Monday, April 24, 2017

A PERMANENT LOW INVENTORY MARKET

There's been a lot of wild swinging and panicked desperation among buyers throughout the Denver  housing market in the spring of 2017, but especially in the sub-$400k price range.

Right now, in the entire Denver MLS, there are fewer than 1,700 total homes for sale below $400,000.  For comparative purposes, at this time in 2011, there were more than 15,000 homes for sale below $400,000.

The inventory is gone, and it's not coming back.

There are several reasons for this, but chief among them is the fact that if you purchased a home in this price range in 2011, 2012, 2013, 2014, 2015 or even 2016... you have an asset that increased dramatically in value with an interest rate near historic lows during an era when rents in many areas of town have nearly doubled.

To illustrate this shift in the market, between 2006 and 2012, I helped 55 clients buy homes for less than $200,000.  Since 2013, I have helped four.  

For those lucky 55 who bought homes under $200,000, regardless of how small their down payments were (and all have long since petitioned their lenders or refinanced to get out of mortgage insurance to further improve their cash flow positions), no one has a payment higher than $1,100 per month.  Yet many of these entry-level homes would easily rent for $1,600... $1,800... or even $2,000 per month today.  

The bottom line is if you own one of these cash flowing beasts, there is absolutely no reason to sell.  

And because I am wired to tell the truth instead of chase commissions, I have spent significant time and energy over the past few years encouraging my younger clients to hold onto these homes rather than selling them, because by renting them out and applying the full rental amount to their monthly housing payments... it's possible to own and control a huge financial asset free and clear within 10 to 15 years.

Great for your popularity and position as a trusted advisor, but generally terrible for business.  

As a result, I have several clients who are under 35 who own two, three or even four properties... all purchased during this historic surge in Denver home values.

The fact is, there is no new construction coming online anywhere under $400k anytime soon.  And as a result, you have a fixed inventory of homes in this price range, while population growth of nearly 2% per year has brought a net gain of nearly 100,000 people per year into Colorado since 2012.  

If you own and control a home worth less than what the builders will build for, you're set. 

Now the market is going to struggle with these new realities, because historical norms don't hold up in the face of new realities.

When I got into the real estate business 23 years ago, the average time homeowners stayed in a home before selling it was less than six years.  And for two decades, I based many of my business model decisions on the belief that if I sold a home in 2007, it was likely to turn over again in 2012 or 2013. 

Take great care of people, stay in touch, create value, be a resource... and boom, the listing is yours a few years down the road.

Not happening anymore.  The latest figures from NAR show that, on average, owners are staying in their homes more than nine years.  And with each passing year, that average time in the same home increases.  In a zero inventory market like Denver, those time periods will only get longer.  

In the past 11 years, I have helped nearly 250 buyers in Colorado purchase homes, more than 20 buyers per year.  After seven or eight years of racking up these numbers, I should have a listing pipeline that sets me up for life.  

In the past two years, however, I have had a total of 14 past buyer clients sell their homes... eight in 2015, and six in 2016.  Under the old model, I would easily have twice this number... but the truth is for tons of owners, it simply makes more sense to hold than to sell.

That's one reason why we ended February with less than 5,000 homes on the market in the Denver metro area for only the third time in 32 years.... with a population that's nearly double  (3.2 million in 1985 versus 5.6 million in 2016) what was here when the Denver MLS was launched in 1985.

This spring has been brutal on buyers, and on buyers' agents, frankly.  I have written 28 offers in the first four months of the year and 23 of those contracts went down to defeat in multiple offer situations.

Listings below $400,000 routinely draw five to 15 offers, buyers routinely modify or waive appraisal clauses, and the entry-level housing market itself has literally turned into an auction between the have's and the have not's.  Guess who wins?

The buyers coming here with good jobs from out of state... the buyers with significant cash reserves and a willingness to pay beyond past values... and the buyers backed by the almighty resources of Mom and Dad... win.  

The traditional entry-level buyers with 3% or 5% down, not much extra cash in the bank, and a conservative financial mindset... get trampled.

I have talked extensively with my clients about how much this market reminds me of California in the 1990s, when the population exploded, the job market surged and home prices doubled in a 10-year period.  

People stopped moving because they couldn't afford to move up.  Staying became the new going.  Inventory became permanently constrained and the only remedy for market equilibrium was perpetual rising prices.  

Homeowners pulled cash out of their homes and made improvements.  Poor neighborhoods became middle class neighborhoods.  Middle class neighborhoods became upper middle class neighborhoods.  And well off neighborhoods put up wrought iron fencing, hired security guards and became exclusive "gated communities". 

Meanwhile, people who didn't own got completely left behind, and a permanent underclass was formed.

I'm not saying the parallels are 100% aligned between California in the 1990s and Colorado today... but they are close.

I've seen the future, and I left it 11 years ago to come here.  

We are in a permanently constrained low inventory market, and you better figure out how to deal with it... or start scouting for other states that offer better affordability.  

Wednesday, February 22, 2017

SO YOU WANT TO BUY A CONDO

The roadkill market is back, and it's scarier than ever.

If you have followed my writings for any period of time, you know that there is seasonality to the Denver market.  Sellers rule from January until about the 4th of July, the market balances from mid-summer until Labor Day, and from September through the end of the year buyers actually have a fighting chance to buy something without having to outbid scores of competitors or waiving appraisal clauses.  

Well, it's February, and we all know what that means.

Buyers everywhere, nothing for sale.

I know we've had a strong, appreciating market that has been rolling since the end of 2012.  I know prices are up, on average, 45% overall in the metro area.  And I know that some of the more affordable areas of town have seen prices increase anywhere from 65% to 100% since the market bottomed in 2011.

None of it matters.

What I do is look at the numbers and I let them be my guide.  Being a student allows me to know the vital signs of the market.  I study inventory numbers, the ratio of active listings to under contract properties, absorption rates and historical norms.  I keep the data on laminated cardstock spreadsheets in a book that is six inches thick which sits in my office.  I study it like a doctor looks at x-rays.  

Here's what I know.

A flat, non-appreciating market will have about twice as many active listings as homes under contract.  Less than that, and you have price pressure.  More than that, and you had better start carving on price because values aren't likely to hold.

So let's do a little digging into the metro area attached-home market.  

As we all know, we don't have many condos for sale because since 2005, Colorado has had one of the most notorious construction defects laws of any state in the country.  Build a condo complex with leaky windows, cracking drywall or drainage issues... and you can be sued with uncapped liability based on a simple majority vote of the HOA board members.  In some cases, that means as few as two homeowners in a 100-unit complex can trigger a lawsuit against the builder.

Builders have responded by... no longer building condos.  

Today, literally 95% of the new construction product being built in Colorado comes in the form of single family detached residences.  The profit margins are better, the demand is there, and you're much less likely to get sued.

With the exception of about three luxury high rises downtown, everything you see going up in the city today is an apartment building.  And that will continue to be the case until the legislature finally does something to counteract this litigators' wet dream.     

So we have an artificially limited and highly constrained inventory of condos and townhomes for sale.  Which means demand for them is intense.

Let's look at a few snapshots inside the market. 

In Littleton, below $275k, there are currently 64 townhomes or condos on the market.  59 of those are under contract.

In Lakewood, there are 81 townhomes or condos on the market below $275k.  74 of those are under contract.

Let's try Arvada.  Here, there are 33 townhomes or condos on the market below $275k.  32 are under contract.  (I can't imagine how bad that one unclaimed unit must be!)

In these three cities, 92%... 91%... and 97% of the units listed below $275k are under contract.

Based on the 2-to-1 ratio of a flat market (which has been repeatedly substantiated by two decades of experience), prices would stop appreciating when the percentage of homes under contract falls below 33%.  Those current percentages, once again, are 92%... 91%... and 97%.

This is highly, highly discouraging if you are a financed buyer dependent on a property appraising in order to get the deal done.  Just as it was highly discouraging in the spring of 2013, 2014, 2015 and 2016.  

So let's go a little further east.  Surely there has to be a more affordable market than Littleton, Lakewood or Arvada.  Those are popular westside locations.

Okay, let's try Aurora.  No one can dispute that Aurora is known for being an entry-level market with a far higher percentage of townhomes and condos than other cities in the metro area.

And sure enough, if you search today, you'll find 301 attached units currently listed in Aurora below $275k.  245 of which (82%) are under contract.

So your chances of finding something below $275k are probably a little bit better in Aurora, but it's all relative.  When more than 80% of the inventory is under contract, prices are going up... and they are going up a lot.  

If you are looking to buy a townhome or condo under $275k and you see these numbers, you have two choices.  

Step up, be emboldened by the fact you know values are going up significantly again this year, and fight.

Or delete your Zillow app, sign another lease and wonder why you aren't making any financial progress in life when your homeowner friends are piling up significant equity gains every month.

I can't tell you what to do.  You have to decide for yourself.  I've advised those with limited resources or queasy stomachs to sit tight until the fall, because eventually this red hot spring market will begin to flicker and you'll have less competition simply through attrition and the seasonal patterns of our market.

But you'll pay more in the fall.  And it's going to be hard to sit on the sidelines when everyone else is diving in.

For months I have thought that higher rates would slow things down.  That people would be less willing to pay 2017 prices plus see payments pushed even higher by rising mortgage rates.

So far, it's not stopping anyone.  

If you are thinking about buying a townhome or condo under $275k, you need to detach from your preconceived notions of what things are worth.  When demand overwhelms supply (again), prices go up (some more).  Which means paying $255k or $260k to get something now when the comps say it's worth $250k is a defensible move.

Of course we'll continue watching the numbers.  One of these days, the pattern will start to crack.  Or it won't.  

Maybe rates will go up, people will stop moving here or Trump will launch a nuke.

Or maybe this market will just keep rolling along at 10% per year, driven by a sizzling job market, a great quality of life and the continued exodus/arrival of educated young people and overtaxed Californians.  

It's going to be another spring of bidding wars, short tempers and high drama.  Those who don't have a plan are going to lose.  Those who spend their time looking back are going to lose.

Those who trust the numbers are going to write strong, aggressive offers that are designed to knock out the competition.  Those who do that will still have time to win in a market that's going to heights it's never seen before.  

Wednesday, February 1, 2017

THE BUYERS ARE BACK, BUT SELLERS ARE NOWHERE TO BE FOUND

January was an interesting month in the Denver real estate market.  No listings, lots of political distractions and a sense of uncertainty about how higher interest rates and rapidly shifting government policies might impact the market.

The story is still unfolding, but here’s my take.

Active inventory in the metro area as of yesterday dipped below 5,000 homes for the first time in two years.  We started the year with 5,111 homes for sale and closed the month with 4,992. January and February of 2015 were the only two months in the history of the Denver MLS - which dates back to 1985 - when we had fewer than 5,000 active listings on the market.

If it feels like there's nothing for sale, there's not.  

The bidding wars are back. 

In both 2015 and 2016, the market went from frenzied in the spring to strong during the summer to just okay during the fall.  At no time has this market ever gotten close to being “soft” (the longest I have carried any of my listings in four years is 23 days), but the best window of opportunity for buyers to purchase without having to outbid the mob has been August through January. 

Right around Labor Day, I actually went back to several buyer clients who had given up during the spring and encouraged them to re-engage during the fall.  Some did – and bought homes.  Some didn’t – and now they are talking about getting back into the market right as the crazy wheel starts spinning again.  Sigh.

Higher interest rates are a big deal to me, but apparently many buyers are not as concerned as I am. 

Maybe that’s because they believe (with justification) rates are heading even higher as more regulations are rolled back and Trump tries to drive the stock market to 25k.  If that’s the thought process, then yes, it makes sense to get after it now.

My take on it has been that even if demand remains constant with the past few years (and demand has been through the roof), higher rates are going to end up impacting the rates of appreciation we have seen in recent years. 

In other words, if rates were constant at 3.5% and prices went up 10% over the course of a year, payments on a 30-year mortgage at 90% LTV would go up about 10%. 

If rates increase from 3.5% to 4.5% and prices are flat, payments still go up about 10%.

The logic here is that higher rates have the potential to significantly cut into the consistent price gains we have seen as demand has swamped supply. 

Therefore, I think you need to be more cautious in your assumptions about where this market is headed.  I think 5% appreciation (on average) is a reasonable baseline for 2017.  I think a whole bunch of other people (and backslapping real estate agents) are still pounding the drum for 10%, and that’s just not going to happen. 

The problem, though, is this market is still being driven by a lot of greed and a lot of emotion.

Quite frankly, you shouldn’t be doing the same things you were doing (or advising) last year because the market is different now.  Higher rates mean less appreciation. 

That doesn’t mean prices are going down, and that doesn’t mean you shouldn’t buy. 

But it does mean you need to be more careful about overpaying for homes, and you need to willing to detach emotionally if you want a square deal. 

Four weeks into the new year and I already have clients who are getting impatient with the lack of inventory and level of demand. 

Yes, this market is frustrating as heck if you’re a buyer… but please don’t forget that patience isn’t a crime.  

In the long run, logic always beats emotion.  Be educated, be prepared, be cautious... but when something good shows up, be ready to swing like you mean it.  

Tuesday, January 24, 2017

TIME TO LIST

For as long as I’ve been in real estate, the biggest buyer surge relative to listings on the market takes place between mid-January and the end of March. 

Why so?

I’ve always felt it was because sellers tend to more beholden to the school calendar and the “conventional wisdom” that the time to sell is in the spring.

However, the numbers tell a different story.

Take a look at these inventory shifts between January and February over the past few years:

January 2016 – absorption rate of 1.85 months, active-to-under contract ratio of 0.93
February 2016 – absorption rate of 1.07 months, active-to-under contract ratio of 0.73

January 2015 – absorption rate of 1.81 months, active-to-under contract ratio of 0.96
February 2015 – absorption rate of 0.95 months, active-to-under contract ratio of 0.67

January 2014 – absorption rate of 2.52 months, active-to-under contract ratio of 1.19
February 2014 – absorption rate of 1.45 months, active-to-under contract ratio of 0.85

In normal months, these ratios will only move a few basis points… but the evidence clearly shows that the buyers show up swinging after the first of the year, while most prospective sellers are just starting to take down their holiday decorations. 

I’ve seen it at street level as well.  Already in 2017, I’ve written three contracts for buyer clients which lost out in multiple offers. 

While not as intense as 2016, the surge is still real.

I’ve always believed the psychology of the market is that buyers – especially first-time buyers – spend the holidays formulating plans and making decisions about the coming year.  If they reach the point of deciding to buy, they want to start sooner, not later. 

And so as quickly as they can find a few new listings and an agent to show them around, they start swinging.

As a seller, the absolute best time to list is when the choices are limited and the buyers are plentiful. 

There are other compelling reasons to list early in the year:

Relocations – many relocations are on hold during the holidays, but those relocation buyers hit the ground running in January

Landscaping – if you have an older home with questionable landscaping, the time to sell it is when there is snow on the ground and everyone’s lawn is brown

Lot Orientation – by the same token, if your backyard faces due west and bakes in the summer, buyers aren’t thinking about this in February

Air Conditioning – if you don’t have it, it matters less in the winter

Driveways – a south facing driveway is a more valuable asset in the winter than it is in the summer

Noise – both road and neighborhood noise are less of a factor in the winter, when windows are closed and the focus is on indoor living

Of course, diligent agents will note all these things, and with good representation a buyer will know exactly what’s going on.  But I also talk to people all the time (who were represented by other agents) who say “we never thought about that when we bought”, or “if we had known, we would have reconsidered”. 

The job of a good agent is to make sure you know everything there is to know and that your eyes are wide open – regardless of the time of year.  I often tell my buyer clients, “My job is to think winter all summer, and summer all winter.”

With the being said, I know the odds of selling a home – any home – are a lot better in the first three months of the year than in the last three months of the year. 

The best time of the year to list a home for sale is now.  Right now.  

Wednesday, December 7, 2016

RE/MAX ULTIMATE TEAMS EVENT IN DALLAS

Earlier this week, I traveled to Dallas for the 2016 RE/MAX Ultimate Teams Event. 

This two-day program attracted nearly 600 team leaders or aspiring team leaders from RE/MAX offices in the US and Canada.  The demographics of the group were extremely impressive, as attendees averaged 17 years in the business and average 2016 income of over $280,000.

In short, these were the best and most successful agents in the RE/MAX system.

RE/MAX has been slow to support teams, quite candidly, because the formation of teams usurps power and revenue from the RE/MAX corporate model, which has long been focused on attracting successful, experienced, and entrepreneurial top-producing single agents. 

Consolidating the production of multiple agents under the banner of a single team leader threatens a business model that is largely dependent on individual agents each paying monthly fees to be a part of the brand.  But to their credit, RE/MAX International has finally recognized that team-building is not only here to stay, but long-term it’s going to be the only sustainable model in real estate.

With technology creating a 24/7 marketplace, it’s increasingly difficult for single agents to keep up with the demands of a 24/7 real estate business cycle.  The best long-term answer is to create a structure that supports constant availability and provides exceptional service at all times.  

Much of the two-day event was like drinking from a firehose.  Power panels featuring top-producing team leaders, financial experts preaching the importance of strict budgetary discipline and an intensive three-hour seminar on Tuesday with Brian Buffini, whose referral-driven real estate sales model has been at the center of my success and whose globally-renowned coaching organization works with many of the top agents in the world.

“You don’t form a team for leverage,” Buffini told the crowd.  “It’s not so you can have more time at home, or even so you can work fewer hours.  The only acceptable reason to form a team is when you consistently have a surplus of leads that you yourself cannot handle.”

The most important hire is the first, because your personal assistant will either provide the structure and support to grow or keep the entire enterprise from getting off the ground.  

“Hire a fit, not a friend”, Buffini said. 
 
The three hiring filters for that personal admin (in order) are character, competence and chemistry. 

“You need all three for a successful hire", Buffini continued, “but in the end, character wins out.  Competence can be learned, but character is innate, and without it nothing else matters.” 

Buffini also emphasized that building a successful team requires leadership, not management. 

“Management is telling people what to do, “Buffini said.  “Leadership is doing the right thing, regardless of circumstance.  Leaders must lead, or they will eventually lose their teams.” 

The goal of any successful team leader should be to help each team member reach his or her goals.  If those goals don’t align with the success of the team, then the hire was a mistake from the beginning.

Most highly successful agents and team leaders are control freaks, and I certainly can relate to that.  But Buffini said that unless control freaks learn to grow and delegate, they rarely build successful teams.

“You've got to be broken of your controlling ways," Buffini explained.  "The cure to being a control freak is constant feedback.  You must have the humility to seek out feedback, internalize what you hear, and proactively empower those on your team.  Even if that means allowing them to make mistakes so they can grow.”

Buffini cautioned that for 90% of team leaders, there is no annual four week beach vacation.  There is no endless flow of passive income.  Being a team leader is about creating opportunity for others to succeed and building an enduring, trusted brand.  Only after years and years of hard work can a successful team leader look at easing out of the sales equation and handing the reigns off to a team of subordinates. 

Ultimately, being a team leader means that the buck stops with you, always.  

“Leading a team of six is far harder than running a company of 600,” Buffini said.  “No matter what happens, the leader has to take responsibility and set a daily example of what is expected.  No matter what happens, the leader must own it.  No matter what goes wrong, regardless of who dropped the ball, the first and most mature response from a good team leader will always be ‘it is my fault.’

Friday, December 2, 2016

BLACK SWAN COMPS

The theory of “black swan events” is a metaphor that describes hard-to-predict events which result in a shock to the system and disruption of the status quo.  These unforeseen events often result in immediate shocks to markets, political structures or societal norms. 

In real estate, a black swan event happens when a home sells well above or well below the established range of values for a neighborhood.  Sometimes there’s a good reason for the range-breaking sale… and sometimes there is not.  I call these “black swan comps”. 

I recently listed and sold a gorgeous, impeccably-updated newer home at an all-time high price for its neighborhood… a black swan comp since it closed $24,000 higher than any other previously closed sale and more than $70,000 above a similar square footage home which sold across the street only a few weeks earlier. 

From the beginning, as my sellers and I discussed strategy and how to competitively price the home, our number one topic of concern was with the appraisal.  I made it clear that getting this home to appraise for a financed buyer anywhere near our listed price was going to be a significant challenge, and that the appraisal was going to be moment of truth inside this transaction. 

Unless… we could find a cash buyer, in which case we might be able to sidestep an appraisal altogether.

Most appraisers are cautious by nature, especially in a rapidly-appreciating market, and so even though this home had remarkable updates, including reclaimed wood flooring, custom kitchen and bath remodels and extensive landscaping improvements… persuading an appraiser to push up so far above other closed sales in the area was no sure bet.

Things rarely go as planned in real estate, but in this case, we caught lightning in a bottle… and found a full-price cash buyer the first weekend we were on the market.

Long story short, the deal eventually closed at full price, which led to some very happy clients, a very happy listing agent, and lots of very happy neighbors.

It’s unlikely that another home is going to sell above this number any time soon, because quite simply, I don’t think there’s another home in the neighborhood so fully and beautifully upgraded.  And so the closed price on this home is now a data point with a limited shelf life - probably six months, which is about as far back as most appraisers will go in searching for area comps.

It’s entirely possible that the inclusion of this black swan comp will add $15,000 - $25,000 to the value of other homes in the neighborhood…. but only for as long as this home sticks on the grid as a recently closed comp.

Which is why it’s important for brokers to exercise supreme diligence when sifting through recent sales in a neighborhood. 

When a great home sells for a record price, there’s a window of opportunity for everyone else to “leverage up” off the value of that closed sale.  And so an experienced listing agent will call this to the attention of potential sellers so that they do not miss the opportunity.  It might mean pushing things forward and listing a home a few weeks earlier than planned, but if it adds five figures to the market value, it may well be worth it. 

Six years ago, we saw the opposite effect… when one distressed short sale or bank-owned home would undercut the value of other area homes by thousands of dollars.  Smart buyer agents would try to leverage down off this negative black swan pricing for as long as the home stuck on the grid of recent sales, while listing agents pulled their hair out trying to wish away the bad comp.

The bottom line is that timing, strategy and market knowledge count for a lot in real estate.  There are single, short-term events that can temporarily add or shave tens of thousands of dollars to or from the value of homes in a neighborhood. 

Good agents can identify these black swan events and use them to the benefit of their clients.  Less experienced agents often miss them (or willfully ignore them), and as a result, cost their clients a lot of money.

Tuesday, November 15, 2016

SHOCK TO THE SYSTEM

Last week’s election of Donald Trump as 45th President of the United States caught much of the country by surprise.  The bond market also failed to see it coming, and as a result, Wall Street is recalibrating quickly based on expectations of fewer regulations, tax cuts and higher interest rates.

The impact on the housing market is potentially unsettling.

In just seven days, the 10-year T-Bill has leaped by nearly 50 basis points, which equates to a .50% increase in 30-year mortgage rates.  For a $400,000 purchase with a 20% down payment, that equals a monthly payment that is suddenly almost $100 higher in just seven days. 

Put another way, over 30 years your interest costs just increased by more than $33,000.

This is a very significant development, especially in a high-cost market like Denver, which is already struggling with unprecedented affordability issues.

Much of the anxiety reflected in the bond market is based on Trump’s promises to repeal or amend Obamacare and get American workers back to full employment.  All politics aside, one key consequence of Obamacare's employer mandates to provide coverage for those working more than 30 hours a week is that millions of American workers are now chronically underemployed. 

Major corporations like Home Depot and Target have reduced hours in order to dump employees onto Obamacare exchanges, while other companies have simply increased overtime and wages for existing employees while staying away from adding new full-time labor.

As such, economic growth in much of the country (with Denver a notable exception) has been stagnant, and that has allowed the Federal Reserve to justify keeping rates at historically-unprecedented lows.  

This is part of the angst that fueled the Trump movement, and if Obamacare mandates are overturned and employers once again begin hiring full-time help, that growth is perceived as inflationary.  Add to that the prospects for lower taxes and fewer regulations, and the groundwork is already in place for much more explosive economic growth than the country has experienced in recent years. 

Of course, economics (like politics) is complicated business and we can have long debates about the merits, truths and consequences of different policies.  But this is why the market is suddenly freaking out – no one knows for sure what the landscape will look like in 12 months.

The immediate impact is higher rates, and that’s bad news for housing.  Long term, I’m still resolutely optimistic for the Denver market, because we offer employers a diverse, well-educated, youthful workforce that is equipped for our evolving economy.

But you can’t deny that double-digit appreciation has been fueled in large part by interest rates in the 3’s.  Those days appear to be over and so, realistically, do the days of double-digit appreciation gains for housing.   

Thursday, November 3, 2016

THE SLIPPERY SLOPE OF NON-PERMITTED WORK

Permits matter.  

Or at least, they matter a lot more than they used to.

Here in Colorado, there are more than 30 different types of home improvements that, per code, should require a permit.  Here's a partial list:

Interior:  Air conditioning, basement finishing, boiler replacement, electrical service upgrades, evaporative cooler installations, furnace replacement, gas fireplace installations, garage conversions, kitchen remodeling (if plumbing or electrical components are touched), water heaters and any other type of work that affects plumbing or mechanicals.

Exterior:  Additions, carports or garages, driveways (new or repoured), decks and patios, fencing, enclosing covered patios, adding a shed (always be aware of property line setback requirements), window replacement (lead-based paint mitigation is required for homes built before 1978), skylights, siding, solar panels, and of course, re-roofing.  

As you can see, the list of items that technically require permits is quite long.  I would say that, based on my experience, required permits are pulled less than 50% of the time.  The number one reason people pass on permits is to try and save a few bucks, but sometimes that desire to save money ends up creating a lot of future problems.  

Up until about 10 years ago, insurance companies were a lot more tolerant of non-permitted finishes.  But then Hurricane Katrina happened.  Then the housing market crashed.  Then the stock market crashed.  And then a relentless series of hailstorms pelted the Midwest, including many parts of Colorado... and suddenly, profit-minded insurance companies became a lot more serious about finding ways to avoid paying claims.  

Permits are not that expensive, in my opinion.  Most times, city inspections and closed permits cost anywhere from $100 to $1,000, depending on the work.  Sometimes it takes the city inspector a few days to get out to the house.  Sometimes permit inspectors will nitpick repairs.  It adds time and money to the cost of remodeling, and so some contractors and homeowners just roll the dice and skip it.  

Increasingly, though, I have become more and more committed to educating my clients about the need to pull permits.  In Colorado, the purchase contract states that buyers purchase homes "as is, where is", meaning that they inherit all faults and assume liability for issues with the house.  (A new owner can always sue a former owner for non-disclosure, but that is a very hard lawsuit to win most of the time)

If your basement floods due to faulty plumbing work and there were no permits pulled, many insurers will now deny the claim. Same with basement fires, kitchen fires and roof leaks.  If no permits were pulled, the insurance company has an opportunity to get out of paying a claim. 

There are other reasons permits matter.  Increasingly, some lenders don't want to loan on homes with unpermitted additions.  These lenders will instruct appraisers to give the extra space no dollar value, because (in theory) the city could require the addition or improvement to be torn out or redone.  

There is also a legal component to this, especially if you are a landlord.  If you have a finished but unpermitted basement and your tenants are injured or killed in a fire, or poisoned by carbon monoxide from a faulty furnace installation, get ready to be sued.  And insurance may not cover you.  

Even appraisers disagree about whether value should be given for unpermitted additions or finishes.  Appraisers are not required to check for permits.  You may have one appraiser who gives a finished basement full value, but five years from now a more conservative appraiser (who may have been burned overvaluing unpermitted work) may slash or wipe out your value altogether. 

And if you want to sue your home inspector for not identifying unpermitted work, be aware that most inspectors have a liability clause in their agreements that limits recourse to the cost of the inspection, which won't come anywhere close to addressing the cost of redoing an unpermitted basement finish or illegal garage conversion.    

There are many variables here, and the time to educate yourself is before you have crossed that line.

Tens of thousands of homes in Colorado have unpermitted finishes and owners and tenants live comfortably unaware of the liability that may exist.  

You can make your own decisions about whether unpermitted work is right or wrong for you.  Truth is, almost every home has some work done requiring a permit that was done without one.  But as I often say to my clients, most things in life (and real estate) come down to odds and percentages.  You have to determine your comfort level with the risks and liabilities of unpermitted work.  

Sunday, October 23, 2016

THE FALL MARKET AND A WINDOW OF OPPORTUNITY

As I have chronicled before, the fall market of 2016 is behaving almost identically to the fall market of 2015.  This is relevant because the fall market of 2015 - loosely defined as the period from Labor Day to Thanksgiving - presented the absolute best opportunity for buyers to get into Denver's red hot market last year without having to fight through bidding wars, utilize escalator clauses, chop off body parts or engage in other one-sided strategies in an extreme seller's market.

The same thing appears to be happening again this year.  Listings that routinely drew 5 to 10 offers in a weekend during the spring are now drawing a lot less interest... sometimes one or two offers, and sometimes none at all.  

I've seen this with my own listings, and I have started advising some of my prospective sellers to sit tight until January unless they absolutely have to sell now.

A year ago at this time, I was concerned about this uptick in inventory and overall calming of the market.  

But once January arrived, the buyers came out swinging yet again, leading to one of the most frenzied seller's markets I've seen in 22 years.  

Let's look at a couple of numbers to show how this pattern has played out over the past few years, focusing on the ratio of "active listings to homes under contract" and the overall absorption rate.

(As a quick refresher, a "balanced market" has an active to under contract ratio of about two-to-one and an absorption rate of about five months - these are the ratios where prices generally stop appreciating and the market goes flat)

April 2013... Active to under contract ratio of 0.73, absorption rate of 1.30 months
October 2013... Active to under contract ratio of 1.51, absorption rate of 2.73 months

April 2014... Active to under contract ratio of 0.68, absorption rate of 1.06 months
October 2014... Active to under contract ratio of 1.05, absorption rate of 1.60 months

April 2015... Active to under contract ratio of 0.62, absorption rate of 0.89 months
October 2015... Active to under contract ratio of 1.04, absorption rate of 1.58 months

April 2016... Active to under contract ratio of 0.71, absorption rate of 1.06 months
October 2016... Active to under contract ratio of 0.96, absorption rate of 1.57 months

What you can clearly see is that the spring market of 2013 was insane, with tons of buyers and little for sale.  In the fall, while the market stayed very healthy, the ratios showed there was a lot less buyer-side competition.

Same scenario in 2014.  Buyers calmed down and backed away in the fall, only to come roaring back into the market at the start of 2015.

Last year, the same thing happened again.  The active to under contract ratio increased from 0.62 in the spring to 1.04 in the fall, only to slingshot back down to 0.71 in April of 2016.

For historical perspective, in case you were wondering... the last time our market had an active to under contract ratio of more than two-to-one was January of 2012, when the ratio was 2.06.  The last time the absorption rate topped five months was August of 2011.  And if you trace things back, you'll see that window of time was pretty much the exact moment when our market began its dramatic turnaround.  

The lesson here is clear.  The imbalance between buyers and sellers is most advantageous to the sellers in the spring, and most advantageous to the buyers in the fall.  

If you are looking to buy something before prices surge again next year, the time to get it done is now.  My clients know that one of my favorite sayings is "the numbers always tell a story", and the story the numbers are telling today is that fall is the right time to buy a home in Colorado.  

Friday, September 30, 2016

THE COMPETENT AND THE GRATEFUL

Real estate is an emotional business.  Crazy emotional.  It can be a boom-bust world of big wins, painful losses and lessons learned.  It's a roller coaster, whipsaw, loop-de-loop lifestyle.  And it gets the best of many of us.

Like anyone else who has done this full-time for 22 years, I've ridden the highs and the lows.  

But after two decades, I've mellowed.  I've learned that there's a lot of stuff that happens that is simply beyond my control.  To be sure, those of you who know me know that to the best of my ability, I try to manage every variable that I can.  

But sometimes, people or circumstances can simply lurch in ways that cannot be predicted.  

Often, there's so much emotion wrapped up in a real estate transaction.  Buyers are running up against the end of a lease, sellers are trying to navigate the challenges of moving kids during the school year, lenders are dealing with ridiculous underwriting requirements and appraisers are fearful that one bad appraisal could cost them their livelihood.

Agents worry about all of it.  Trying to keep everyone moving in the same direction is like the proverbial herding of cats.  But how you go about doing it, how you communicate with buyers, sellers, lenders, appraisers, attorneys, underwriters, title closers and everyone else involved in a real estate transaction... makes all the difference.

Real estate agents come with all sorts of emotional profiles... and I've met them all.  You've got the controllers, the bullies, the ego-maniacs and the posers.  You've got the paranoid (everything is bad), the inverse-paranoid (everything is good), and the bi-polar (everything is good... oh wait, everything is bad!).  

But there are two profiles I look for above all else - the competent and the grateful.

Competence speaks for itself.  Competent agents know how to solve problems when they arise, but they also know how to head small issues off before they become larger problems.  They understand the contract, they understand the law, they understand the market and they understand human emotions.  They usually sell a lot of houses, because their services are always in demand.  

This is why I pay so much attention to who the other agent is when offers show up on my listings.  The highest offer is not the best offer if the entire transaction is likely to end up in ditch, upside down with the tires spinning.  

I'm looking for Proven Results (which happens to be the name of this blog).  I'm looking for agents who know what they are doing, because guess what... good agents usually have educated, qualified, reasonable clients.  

But there's another component to surviving this crazy business, and all too often I find it overlooked or missing entirely.  It's gratitude, the simple realization that we are blessed to have the privilege to help people through this process with the opportunity to earn a good living along the way.

When I work with buyers, I take my responsibility to advocate for them very seriously.  But at the same time, I remember that (under most circumstances) it's the seller who is paying the bulk of my commission.

Thus, whenever I have dialog with the other side of a transaction, it's always from a position of respect with a focus on solutions.  

Seek and destroy negotiations are for losers.  Zero sum games suck.  Take-it-or-leave-it strategies should only be used as a last, final resort in the most dire of circumstances.

I don't want to hang out with people who build themselves up by tearing others down.    

It's critically important that you surround yourself with people you actually want to be around.  If you don't like the vibe you are getting from your clients, you should not be working with them.

Often, "no" is the most empowering word in the English language.  

I'm going to continue to sell a lot of houses.  I'm going to approach this business with firmness, seriousness, competence and respect.  And I'm also going to be grateful and I'm going to express that gratitude every chance I get.  

Most people respond well to gratitude.  It's disarming.  It builds trust.  It takes and shows confidence to express it.  I'm grateful for the other agents, the hardworking lenders, and the clients on the other side of the deal.  

That doesn't mean every transaction goes smoothly.  But I'm not consciously going to give other people the power to determine how I feel.  Gratitude will be my weapon of choice, and I will use it whenever possible to make people feel like they are meaningful, heard and respected.    

Wednesday, September 21, 2016

DODD-FRANK AND $1,000 APPRAISALS

If you're buying, selling or refinancing a home these days, chances are you're hearing a lot of complaining about appraisals.

The cost, the turnaround the times, the difficulty of even finding an appraiser to take the assignment... sometimes it feels like the whole world of appraisals has turned into a bureaucratic, over-regulated cesspool.

In fact, for the first time, I just had a client pay $1,000 for a rush order appraisal, which basically meant getting it turned around in 14 days.  

But before you complain to me (or your lender) about the soaring cost and uncertain response times of appraisers, it's worth a few minutes to explain why this is happening.

Long story short, after the subprime financing meltdown and Great Recession of 2008-2009, government regulators began doing an autopsy on the housing market collapse and much of the blame, rightly or wrongly, was ultimately dropped at the feet of the appraisal industry.

Too many incestuous relationships between independent contractor appraisers and value-dependent subprime loan originators, weak licensing standards and a lack of regulatory oversight were cited as primary reasons so many bad loans were made during this toxic era.

Agreed.

In fact, one of the main reasons I picked up and left California at the end of 2005 was the unhealthy and unsustainable practices of the mortgage finance industry.  

In much of Southern California, where I lived, home prices had doubled inside of seven years... not necessarily because of economic conditions or a massive migration of new residents who could afford $700,000 starter homes... but because in the subprime era, people could buy homes not based on qualification, but simply desire.

Hence, the market flooded with low quality, over-extended buyers.  Values surged.  The bubble inflated.  I lost faith in the market.  And then I sold my house and moved to Colorado.

But I digress.  

In the aftermath of the mortgage meltdown, the Consumer Finance Protection Bureau (CFPB) was born and became federal law in July of 2010.  Often referred to as "Dodd-Frank" (named after the architects of the new bureaucracy, who also signed off on virtually all of the polices which led to the subprime meltdown... but again, I digress), the new agency created sweeping new regulations for the mortgage, appraisal and finance industries.

Among the key provisions... 

1) Appraisers valuing homes with loans that would be sold to Fannie Mae or Freddie Mac (more than 80% of all mortgages are sold to Fannie/Freddie) would need to give up their independent contractor status and become employees of Appraisal Management Companies, a new entity that would pool appraisers together and make random appraisal assignments to avoid conflicts of interest between individual appraisers and mortgage companies and originators.

2) Appraisal Management Companies would be allowed to mark up the cost of appraisals to cover their administrative, licensing and management fees.

3) Licensed Appraisers would now be required to have at least an Associate's Degree (AA) and Certified Residential Appraisers would require at least a Bachelor's Degree (BA) in order to keep their licenses.

In addition, continuing education requirements increased and a new disciplinary process was put in place that would ensure appraisers who overvalued homes would face reprimand, suspension or revocation of their licenses.

So, six years later, here's what you have.  

In some states, as many as half of the licensed appraisers have quit or been regulated out of the business.

Appraisal Management Companies now add as much as 40% to the cost of an appraisal for "administrative, licensing and management" fees.

Individual appraisers routinely turn down assignments for any property that isn't a "slam dunk" on value for fear of having their work audited.

And many of the most experienced, most competent appraisers have opted out of the mortgage finance chain to preserve their independent contractor status.  These appraisers now focus on doing work for private lenders, divorce and estate attorneys, and others with appraisal needs that don't funnel into the Fannie/Freddie pipeline.

The bottom line is that an appraisal which may have cost $400 five years ago will cost $750 to $1,000 to obtain today.  And instead of getting an appraisal in a week, it could take a month to see a finished report.

I'm not telling you if it's good or bad... I'm just telling you why it is.  You can draw your own conclusions.  

"Reforming" anything always comes with unintended consequences.  It's debatable whether you are getting a better, more accurate appraisal than before Dodd-Frank.  But it certainly is going to cost you more, and it's going to take a lot longer to arrive.  

Thursday, August 18, 2016

SEASONAL CHANGES ARE COMING

As the days begin to shorten and we see the first tinges of fall color, the Denver housing market is also transitioning into autumn.  
 
Nothing dramatic or worthy of extreme anxiety… but a shift, nonetheless.

The market is in the process of a seasonal slowing, and it’s apparent at all price levels.  But before you panic, you must first understand how overheated and frenzied this market has been during the first half of the year (and for most of the past five years, for that matter).

Let’s start our dissection by looking at the market in terms of price points.  

Below $250,000, which is always the most heated sector of the market, there are 814 listings for sale  in the greater Denver metro area and 1,904 under contract.  Under normal market conditions, which means 2% - 3% appreciation and 45 to 60 days to sell a home, you would see about twice as many homes for sale as you have under contract.

With 814 active listings, that means 407 homes under contract would represent a balanced market.  There are 1,904, or nearly five times that amount.  Listings continue to generate multiple offers, bidding wars, and record high prices, with little relief in sight. 

In the $250k - $400k price bracket, there are 1,942 homes for sale and 4,077 under contract.  Again, a balanced market would have about 971 homes under contract… there are four times that many.  Prices will continue going higher.

From $400k - $600k, there are 2,538 homes for sale and 2,464 under contract.  A balanced market would have about 1,232 under contract.  Here you can start to see the market drifting toward more modest appreciation.  It might take a few weeks to sell a home in this price bracket, even if it’s priced right and shows well. 

From $600k - $1 million, there are 1,866 listings and 992 homes under contract.  That’s a noticeable change from the patterns with the less expensive homes, and it suggests that price appreciation is stalling out above $600,000.  Here, you need to mentally budget for 45 to 60 days of market time.  

Interestingly, while the inventory of homes in the $600k - $1 million price bracket (1,866) is very similar to the $250k - $400k bracket (1,942), in the past 30 days there have been nearly five times as many homes placed under contract in the $250k - $400k range than in the $600k - $1 million bracket.  

Selling a home in this price range is work, it will take patience, and the buyer pool will drive a harder bargain. 

Above $1 million, you have 1,127 homes on the market and just 280 under contract, which is not a positive indicator.  In fact, here you have 4.03 homes for sale to each one under contract, well above the 2-to-1 baseline ratio of a balanced market.  Despite the great economy in Denver, selling a $1 million home is a very difficult proposition and there is little evidence that prices are going to move higher anytime soon.  

There is nearly eight months of inventory here, so if this is your bracket and you’re looking to sell, you had better be ready to start carving on price because there is much more competition among high-end sellers than you may realize. 

The best way to interpret these numbers, in my opinion, is on a year-over-year basis.  There are lots of seasonal fluctuations in the Denver market, and you can get faked out pretty easily if you compare spring numbers to numbers in the fall. 

When you look at this market on a year-over-year basis, the similarities to August of 2015 are pretty remarkable. 

The overall inventory one year ago was 8,358 homes for sale… today it is 8,287, a decline of 1.2%.

The overall absorption rate one year was 1.29 months of inventory… today it is the exact same 1.29 months.

And one year ago, marketwide, there were 0.90 homes on the market to each one under contract… today that ratio is 0.85. 

In fact, the trendlines also look almost exactly the same as they did a year ago.

The overall absorption rate has increased from a low of 0.87 months in May to 1.29 months today.  A year ago, it increased from 1.00 months in May to 1.29 months in August. 

In July of 2015, 6,456 homes went under contract.  In July of 2016, the number was 6,423.

The fact is, when you study the numbers, you can see what’s coming… a seasonal slowdown that may very well mirror what happened last year.  By October, homes that attracted 5 to 10 offers in the spring may only draw 1 or 2, which gives buyers a lot more leverage than they had just a few months ago. 

But I do think the headlines are going to be more ominous than they were last year, and I think the election will play a role in that.  There is an unprecedented amount of negativity in our political arena today, and while you could probably say that in every election of the past 20 years, this one really does take the cake. 

I believe the psychology of the market is more fragile now that it was 12 months ago, and so it will be very interesting to watch what happens here in Colorado during September, October and November. 

As always, the numbers tell a story.  Right now the story is… things look just like they did 12 months ago, no better and no worse.  Entry-level homes will remain in high demand, while high end homes carry much more vulnerability to a market correction.