AVOIDING THE MUSHY MIDDLE

I listed a home this week which has booked over 40 showings (!!) in just over 24 hours on the market.  We've got two offers in hand already despite the fact we plan to spend four more days on the market before making any decisions.  

The prospects for a bidding war are excellent and in some ways, this whole experience feels a lot more like the market of 2021 than the market of 2024.

So what gives?  In short, it’s about value. 

This is a single owner home dating to 1972 with lots and lots of “original” inside of it.  Original kitchen, original baths, original windows, original paint and carpet.  There are security bars on every window, heavy duty steel security doors on every entrance and it takes about 13 different keys to navigate through all the random installed deadbolts that have been added to the home through years.

 

You would think this is a dangerous neighborhood, but it’s not.  It’s actually a super nice neighborhood, and a quick look at the comps shows that homes routinely sell in the $600k - $700k range with any updating at all. 

 

It’s an estate sale situation, and rather than take four months fixing it up and sinking $50k or $60k into it, the family wants to move on.  So it’s listed at $525k, making it a true “value play”. 

 

There are two types of homes right now that are drawing lots of attention in our early spring market.  Elite homes in great locations which simply stand out regardless of price… and fixers priced well below market but with the promise of instant equity for anyone willing to do the work.

 

Between these two extremes is what I call the “mushy middle”, and that’s a much harder space to navigate. 

 

If your home is an okay area with some updating but also some not updating or it backs to a busy road or if it’s priced based off a comp from April of 2022… you are in the mushy middle and that a very tough place to be.

 

At the high end of the market, rates are not as big of a factor.  Reality is there is tons of money sloshing around in this economy and most of it sloshed up to those who were already well off.  For them, it’s see it, like it, buy it.

 

At the lower end of the market, properties that have the ability to generate instant equity constitute value.  In challenging economic times, value is gold. 

 

But in the middle, it gets mushy.  And that’s where 75% of the market resides.  Sellers pricing off a market (and interest rates) that no longer exist, and buyers deliberating endlessly over the actual cost of buying a home in a 7% rate environment where house payments are often 25% or more higher than rents, even with a 20% down payment.  That formula leads to doubt, fear, uncertainty and delay.  Sometimes endless delay.   

 

So you have to know what you’re doing and what segment of the market you are shooting for when you list a home for sale.

 

We’re leaving our Centennial property on the market for a full five days before looking at any offers.  I’ve told agents to back twice… go back three times… do whatever you need to do to make sure you and your buyers understand what you’re getting into and are willing to own whatever offer you ultimately submit… because the sellers are not making repairs and will not renegotiate once we go under contract.

 

Measure twice, cut once. 

 

I’ve already received two offers on the home from agents trying to beat the rush (again, we’ve been on the market for all of 24 hours).  The last thing we want is a rushed offer from a buyer who spent 15 minutes in a home and made an emotional decision to engage with a property that needs a lot of work. 

 

Slow down.  Count the cost.  And for the agents, understand that your reputation is made or broken by the behavior and decisions your clients make while under your tutelage. 

 

What we want is a solid offer from an educated buyer with a knowledgeable agent who has run the numbers and counted the cost.  For a bunch of buyers, this deal will make tons of sense.  For others, it won’t. 

 

As an agent, the fastest way to disqualify your buyer is if I get the impression you want/need the deal more than they do.  And there are a lot of agents right now who desperately need deals.

 

That’s why we’re riding this out for five full days and will take 60-plus showings on a property that has lots of upside, but which will also entail a lot of work. 

 

The last thing we want is to choose the wrong buyer, go under contract and then see the whole thing blow up in a week when the buyer’s inspection reveals the home needs pretty much everything we said it would need in the MLS, in our property disclosures and in the dozens of conversations we will have had with agents.    

 

It’s exciting to have a listing that the whole world seems fired up to see.  We’ve had very few listings like this since the spring of 2022, when rates zoomed past 5% and then kept right on going. 

 

Today, it takes either the right property or the right value proposition to get buyers to compete.  And if you aren’t aware of this, you’ll be one of the hundreds of sad, sad agents in the mushy middle with listings they can’t sell, sellers they can’t please and closings that never arrive. 

LIVING WITH THE MARKET WE ACTUALLY HAVE

For the past 20 months or so, the real estate market has been in a state of upheaval.

In reality, it's been a state of upheaval for about four solid years now, since the pandemic and subsequent rate cuts unleased the biggest real estate surge since the Oklahoma Land Rush of 1889.  

Buyers were everywhere, most every listing had five to 15 offers in a weekend, prices went up 40% or more and then... around Memorial Day of 2022... the music stopped.

We all know what happened.  Two years of record money printing, deficit spending and supply chain issues caused the inflation monster to roar, driving up the cost of living and prompting the Fed to slam on the brakes with the fastest series of interest rates increases in modern history.

I called it the Crash Test Dummy Market.

For nearly two years, transaction volume has been cratering.  In the Denver metro area, there were 64,000 closings in 2021... about 51,000 in 2022... and just over 40,000 in 2023... representing a 36% drop in sales (and commission checks).

Agents, lenders, title reps, stagers, inspectors and appraisers have all left the business in big numbers.  Many of the survivors are still wandering around like accident victims, trying to figure out what just happened while holding out for the next big market surge. 

My advice:  get over it, and get used to it.  

Like many of my colleagues, I have fallen into the trap of sometimes saying my business has declined by 20%, 30% or more depending on how I'm feeling on any given day.  

That's not the way to look at any of it.

The market we have today is the market we're going to have for a while, in my opinion.  Rates are elevated and it's my contention they are likely to stay that way until something in the economy seriously breaks or the government dials back its deficit spending.  

Hoping for lower rates is not a strategy.

The reality is, if you are an agent, you need to look at the 41,000 transactions inside the marketplace last year and assume that's the new baseline.  We're not going back to 50k or 60k transactions unless rates go back to 3%, and that's not going to happen.

So rather than say your business is down by some percent (and feel glum about it), the better way is to be grateful for the market we had and to say that, in the old market, your business was actually UP by some huge amount.  

My hope is, for those of you still struggling to come to terms with the new reality, that you saved some money, lived conservatively and didn't buy a bunch of dumb stuff.  If you did, then your anxiety level right now is fully justified.

But if you lived within your means, understood it was only going to last for a season, and are prepared to let go of your old paradigms... your transition into the new reality will go much better.

The season we are in calls for evolution, innovation and determination.  Nowhere on that list is sadness, remorse or regret.  You've got to shift your mindset into moving forward and not looking back, because every moment you spend looking back causes you to fall further and further behind. 

THE WAITING ROOM

A new year is upon us and like so much of our world in general, the housing market seems to be suspended in midair, waiting for something to happen.

Rates are once again pushing 7%, there are more than four times the number of homes on the market that were for sale at the beginning of 2022 and uncertainty continues to abound.

It's a standoff between a shrunken number of sellers, a shriveled pool of buyers and a large (but rapidly declining) number of agents fighting over an ever-smaller pool of transactions.

The number of closed sales in the Denver MLS has plummeted from 64,000 in 2021 to 51,000 in 2022 to just over 40,000 in 2023.  

Welcome to The Waiting Room.

Interest in housing hasn't gone away, it's just been put on hold.  Aspiring buyers still want to buy.  Many with changes in life circumstance or economic situations still want to sell.  But with all the uncertainty, they simply wait.

I have a white board in my office which I use to keep track of my (prospective) buyers, sellers and current contracts.  If we meet together and discuss buying a home, you become a prospective buyer.  If we meet together and talk about selling a home, you become a prospective seller.  And if we do the deed and actually embark on the buying or selling journey, you become a contract. 

It's not uncommon, historically speaking, to have 4 to 6 prospective buyers, 4 to 6 prospective sellers and (in the good old days) 4 to 6 contracts working at any point in time.  

But as we begin 2024, the status of my white board reflects the current status of the market.

Prospective buyers: 9

Prospective sellers: 13

Current contracts:  I'd rather not say

The point is, there's a lot of repressed demand to both buy and sell that just keeps building up in our market.  Pressure has been increasing since the spring of 2022, as more and more buyers and sellers "think about it" instead of taking action.  

There's a high cost to 7% mortgages, for both buyers and sellers, and it de-motivates both sides.  

So people wait.

In my view, there are two ways this pent up demand gets released.  The first, and quickest way, would be for interest rates to drop.  While different people have different opinions about what it would take to unlock this demand, I feel like the magic number is around 5.5%.  If mortgage rates could get to 5.5%, you would have robust and engaged interest from both buyers and sellers.  The number of transactions would soar and the market would boom.

Will we get there this year?  I have my doubts.  

I personally feel like the inflation fight is far from over.  The consumer price index (CPI) bounced back up to 3.4% in December after falling for 10 straight months.  And while 3.4% may sound a lot better than the 4.7% of 2021 or 8.0% of 2022... it's a long ways from the Fed's stated target of 2.0% inflation.

Seventy percent higher, to be exact.

If the Fed is committed to getting back to its 2.0% inflation target (and who really knows, because it's the Fed)... I don't see how rates fall as much as many of the optimists feel they will.  It's more likely, in my view, that inflation remains sticky, the government continues deficit spending, and all that debt floating around on the secondary market requires continued higher yields to find buyers.  

All of it feels pretty stag-flationary to me.  

The second way to unleash the pent-up demand in the market is through (wait for it) more government intervention in the economy, likely through the tax code.  This, I admit, is unlikely to happen in 2024 with a wickedly divided Congress and totally polarized political environment.

But once we get past the elections this November - and especially if either party takes full control of the levers of power - our broken economic condition suggest this would be the moment for monumental changes to the tax code.  Especially since either Txxxx (the candidate who shall not be named) or Bxxxx (the incumbent who shall not be named) will be starting a final term regardless of who wins.  

With $35 trillion (and counting) in debt, the role of the federal government is at a crossroads.  Investment property rules, capital gains laws and inheritance tax policies could all be under the microscope soon, and any changes would definitely change how real estate is perceived and valued.  

Under the first scenario, which is lower mortgage rates... the effect would be like a strong tailwind coming back into the market.  Under the second, which is a radical rewrite of the tax code, the impact would be more like an earthquake, with lots of things being broken.  

I don't know which path we will take to releasing the pressure that continues to build up inside the market.  And until we have more clarity, it feels like the waiting room is just going to become more and more crowded.  

TAKING CARE OF YOUR HOME IN ALL FOUR SEASONS - WINTER EDITION

The holiday season.  Pretty lights, family gatherings and presents under the tree.  But also one of the deadliest times of the year in terms of house fires.  

Just because the nights are long, the days are short and the temperatures are colder doesn't mean your home maintenance responsibilities have gone away.  

Let's talk about how to keep your home safe during the holidays and all year round.

FIRE SAFETY

- Let's start with having a functioning fire extinguisher in the house, especially if you have a holiday tree or wreath.  Make sure your fire extinguisher is charged and accessible.

- With holiday lights, don't overload your circuits beyond manufacturer recommendations, especially if the outlets have aluminum wiring or are ungrounded.  Use a timer to turn the lights off when you go to bed.

- Test your smoke alarms.  Trees and holiday baking are fun, but also dangerous.  

EXTERIOR

- If you have stucco on the exterior of your home, check for cracks.  This is especially important if you have EIFS stucco, a lighter foam backed stucco material that was popular in the 1990s and early 2000s.  Stucco can crack in freezing weather, and if moisture gets behind it, your issues can multiply in a hurry, resulting in costly repairs.

- Check to make sure all exterior electrical outlets have protective covers.  Snow piling up against a hot outlet can be dangerous when those holiday lights are plugged in.  Make sure the covers are secure.  

- Clean out your basement window wells to get rid of any late seasons leaves that may have fallen.  Also, make sure that if your window wells have drains that those drains are accessible and not buried under leaves and debris.  

- Ensure your exterior hoses and disconnected from the faucet, and it's not a bad idea to make sure you have frost-proof covers on your hose bibs if they are older or north facing.  

HVAC

- Change the furnace filter, again.  This action shows up every time because it's important, both in terms of indoor air quality and because a dirty filter makes your HVAC work harder.  With component prices now significantly higher than they were pre-pandemic, this is the easiest preventative maintenance items in the books.
- Winter is humidifier season in Colorado.  If your furnace has a humidifier, turn it on and let is keep your house (and tree) from drying out.  A 30%-35% humidity setting is appropriate for the dry winter months.

WATER HEATER

- Your water heater is likely getting a workout during the winter months in Colorado.  Most plumbers recommend draining it once a year to flush out any accumulated sediment or mineral deposits that have sunk down to the bottom of your tank.  Remember, if you're having to heat your water through a half-inch layer of sediment, your water heater is going to work harder and likely have a shorter lifespan.  There are plenty of good videos on You Tube that can show you how to do this (and don't forget to make sure the power is off if your water heater is electric!).   

ATTIC

- With all that snow on your roof, take a peek into the attic and see if there is any moisture or dampness.  Ice dams forming on the roof can lift shingles and lead to leaks.  Check to make sure your insulation is not wet.  

CRAWL SPACE

- If you're looking for moisture in the attic, might as well head down to the crawl space too.  If there's snow piled up against your home or if you have poor drainage, this is the time of year when it will show up.  

GARAGE DOOR

- Your garage door gets a lot of use in the winter.  Make sure all hinges, rollers and tracks are properly lubricated.  Also, carbon monoxide poisoning is a greater threat, especially if you're the type who likes to warm up your car in the garage (with the garage door open, please!) before heading off to work.  Your garage entry door coming into the house should have a self-closing hinge and shut securely behind you whether you're coming in or going out.  

Remember, this is not an exhaustive list... these are basic seasonal maintenance reminders.  There are plenty of great sources online or manuals at your local bookstore that you can reference to transform yourself into a home maintenance professional.  

Happy holidays!

TAKING CARE OF YOUR HOME IN ALL FOUR SEASONS - FALL EDITION

Around our house, the leaves on the maple trees start to turn in September.  It's my favorite time of year, as sunsplashed 75 degree days turn to 65 degree days turn to 55 degree days followed eventually by... the first snowfall.

Fall is a very important time for homeowners in Colorado, as a number of important maintenance items need to be schedule to coincide with the changing of the seasons.

Here's the autumn edition of "Taking Care of YourHome in All Four Seasons".

EXTERIOR

- All those leaves that have accumulated in your window well need to go somewhere!  How about bagging them up and composting them, or finding out when your city is sponsoring a leaf and branch dropoff day?  

- To keep an eye on those beautiful fall colors, you'll want to wash and rinse your windows and screens. 

HVAC

- Every couple of years (or more often if you have pets), it makes sense to have your home duct system professionally cleaned with a monster vac or other heavy duty cleaning system.  Sucking all that dirt, dander and debris out of your vents means you won't be breathing it in.  

- On the subject of vent cleanings, don't forget about your dryer vent.  Lint that backs up or clogs your vent becomes a very real fire hazard.  There are many professional services that will clean your dryer vent for under $100.  Meantime (and I hope this isn't news to you), you always want to make sure your lint trap is cleaned and free of debris after every load of laundry.

- For most homes, a gas fired furnace presents a legitimate safety hazard if it's not regulary cleaned and serviced.  Have a professional inspect your furnace components for damage and then clean those parts throughly.  Doing so annually can add years of life to your furnace, as well as added safety and peace of mind.  

- When you set your clocks back in the fall, it's also a good time to replace your battery backup in your home thermostat.  

- We're kind of like a broken record on the subject of furnace filters.  Change them often and use the cheaper ones from Ace or Home Depot.  

ROOF AND GUTTERS

- By fall, wasps, hornets and nesting insects should be mostly dormant.  Knock down any nests under your eaves or deck so that you don't have a larger nest in the spring.  

- Walk around the perimeter of your home and take (yet another) look at the roof for evidence of lifting or torn shingles or flashing that may have come loose.  If you see bruises (which look like spots) on your roof from a summer hail storm, call a roofer for an evaluation.  

- You'll want to clean the gutters, probably more than once.  As the leaves come down in the fall, your gutters fill up with leaves.  And if your gutters are full of leaves, water will pool and freeze.  I use a leaf blower to clean my gutters.  If you have a better tool, let me know.  

- Check inground drains to makes sure they are not clogged with leaves or debris.  Remember that water is the enemy of houses, and if your drains aren't draining, that water must be going somewhere.

LAWN AND LANDSCAPING

- This is one of the easiest and most important things to do, yet so many people fail at this.  Have your sprinkler lines drained and blown out professionally before the first hard freeze, no later than October 15 at the absolute latest.  I have spent tens of thousands of dollars (literally) repairing damaged sprinklers through the years when clients either buy or sell homes where this has been done improperly, or not at all.  Unless you live someplace in Colorado where the ground magically doesn't freeze, blowing out your lines is a non-negotiable fall maintenance item.  

- Remove and store pond pumps.  They're going to freeze and crack.  Period.  

FIXTURES AND APPLIANCES

- Test smoke detectors and if they are more than 10 years old, replace them.  

- Winter means you're going to be inside.  Colorado state law requires that you have functioning carbon monoxide detectors within 15 feet of any sleeping area.  They are $30 at Home Depot, a cheap and easy life insurance policy if your furnace starts spitting out carbon monoxide.  

- If you have a range hood filter, pop it out and drop it in the dishwasher.  If you can't find it, it's the greasy, gross, dirty metal thing underneath your microwave and over your stove.  

- Replace batteries for any remote control fans.  Nothing is worse than pushing the overhead light button in the middle of the night only to have it be... dark.  

- Don't forget to wipe down your ceiling fan blades.  In the fall you can have warm days or cool days, but dust never sleeps.  

- Flip your mattress. (Can you tell I'm compulsive about this?)

FIREPLACE

- If you have a gas burning fireplace, call a technician out to clean and service it.  A clean burning gas fireplace will offer better energy efficiency, a safer experience and nice clean glass will make the whole notion of a warm fire on a chilly fall evening much more enjoyable.  

- If you have a wood burning fireplace, have a chimney sweep clean and inspect it.  And if you store firewood, don't pile it up against the side of your house unless you want critters, insects and spiders to spend their days searching for access points into your home.  

WATER AND PLUMBING

- Disconnect hoses before temperatures drop below freezing.  Frozen spigots are the worst!

- When the days get colder, turn up the settings on your humidifier.  In Colorado 30% - 40% humidity settings are about right. 

- Test the sump pump (if you have one).  When the first big snow falls, all that snow is going to melt and end up in your sump, or possibly your basement if your pump isn't working.  

MISCELLANEOUS

- Now that it's getting colder and most of us are wearing socks or slippers in the house, consider getting the carpets cleaned.  All that barefooting around the house in the summer comes with a grimy aftermath, making autumn a great time to get your carpets cleaned.  

- Sweep out the garage one more time before the first snow falls.  Blow out any leaves or debris and get your garage ready to do its job for the next six months, which is to keep you and your car warm and safe and out of the cold that marks winter in Colorado.  

TAKING CARE OF YOUR HOME IN ALL FOUR SEASONS - SUMMER EDITION

Ah, sweet summer time.  Pool days, iced tea, barbecues and lush green lawns.  

What could there possibly be to worry about?

As is always the case, you will never run out of small projects when you are a homeowner, even during these glorious days of summer.  The list may be a little shorter during the summer, but all of it still matters.  So without further adieu, here are some things you should be keeping up with around those camping trips and days at the lake.  

EXTERIOR

- Time for power washing.  With warmer temperatures allowing your home to dry more quickly, it's a good time for a high pressure wash to rinse off all of that dirt, pollen and debris from teh spring..  

- Longer days means more hours of gazing outside.  Best to do so through clean windows and screens, so take a few hours to wash windows and screens (inside and out) and you won't regret it.

- Stain or paint fences and decks.  This can turn into a big job, so you might want to get some help, but if you're going to be outside there's no better time to freshen up fences and decks with a new coat of paint or stain.  

HVAC

- No matter what time of year, you'll always want to change your furnace filter.  Some inspectors recommend you do it monthly, you certainly should do it at least once a quarter.  All that air being pulled through your intake vents is circulating right through your HVAC system, so this is especially critical if you have pets.   

- Also remember to verify that your humidifier is turned off in the summer.  Humidifiers are designed for dry, arid climates, and in Colorado it/s generally much dryer in winter than in summer.  

ROOF AND GUTTERS

- Walk the perimeter of your home and visually examine the roof.  Look for loose or lifted shingles or flashing.  Also, this is the time of year when wasps and hornets are most active.  Removing small nests promptly will prevent them from become large nests later.  

LAWN AND LANDSCAPING

- Check sprinkler heads for spray patterns, look for dead spots in the lawn.  Lawn mowers can bump up against sprinkler heads, so can kids playing in the yard.  Watch your sprinkler system cycle through all zones and make corrections as necessary.  

FIXTURES AND APPLIANCES

- Reverse ceiling fan blades to make sure they are pushing air down in the summer, clean the blades to get rid of that excess dust.  

- Rotate and flip mattresses to prolong their life.  (And don't forget to wash the sheets while you're at it!)

WATER AND PLUMBING

- For increased energy efficiency, it's okay to turn your water heater settings down a notch or two during the summer.  Maximum water temperature from an open faucet or shower head should be about 120 degrees, but who wants to take a 120 degree shower in the summer?  

MISCELLANEOUS

- Ensure your fireplace damper is closed as insects may nest in your chimney and this will keep them out of the house.

- Also wash and rinse all doormats and outdoor rugs.  

Did we miss anything?  Let us know and we'll add it to the list.  

Otherwise we'll be out back in the hammock with a good book and an ice cold lemonade!  

TAKING CARE OF YOUR HOME IN ALL FOUR SEASONS - SPRING EDITION

When you purchased (or built) your home, you likely performed a home inspection. 

But what about AFTER you've closed on your home?  How do you stay on top of maintenance items after that?  

We've put this guide together to provide some good reminders about how to stay ahead of things and keep your home in tip top shape.

Here's the spring edition of "Taking Care of Your Home in All Four Seasons":

EXTERIOR

- Inspect the foundation for cracks.  Dozens of freeze/thaw cycles through the winter months in Colorado can cause the ground to shift and snowmelt has likely accumulated against your foundation.  Always remember the first rule of home inspections - water is the enemy of houses.

- Seal any gaps around your windows or that have developed in your siding.  Keeping water out is among your most important responsibilities.

- Check for gaps or cracks that may have formed in driveways or walkways.  Use a sealant to keep water from spring rains from penetrating those cracks and getting underneath the concrete.

- Clean the windows!  Soon enough, things will be greening up and you've likely got months of water stains that have built up on the glass.  Let the sunshine through.

HVAC

- Change the furnace/AC filters.  Some inspectors recommend you do this every 30 days, others recommend you do it at least once a quarter.  Air filters are cheap and do a good job of pulling dust and debris out of the air circulating through your home, especially if you have pets.  And while there are some expensive hypoallergenic filters out there, my inspectors have always recommended the cheaper ones.  Extra thick air filters make your furnace and AC work harder, shortening their lifespan.  In this rare instance, cheaper is usually better.

- Get the AC serviced before you hit that string of 95 degree days.  Doing it in spring puts you ahead of any problems and checks it off your to do list early.  Your AC is full of moving parts that can collect dirt, dust and grime.  And your condenser outside can and should be fully washed down at least twice a year as well.

ROOF AND GUTTERS

-  Clean the gutters.  Chances are you've had leaves, dirt and muck buried under snow for much of the winter, especially on the north side of your home.  Wash out the gutters so they can do their job.

- Visually check your roof for any lifted flashing or torn shingles.  It's not a bad idea to get the roof inspected once a year, or after one of those big spring Colorado hailstorms rolls through.

- Check your downspouts and inground drains.  A functioning drainage system is supposed to take water from your roof and get it away from your house, not dump water up against it.  This is one of my main pet peeves... I see so many homes with disconnected downspouts, missing extensions or backed up drains.  Do you not remember?  Water is the enemy of houses!

LAWN AND LANDSCAPING

- It's springtime, finally (or almost)!  Trim trees and shrubs, add mulch to your planter beds, seed your lawn and aerate if necessary.  Dogs can do a lot of damage to a dormant lawn through the cold winter months, so if you want to a great looking lawn in the summer, help by priming it for the upcoming growing seasons.

- Have a professional turn on your sprinkler system, preferably after April 15.  Another pet peeve - I have seen countless examples of sprinkler systems being damaged or ruined by not properly being shut down in the fall.  Put yourself on a six month calendar.  Sprinklers off no later than October 15, sprinklers back on no earlier than April 15.

FIXTURES AND APPLIANCES

- Wipe down your (dirty) ceiling fan blades and reverse the direction so that the circulation pushes cooler air down into living areas.  Nothing wrong with swapping out light bulbs after a long winter of use, either.

- Turn off the humidifier on your furnace, if you have one.  If you leave the humidifier on, which circulates water through your HVAC system to create humidity during the dry winter months, it will turn to ice during the summer months when you're blasting the AC.  

- Clean or replace the hood/range vent in the kitchen, if you have one.  These vents have been sucking up smoke, oil and grease all winter.  Like so many home maintenance steps, it's easy to do... but also easy not to do.

FIREPLACE

- If you have a wood burning fireplace, close the damper when fire season is over.  No one wants critters falling into their living room.  And as a matter of practice, if you store wood, don't put it up against your house unless you want to have a giant critter nest butting up to your foundation.  

WATER AND PLUMBING 

- Don't forget to check the sump and test your sump pump (if you have one).  Spring rains can lead to basement floods.  A working sump pump should eject water through a pipe and to the exterior of your home.  If it empties into a drain line, it's not to code.  

MISCELLANEOUS

- Sweep out the garage.  If you use a garden hose, be careful.  Most garage slabs will drop over time, and if you allow water to penetrate the perimeter of your slab, it increases the likelihood of it settling or sinking.  I recommend that if you do use a hose, don't wash it out more than twice a year, and try to do it when the weather is warmer.  

This is not an all-inclusive list, but it's probably quite a bit more than you were thinking of doing on your own.  It goes without saying, but homeownership is a huge blessing, but also a huge responsibility.  

And best of all... one day, when we partner together again to sell your home... chances are it will sell faster and for more money because you stayed on top of your maintenance schedule in all four seasons.  

Now get outside and enjoy the spring!  

THE STRESS TEST FOR HOUSING IS HERE

And at the end of March 2022, things got real.

Welcome to the land of 5% mortgage rates, formerly known as the land of 3% mortgages.  Fresh off the fastest short term rise in rates in nearly three decades, housing is now officially totally unaffordable.

We've chronicled extensively the "everything bubble" created by the Fed since March of 2020, when the discount rate was cut to 0% and banks were allowed to essentially line up for free money.

Now two years later, the money supply has been inflated by more than 40%, inflation is raging out of control and the median home price in many markets is up 30% - 40% from pre-pandemic levels.  (Unless you're talking about Bozeman or Austin, in which case prices have increased that much in the past year)

For 18 months, most semi-decent homes in the Denver metro area have been attracting five to 15 offers, and my favorite moment of 2021 was writing a contract on a home in Littleton that ended up attracting 53 offers (no, we did not win).

In 2019, the last time mortgage rates touched 5%, the Denver market went dormant.  At that time, on the heels of a decade of strong price appreciation with some neighborhoods doubling in value from Great Recession lows, buyers decided they had had enough.  The median home price was $497,000 and with a 5% mortgage, PITI payments on a single family detached home were around $2,500.  

Too much, the market said.

So inventory piled up to 11,000 homes, the absorption rate peaked at 2.16 months of inventory and there were 1.58 active listings to each home under contract.  I had totally legitimate listings that sat for weeks on end.  It felt like the end of an era.  

Then the pandemic happened.

The Fed zeroed out the discount rate and mortgages fell to 2.5%.  Affordability came back in a way we hadn't seen in a decade.  Working from home made home more important than ever, and instead of focusing on kids and vacations and activities and cars, the full attention of the American public seemed to lock in on... houses.

Inventory plunged, prices soared, the stock market roared and the Fed, in charge of managing it all, kept its foot on the gas pedal.  

The discount rate remained at 0% from nearly two years.  

The treasury printed money, the government flung it from the heavens, spending bills were passed and passed again.  Demand rocketed, supply chains collapsed and then Russia decided to kick off what could become World War 3.

As we began March 2022, there were fewer than 2,000 active listings in the metro area, the absorption rate was a ridiculous 0.43 months of inventory and there were 0.31 active listings to each home under contract.  The median home price in Denver is now $665,000, nearly 34% higher than it was when the pandemic began.

The last listing I sold in February attracted 37 showings, seven offers and sold $105,000 over list.  That buyer closed with a 3.25% mortgage.  It would be 5% today, and at 5%, those results would not have looked the same.  

With $30 trillion in federal debt, another $10 trillion of assets on the books at the Fed and inflation topping 8%, the era of cheap mortgages is over, at least for now.

If the Fed isn't going to buy any more discounted mortgages, who will?  Who else would be dumb enough to take 3% returns when the real inflation rate is nearly triple that.  

The Fed giveth, and now the Fed taketh away.

That $2,500 PITI payment on a median-priced home in 2019 that buyers decided was too much?  Today, the payment on that same home is more than $3,400.  

If you're already in the homeownership ecosystem, you've got massive equity (for now), and at least that gives you a chance.  But for the young and the poor and those lifelong renters, it's total devastation.  

Massive government overreach broke the economic system, and now I fear it will take massive government overreach - likely in the form of much higher taxes on personal income, capital gains and real estate transactions - to try and address it.  

The Fed decided the best way to save the economy in 2020 was to fire up the printing presses, jack up asset values and encourage people to pull massive amounts of money out of their personal ATM's (i.e. "homes") to try and keep the economy afloat.  

It was a defensible strategy, initially.  But for 24 months, come on. 

The Fed kept rates low so the federal government could continue borrowing without limit or reason.  Stimulus checks did a great job... stimulating inflation.  The American Rescue Plan "rescued" every government program, interest group and bureaucracy in the country.  

State pension plans were bailed out, state Legislatures are swimming in unspent cash and student loan payments have been paused for two years.  Another $17 billion in student loans has already been forgiven, with more to come.  Mortgages were moved into forbearance, eviction moratoriums kept renters in place and the printing presses just kept running.  

While the Fed kept stockpiling those 3% mortgages. 

I have said we have compressed 8 to 10 years of traditional home price appreciation into 24 months.  Now that rates are recalibrating toward reality, it's entirely reasonable to expect home prices to flatten and underperform, perhaps for years.  

Another recession is unavoidable, which will likely result in the printing presses being turned on again in a few months.  

The net effect of higher rates is going to be fewer buyers.  But it's also going to mean fewer sellers, since virtually everyone refinanced into a 3% mortgage and the pain of letting go of that loan for a 5% mortgage on a replacement property is just too severe.  

Fewer buyers, fewer sellers.  And that means fewer agents and brokers.  By orders of magnitude.    

I've said for a while that the next market shift would be an extinction level event for half of the agents and brokerages in our industry.  

Brace for impact, because that day has arrived.  

THE EVENTURAL DEMISE OF BUYER BROKERS, ZILLOW AND THE MULTIPLE LISTING SERVICE ITSELF

The world is shifting under the feet of the real estate industry and it's my contention that very soon, traditional real estate consumers will have a hard time recognizing anything about an industry that seemed to not evolve much at all for decades on end.

 

With barely 1,100 active listings on the market in the Denver metro area as of the writing of this article, the number of active listings in Denver is down 83% from two years ago.  Current inventory is 73% below the pre-pandemic all-time low of 4,203 active listings, set in December of 2017.

Nationally, the statistics are not quite as bleak, but they're close.  According to Federal Reserve research data, in December of 2019 there were 1.125 million active listings on the market in the United States.  At the end of 2021, that number was 483,000, a decline of 57%.  

What does it all mean?

Very soon, the end of buyer agents, data aggregators and perhaps the MLS system altogether.  

Let me explain.

In most markets, it is customary for a real estate brokerage to charge a "gross commission", usually between 5.5% and 6.0%, to market and sell a home.  Historically, about half of this amount has been offered to buyer agents as "co-op", or cooperating compensation, while the listing brokerage retains the other portion.

In the environment that has been created in the past two years, with record low inventory caused by record low rates and little hope for a return to anything resembling the "pre-pandemic" market (since almost all homeowners have refinanced into 3% mortgages, which they will likely never give up), the inventory is not coming back.

And that means we are now in a perpetual low inventory environment, which supports prices but also exposes the fact that there are far, far too many real estate brokers in pursuit of what will be a very limited pool of sales for many years to come.

How bad is it?  

There were approximately 6.2 million completed home sales in the US in 2021.  Assuming 80% of those ended up in the MLS, that's about five million transactions.  With 1.6 million licensed NAR member nationally, that's about three sales per agent per year.  

Clearly, we have too many agents by orders of magnitude.

This is not news.  Having too many agents in the ecosystem has been a fact of life forever.  The difference is that Fed's economic response to the pandemic (cut rates to zero, set off a frenzy in the housing market like we have never seen before) took something that was hidden and put it out in the open.  

Professor Darwin now has his opening.  We will never again have enough sales to justify the existence of 1.6 million agents.  

The point of this post, and the reason I'm writing about this, is because in a world where buyers are a dime a dozen and buyers' agents are up against near-hopeless odds for success, the value of a buyer's agent becomes... almost zero.

Truth is, in this environment, listing agents hold all of the cards.  

Yet, under the antiquated MLS rules, sellers are being asked to pay between 5.5% and 6.0% to list their homes, with the very low-value buyer's agent taking half or more of that commission.

That is where the change is coming.

In most of Europe, there is no MLS.  Sellers hire brokerages to sell their homes, and the brokerage is expected to find the buyer.

With no separate buyer's agent to pay, commissions are lower. 

And so you can clearly see here, in our current low-inventory environment which will likely become endemic because of the Fed's extended low-rate policies, sellers should question why there are paying buyer agents anything at all.

Realogy, the holding company which owns Century 21, Coldwell Banker, LIV Sotheby's and other prominent real estate brands, recently filed a court brief challenging NAR's so-called Clear Cooperation Policy, which requires compensation for buyer agents on homes listed for sale in the MLS.  

Sooner than you think, just as with the European brokerage models, homes likely won't even be listed in a regional MLS system.  Instead, sellers will choose a major brokerage - like Compass or RE/MAX - to sell their home.  Those sellers will likely pay smaller commissions - say between 4% and 5% - and they won't care where the buyer comes from.  

Those major brokerages will control all marketing, exposure, contract solicitation and negotiations in house, usually at a much lower fee than what sellers are paying today to outside third party brokerages through MLS compensation rules.

And so soon - and I'm talking months, not years - you will see the rise of models where Zillow and MLS systems become irrelevant as consumers focus on in-house listings of the largest brokerages, going direct to the seller's agent or an in-house buyer's agent being fed leads by the company at a reduced commission rate.

It will be more efficient for the seller, more profitable for the brokerage, and it will spell the end of half or more of the real estate brokerages in America.  

I'm not saying I'm in favor of it, or opposed to it.  

But if you're 27 years old and trying to decide if a career in real estate is right for you, chances are it's not.  Because very soon, listing agents (who are generally more experienced with deeper databases of past clients) and large brokerages will run everything, and sellers won't be paying the freight for rookie agents just starting out with random buyers they met at an open house, at church or in a checkout line at King Soopers.  

The real estate world is about to get very small, very fast.  It won't be the welcoming haven it has been for newcomers or those going through a mid-life career crisis.  It will be a cutthroat, closed industry with smaller commissions, fewer participants and a very different fee structure than the one we know today.

If inventory levels are never going back to pre-pandemic levels, thanks to everyone refinancing into 3% mortgages, then it's time to discuss what that means for the real estate industry.  Cross-brokerage cooperation, buyer agency and MLS systems were built for the old world, where selling listings was hard and you needed the help of outside brokers.  

In the new world, the survival of brokerages will depend on doing it all in-house, exclusively, with thinner margins and no outside help.  Which means 50% or more of agents are in their final act, whether they know it or not.  

BUILDERS, iBUYERS AND THE WAR ON BROKERS

Last year, there were about 6.5 million closed home sales in the US.  If you assume 80% of those deals were properties listed in the MLS with broker representation, that works about to about 5.2 million "commissionable" transactions.  

With an average sales price nationally of about $400,000, and using a conservative estimate on gross commissions charged, that works out to about $100 billion in real estate commissions paid to the 2 million or so licensed agents in the US, or about $50,000 per licensee before expenses, licensing fees, transactional costs and broker splits.

All well and good, except that $100 billion in commissions has become a very attractive target to tech companies, disintermediators and, most recently, certain home builders like Lennar and Richmond, who have decided to reduce or fully eliminate commissions paid to brokers as a carve out on that $100 billion pie.

The reality is that the average real estate agent earns about $30,000 a year, which is one reason real estate is the ultimate revolving door business. While appearing fun and glamourous from the outside, in real life it's an endless grind of showing properties (often at the direct expense of your spouse and children), competing for listings, solving problems and managing emotions, made far worse by the historic inventory plunge triggered by the loose money Fed policies enacted at the onset of the pandemic.

Nationally, 50% of licensees will quit in their first year, and nearly three out of four new agents will not renew at the end of their first three or four-year license cycle.  

Zillow has significantly altered its business models over the past few years, transitioning from an advertising platform to a lead generation service to a brokerage company to a home flipping service, with disastrous results.  

They saw that $100 billion in commissions just hanging out there, like a giant piece of candy just beyond their reach, and fell of a cliff in pursuit of it.  

Like their home flipping competitors Open Door and Offer Pad, Zillow thought if they just bought enough market share, they could eventually make people comfortable with selling directly to them, buying directly from them, financing with them and leveraging a host of affiliated businesses like insurance and contractor services to take over the world.

In pursuing this strategy, they alienated the agents who advertised with them, alienated the brokerages that used to partner with them, alienated the home sellers they lowballed, and alienated home buyers dumb enough to overpay for smoky, dirty, overpriced properties with bad carpet that became the expectation when you saw a Zillow sign in the front yard.

They also announced they will lose more than $550 million in the second half of 2021 alone, which tanked their stock by more than 20% when the announcement came at the beginning of November.  

As referenced earlier, Lennar is now one the builders who have declared war on brokers and commissions.  And no, they don't plan to share those savings with you.  Lennar has actually doubled down on attacking brokers by partnering with Open Door, hoping that when you walk into that sales office unrepresented and find out you need to sell your home in order to be a non-contingent buyer for one of Lennar's new builds, you'll chop off your right forearm and sell directly to Open Door (at a steeply discounted price) to satisfy the contingency.

Again, all well and good.  I'm all for different business models.  Seriously, it's a marketplace and ideas and models should be in competition with one another.  

But if you're going to try and squash me, it's hard for me to offer a hearty endorsement of your product when your business model involves removing the experience, commitment and fiduciary expertise of good brokers from the transaction so you can sell directly to consumers who have no idea how many hand grenades are buried in a 50-page builder contract (written by the builder's attorneys).

So it's a marketplace, and if you want to destroy me, don't expect me to offer a recommendation to my buyers.

I've said for a while that a great die-off is coming in the real estate world, and it has arrived since March of 2020.  For both agents and brokerages, if you don't have a compelling value proposition, you are headed for extinction.  

And that's okay too.  Again, I'm all for markets and a competition of ideas and services.  Let Open Door and Offer Pad buy crappy homes and slap lipstick on them.  Let builders roll the dice on letting unrepresented buyers sign one-sided purchase agreements that strip away their rights without disclosure or understanding.  Let consumers decide what works for them.

Zillow discovered that chasing what looked like $100 billion in low hanging fruit ruined their brand integrity and threw their company into organizational chaos.  I wasn't the only one who noticed that when Zillow started flipping homes, their appreciation estimates went from some of the most conservative in the automated arena to the most aggressive.

It's hard living through disruption, but Americans in all walks of life have been going through it for 21 months now.  Real estate is no exception.  If you think an honest, experienced broker adds value, then hire one.  And if you don't, call the 800 number on the post card in your mailbox and give away 10% of your equity to someone who isn't based in your community, will provide little or no service and has no regard for your best interests.  

IS DISTORTING THE TRUTH IN THE CONTRACT GOOD AGENTING OR A BREACH OF ETHICS?

In the madness that is the real estate market of 2021, I must admit it took me a while to realize how many people were "cheating" when writing contracts to buy and sell. 

Perhaps "misrepresenting" would be a better term.

Nah, let's just call it what it is.  Lying.

With so many properties drawing five to 15 offers and competition at a level that is hard to describe to a normal, non-real estate industry employed civilian, contract writing has become a topic of much conversation.  

Historically speaking, many sellers (and agents) have equated larger down payments with stronger buyers.  In other words, with 10 offers on a home, you have to come up with some mechanism for sorting, and down payment size is an easy one.

Larger down payment buyers, the theory goes, have more resources and therefore have better ability to deal with low appraisals and inspection requests that sellers more often than not simply toss in the trash can these days.  

A lower down payment buyer (less than 20%), the theory goes, are already pushing all of their chips onto the table just scraping together a 5% or 10% down payment.  When they offer $600k for a home and it appraises at $550k, they're dead because they don't have extra resources to bring to the deal.  (And in the one-sided rout that is the Denver real estate market of 2020-21, it's highly unlikely a seller is going to lower the contract price when there are nine other contracts stacked up on the kitchen table)

So one interesting "strategy" many agents seem to have adopted is... lie about it.  

Section 4 of the Contract to Buy and Sell lays out the grid showing the purchase price, earnest money deposit, loan amount and cash due at closing.  The purpose of this paragraph is to show the seller, quickly and concisely, what kind of resources the buyer is bringing to the transaction.  

Section 29 of the purchase contract is called the "Good Faith" provision, and it states that buyer and seller agree to work in good faith to honor the terms of the contract and failure to do so shall be grounds for default.

So what happens when a buyer states they have 20% down when they really only have 5% down?  Are they breaching good faith?  

The answer, as is so often the case in life, is "it depends".  

Section 4.5.2 of the purchase contract actually gives the buyer the right to change financing terms, as long as the buyer stays within the same financing type (cash, conventional, FHA, VA, etc) specified in the contract.  

So this can be interpreted to allow a buyer pledging a 20% down payment to close with a 5% down payment, assuming the financing type is the same as originally specified in the contract.  The gray area here, in my opinion, is could the buyer claiming to have 20% down and attempting to close with just 5% down actually have honored the original down payment commitment in the contract, or not?

Because if that buyer never had 20% down, I think it's arguable (if not obvious) that buyer is not acting in good faith and thus is in default.

As I said at the beginning of this post, I'm late to the party on this because it was only after I began to see buyers claiming to have 20% down on my listings show up at closing with a much smaller down payment amount that the alarm bells went off in my head.

In theory, if the seller believes the buyer has not acted in good faith, that seller could refuse to close, claim the buyer's earnest money and leave the buyer high and dry.  Of course, the buyer would then likely sue the seller, who has a good chance of winning in mediation or arbitration unless the buyer can prove he or she intended and was capable of bringing the larger down payment to the closing table. 

But at the end of the day it's all a giant fistfight over ethics, integrity, honesty, honor and, of course, good faith.  

If lying is part of your contract writing strategy, I would say your desperation is getting the best of you.  But if your client legitimately could bring 20% down, but then downsizes to 10% when the appraisal comes in low and then realizes the home needs paint, carpet, siding and a new roof... well, in that case reducing the down payment is understandable and, in fact, logical.

With desperation a key ingredient driving buyers and their agents in a hopeless low-inventory environment, it's increasingly common for misrepresentations to be made intentionally and strategically.  

It's one reason why the forms committee is about to release a major re-write of the Colorado Contract to Buy and Sell in 2022 - perhaps the biggest set of revisions to the contract in 20 years.  

The contract is going to get longer, it's going to get clearer, it's going to incorporate more penalties and it's going to strip away some of the key ambiguities buyers and their agents have been exploiting to cut to the front of the line in multiple offer situations (which is pretty much everything in Denver that isn't a meth lab).  

There are 100 reasons why 2021 has been the most challenging environment I have ever experienced in 27 years as a broker, but having others intentionally misrepresenting buyer qualifications on the purchase contract over and over again is one of the offenses I am most done with.  

THE OTHER SIDE OF THE CRAMDOWN COIN

I'm old enough to remember the summer of 2019, when the following things happened:

- Mortgage rates went to 4.5%

- The inventory of homes for sale rose to more than 11,000

- Good listings began sitting on the market for weeks with little or no interest

- Prices flattened and the market appeared to be, at long last, running on empty

Then, as you know, the pandemic hit.  And with it, rates went to the mid 2's.  Inventory disappeared and bidding wars began.  Bidding wars intensified and we then went to frenzy mode.  Overall active inventory fell from more than 9,200 listings in April of 2020 to 1,878 by the end of the year.  Prices went up 20%.  Everyone lost their minds.  Buyers (correctly) felt (and continue to feel) hopeless.  Sellers (correctly) felt (and continue to feel) emboldened.

And with that sea change in sentiment, the cramdowns began.

No need to get definitionally fancy here.  A cramdown is simply one side imposing its will on the other, with little regard for real or perceived fairness, mercy or ethical balance in a transaction.  

Where it shows up most is with inspections and appraisals.  Sellers aren't fixing much and if it doesn't appraise (which it probably won't), then tough.  Also, the sellers would like a free 60 day rentback, earnest money "hard" (non-refundable) early in the process and if you're even going to bother asking for an inspection (which might just cause them to toss your offer in the trash right off the bat), don't forget to turn the lights out when you leave.  

Market conditions dictate negotiations, and with artificially low rates driving a 90 mph tailwind, home prices are soaring into the stratosphere.  Buyers courageous enough to brave these conditions are expected to show up, smile and take their beatings like good little soldiers.  

For now.

It's a wildly unhealthy climate and it comes with risks.  We are engaged in the biggest money-printing binge in history (hello Modern Monetary Theory) with mortgage rates artificially dragged down to less than half the rate of inflation, which is totally illogical and makes no fiscal sense in any sane universe.

Ah, but I said "sane" - that's the catch.

We are living in insane times with monetary policy that reflects the insanity.  

If the Federal Reserve was following its longtime mandate of keeping inflation at 2%, mortgage rates would be 5% or higher right now and the so-called market would be flat on its back.  

The only way to kill inflation is with higher interest rates, which nobody wants to do because we have this little issue of $29 trillion (and counting) in federally financed debt, and if you raise rates, the country basically goes bankrupt and defaults on its debt.  

So we keep pretending that 3% mortgages and endless money printing will work great forever, which is dubious policy at best and reckless endangerment of our entire economic system at worst.  Inflating your way out of unsustainable debt is not a strategy - it's a conspiracy, and it certainly appears that the Fed is all in on printing money for as long as it takes to mitigate the impact of US debt.  

(And, alternatively, if you know that endless money printing is likely to continue and rates will stay low until the whole systems breaks, those crafty Fed bankers get to move their own investments into assets that are inflation-protected hedges like gold, silver, and real estate)

You can only drive 90 mph for so long until you encounter a sharp turn, and at that point it will be interesting to see if the Fed can successfully navigate the hairpin or if we go blasting through the guardrail, over a cliff and land in Venezuela.  

But I digress.  

The original intent of this post was to talk about cramdowns, and if you're selling a home or thinking about it in the coming months, remember this.  

It won't always be this easy.

When this market stresses or breaks, with prices that are so far beyond wage growth and incomes as to make inquiring minds like mine woozy with overwhelm... this whole notion of cramming down ridiculous terms on buyers will flip.  

And while I think prices will hold most of their gains because of money printing and the fact we simply can't build affordable homes anymore, what will change is that buyers won't simply roll over and take it when the furnace is 20 years old, the roof is splattered with hail damage or there's a 30 foot belly in the sewer line.  

When the pendulum finally swings, I expect buyers to be relentless and without mercy in their demands of sellers to provide homes in a condition that matches the over-the-moon valuations of 2021.  

If you have something to sell, I would look seriously at selling it - sooner rather than later.  And double down on that if it's a home that is less than perfect.  

When this market eventually slows, you may not see huge price reductions, but you will see a very different world in terms of inspections, appraisals, reasonableness and leverage.  

So enjoy your season of cramdowns, sellers.  

While it lasts.