com which is the MLS for Denver metro concerning potential opportunities including new listings, price adjustments and days of market. If the property is priced correctly and within a desirable area it will usually go under contract within days if not hours due to pent up demand and limited supply.

As many of my readers know I too am in the market as I sold my primary residence a few months back. However unlike many I have the luxury of living in what I hope is a temporary situation with below market rent thus I am willing to wait out the market. And while I may be incorrect; I believe the market will continue to slow in the middle to upper price ranges. While I am not suggesting a hard fall; existential issues may happen i.e. world events, interest rates and a getting long in the tooth bull market in equities…..my personal view business cycles have not ended and memories are short.

Yet for those looking long term I wanted to provide some real examples of properties presently for sale that have languished on the market yet may provide a good opportunity for someone looking longer term.

Cherry Creek North (1st Ave to 6th Ave, University Blvd to Colorado Blvd): Arguably one of the most in-demand neighborhoods in Denver with asking prices to match. Between the shopping district, The Cherry Creek Shopping Center coupled with easy access to Safeway,  Whole Foods and Trader Joe’s and a diversity of housing styles all within close proximity of downtown, its true location, location, location.

I pulled some statistics as follows:

Sold over the last 6 months:

Average Sales Price: $941,000

Per Sq. Ft. Above Grade: $447.73

Total Per Sq. Ft. i.e. including basement/unfinished: $340.39

On Market at Present:

Average Asking Price: $1,085.000

Per Sq. Ft. Above Grade: $484.83

Total Per Sq. Ft. i.e. including basement/unfinished: $394.84

Granted the numbers above may be skewed due to larger homes, new construction and of course location, location, location. However there are a few bargains available. Please note I have provided “my prediction” concerning closing sale price. This is just my personal forecast as I have no relationship with the sellers or the brokers listing the units and thus have no idea concerning motivations. Thus consider my predictions based on if I was representing a buyer and they asked me what they should offer and eventually close at.

525 Jackson Street: Located in the eastern part of the neighborhood 525 Jackson Street is a smaller 28 unit condo building on the NWC of 5th Avenue and Jackson Street, a pretty tree-lined quiet block. Built in the 1940’s the building is basic with some art moderne elements i.e. glass blocks illuminate the stairs (it is a 3-story walk up). The condos have nice expansive layouts, many closets and off-street parking, individual storage units plus a laundry/bike room.

At present there are two units for sale. Of note some of the challenges for some include no rentals allowed i.e. investors need not look. Per the bylaws there are various restrictions concerning air conditioners. There are no amenities beyond off-street parking, individual storage units and the laundry/bike room. Yet the building (new windows) and grounds (professionally maintained) fit right in with Cherry Creek’s streetscape.

525 Jackson Street #102: This is a smaller 2BD/1BA with 814 SF. The unit has been renovated including granite countertops, a designer bathroom and a unique tin ceiling in the master bedroom. Hardwood floors and ample east sun filtered through mature landscaping. This is a charming unit with an easy layout. Some may object to the 1st floor location and the smaller size, however at $350 PSF with an asking of $285,000 one can afford the Cherry Creek lifestyle for an entry-level price. My prediction concerning closing sale price: $250-$265.

525 Jackson Street #209: This is a larger 2BD/1BA with 917 SF. The unit has been partially renovated with a nice open kitchen. The bathroom is closer to original. It is a corner unit thus nice cross ventilation as it faces north and east. Windows have custom shutters, there are ample closets including 2 walk-ins and 3 hallway and off-street deeded parking. Asking is $299,000 or $326 PSF. My prediction for closing sale price: $270-$285.

Of note the last resale was unit #306, top floor (a walk-up building), nicely renovated including interior swamp cooler vent from the building common area system. An expansive 600 SF one bedroom which was asking $250K and sold for $255K in June 2017. The interior design and finishes were truly top-notch.

264 Harrison Street: A fourplex row house this complex is unique as it is a row house thus no common HOA fees; each unit is fee-simple and sits on its own tax lot. 264 Harrison has been through multiple and dramatic price adjustments. This is not a row house for everyone. The positives are the 2-car attached garage, modern, timeless design by a well-respected firm, Arquitectonica and a unique multi-split level design with the 2 bedrooms, one located on the 1st level, the master on the 3rd level and the middle level constituting the entertaining areas. There is a small private backyard and a balcony off the kitchen. The challenge with this unit is its location; the rear is adjacent to Colorado Boulevard (yet there is a 6′ brick sound wall  coupled with mature landscaping). The interior is dated including the appliances and cabinetry original 1984 with an interior palette of colors more associated with Santa Fe versus Denver. At present asking $474,950 or $287.85 down from $549,900. The value play, the neighboring unit 266 Harrison sold for $535,000 in April 2017. Granted it was completely renovated including updated interior including granite kitchen and Kitchen-Aid appliances, mechanicals, new windows, gas fireplace, built-in surround sound system, rear landscaping and so forth. However if one is willing to invest some dollars into renovation the value is there. Also sans HOA fees additional affordability and no restrictions concerning rentals. Please note I am in total disagreement with Zillow’s valuation of $501K which I assume is based on the sale of neighboring 266 Harrison. My prediction for closing sale price: $415-$440.

149 Harrison Street: Located on the west-side of Harrison Street i.e. not on Colorado Boulevard, a true single-family home for under $1,000,000 in Cherry Creek North. Originally a duplex and part of a larger 4-plex development the two units were combined and the lot separated allowing for a true single-family home on a standard 50’ x 125’ lot back in 2012. This home is not for everyone as 1) it is a ranch thus no basement or 2nd level. While offering 3 bedrooms and 3 bathrooms it is within a tight 1,826 SF. The yard is fenced in; there is a 2-car garage. However for comparable pricing of townhomes on the 100 block of Harrison Street one can own a single-family and the lot value (closer to the main business district similar lots are asking $900K). Yes there is a discount for being on Harrison Street across from Colorado Blvd and the eastern part of the neighborhood. However for a true SF home, renovated, newer mechanicals and materials all for $764,900 or $419 PSF down from $795,000, may be a good option for the buyer who desires a true unattached residence and possible future equity appreciation due to the lot with its G-RH3 zoning. My prediction for closing sale price: $725-$740.

Happy Hunting

July 2017 Statistics Show The Denver Real Estate Market Is Cooling

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

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

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

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

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

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

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

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

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

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

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

Head and Shoulder Pattern in Denver Real Estate

As readers of my blog know I am somewhat a statistician as I look at various statistical measurements including the well respected Case-Shiller index concerning housing costs. Please note statistics are similar to an appraisal; they are a look back and not necessarily a look forward. I also believe history repeats itself as I have been a broker for 20+ years and have watched with interest the effects of business cycles on our real estate market.

Please note I am not advocating the following analysis concerning a Head and Shoulders pattern adopted from the stock market HOWEVER housing prices in general trend with the stock market. Thus reviewing the latest statistics and graph patterns I noticed a head and shoulders pattern-taking place in the Denver (and other) housing markets: The following is a graphic of a Head And Shoulders Bottom as related to equities:

H_and_s_bottom_new

Per Wikipedia: This formation (Head & Shoulders Bottom) is simply the inverse of a Head and Shoulders Top and often indicates a change in the trend and the sentiment. The formation is upside down in which volume pattern is different from a Head and Shoulder Top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. A corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.

Another difference between the Head and Shoulders Top and Bottom is that the Top Formations are completed in a few weeks, whereas a Major Bottom (Left, right shoulder or the head) usually takes a longer, and as observed, may prolong for a period of several months or sometimes more than a year.

Screen Shot 2017-08-11 at 8.41.30 AM

In May 2017 according to the Case Shiller index the average home price in Denver reached $456,100 which is 41%+ higher than the previous peak experienced in Denver in August 2006 which many will remember was the pinnacle before descent into the Great Recession.

While the graph is not the easiest to comprehend yet the visual is strikingly similar to the Head and Shoulders Bottom, the following is the pricing and trend over a 17-year period, which I have mentioned in previous blog posts including the pricing history and activity of a home in Country Club.

  • 17 years: Average Annual Increase: 5.8%
  • 10 Years: Average Annual Increase: 4.6%
  • 3 Years Average Annual Increase: 10%
  • 1 Year Average Annual Increase: 7.9%

The average cost of a home in Denver throughout the past 17 years:

  • 2000: $230,000
  • 2007: $313,500
  • 2010: $290,000
  • 2014: $350,900
  • 2016: $422,800
  • 2017: $456,100

Are times and trends different from the Great Recession at present? Yes. Lending standards have tightened, sub-prime lending seems to be under control and we continue to be in a Goldilocks Interest Rate environment.

However just on a business cycle trend I have some concern and this does not include outside influences i.e. saber rattling concerning North Korea which impacted the equity markets worldwide yesterday with the largest point downtown since May 17th, 2017.

I am not a market forecaster however based on the statistics and graphs presented in this blog my level of concern for a retrenchment in prices is ratcheting upward. We are witnessing price adjustments in the upper-end of the market and if interest rates were to increase we would see affordability challenged further and average prices go down. Not necessity a negative as we continue to be in a seller’s market and average buyers are challenged concerning affordability and inventory, not a positive long-term trend for our housing market. I am not making any predictions, just showing statistics and voicing some concern.

 

 

Is A Real Estate Bubble in Colorado’s Immediate Future

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

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

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

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

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

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

The following is excerpted from the AOL Finance article:

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

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

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

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

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

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

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

Denver Now 3rd for Year over Year Price Appreciation. Sustainable?

The most recent Case-Shiller Index for Metro Denver shows continued strength in our market which is now at #3 behind Seattle and Portland for price appreciation. Within the last year the price appreciation for Denver has been 7.9%, which is very, very healthy (nationally the increase was 5.6%). Even more interesting is the following statistic from the report: “Denver’s Case-Shiller home price index in May rose to a new record of 198.32. That means that local home resale prices averaged 98.32 percent higher than they were in the benchmark month of January 2000, based on non-seasonally-adjusted data.”

Yes as a broker I should be celebrating. However I have been curious about business and real estate cycles as I have learned over the year’s lessons from history should be respected.

Case in point a charming house on a nice corner lot in one of Central Denver’s most desirable neighborhoods recently came in the market. The house is of a desirable size with 2,000 SF above grade and a fully finished basement with 1,300 SF. In addition the home is located within a most in-demand public elementary school which is within walking distance.

I decided to do a title search to see the activity on this house as it relates to the Case-Shiller index. Fortunately I could go as far back as 1992. Here is the history based on public records, please note the information reads as follows

Transaction/Date/ Price/Gain/Loss over Prior Transaction in $/%/ From 1992/ % Int. Rate:

  • Sold June 1992 – $225,000 Average 30 Yr. Mortgage Rate = 8.51%
  • Sold Nov 1993 – $238,500 + $13,500 or +6% gain/ 30 Yr. = 7.16%
  • Sold Aug 1999 – $480,000 + 241,500 or +101% / 113% gain from 1992/ 30 Yr. 7.94%
  • Sold Oct 2003 – $690,000 + $200,000 or +43% / 206% gain from 1992/ 30 yr. 5.95%
  • Sold Sep 2007 – $825,000 + $135,000 or +20%/ 260% gain from 1992 / 30 yr. 6.38%
  • Foreclosed Nov 2010/ 30yr. 4.3%
  • Sold Aug 2011 for $625,000 (- $200,000) or (-24%)/ 170% gain from 1992/30 yr. 4.27%

Placed on market July 2017 for $1,950,000/ 30 Yr. 3.88%

Assuming a sale for $1,900,000 + $1,275,000 or 204% Gain/ 740% gain from 2002

Thus from 1992 to 2007 which many consider the pinnacle of the last market upturn before the Great Recession, the gain over the 15 years equaled $600,000 or 73%.

In the three years from the pinnacle of the market to subsequent foreclosure in 2010 and sale the following year in 2011 the home lost $200,000 or 24% in value in 4 years. Yet from 1992 the increase still equals $400,000 or a 200%+ gain over 19 years.

If this home sells for close to asking in the 6 years of most recent ownership, looking at a $1,275,000 gain or $204% over their purchase and 700+% over the 1992 sales price.

Again I assume there have been renovations. Of note I am not factoring inflation as the $225,000 in June 1992 would equate to $393,000 in 2017.

However if one were to graph the history of this home it is unique as it shows true cycles in the market. In 1994 Denver and all of Colorado was experiencing a similar economic boom as we are enjoying at present. Granted the present expansion cycle is exacerbated coming off the Great Recession however I continue to argue fundamental business cycles have not ended.

Yes we are in a Goldilocks fiscal environment with historically low interest rates. I purposely included the average interest rates at the time of each transaction based on the 30 yr. fixed rate. Also with unemployment at record lows eventually we should see inflation tick up. During times of inflation housing generally increases in value HOWEVER when mortgage interest rates increase there is historically an inverse relationship i.e. rates go up on mortgages prices can come down concerning housing as more of the monthly is debt service.

Thus one may conclude the phenomenal increases in values may be attributable to the influx of capital and population to Denver, attractive pricing when compared to coastal cities and all coupled with cheap borrowing costs. However is this growth sustainable?

Ask me in the next 12-18 months.

Personally I would be a seller at present and only a buyer assuming a longer-term hold i.e. over 3-5 years at minimum while locking in the low-interest rates. Just my humble opinion.

 

 

 

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.