READY TO LAUNCH

As 2012 arrives, the entry level of the Denver market is truly ready to launch.

Why do I say this?

Consider the following…

If you think of the real estate market as a giant conveyor belt, there is one sector of the market that has been rolling at full speed for three years… and that is with buyers coming in to purchase entry level housing, generally priced below $250,000.

Currently, this sector of the market accounts for 34% of all listings, but 59% of all buyers.  There are just 1.25 homes on the market below $250,000 for each one currently under contract, an absurdly tight ratio, and the absorption rate is below 3 months. 

One leg up, in the $250k - $400k price range, the conveyor belt slows.  Here, there are 2.54 homes on the market to each one under contract (still a functional market) and the absorption rate stands at 4.99 months.  In this range, you have 29% of the inventory accounting for 25% of sales, which is basically a balanced market.

From $400k - $600k, the conveyor belt beings to stall out.  There are 3.88 homes on the market to each one under contract, and the absorption rate is 6.79 months.  Home in this category account for 17% of properties on the market, but just 10% of contracts.

Above $600k, the conveyor belt simply stops.  Homes above $600k account for 19% of the inventory, but just 5% of the contracts.  The absorption rate from $600k - $1 million is 12.24 months, and above $1 million, it’s 22.48 months.  There is simply no price support at the top of the market, and I do not see this changing unless there is a radical (and unforeseeable) turnaround in the economy.

The other major theme in our market is lack of inventory.  With fewer than 13,000 homes on the market, we have 36% fewer homes for sale today than one year ago – a stunning turn of events that I can’t recall seeing at any time in my 17 years as a broker.

There are two reasons for the lack of inventory:

1)      Far fewer foreclosures, and

2)      Loss of the traditional “move up” market

Foreclosures are down 50% from the peak year (2007) in Colorado, and the mix of homes being foreclosed upon is very different than what we were experiencing even three years ago.  While the first waves of the foreclosure crisis pounded the entry level of our market, today it’s a mix of entry-level, mid-range and luxury homes that are going back to the lenders.  Statistically, the fastest growth in foreclosures is occurring at the luxury ($1 million and up) level, as buyers simply do not have the courage or faith in the economy to pay retail prices for high end homes in this market.

So what does it mean?

In January of 2011, there were 9,121 homes on the market below $250,000 – and just over 1,000 of these went under contract during the month.

In January of 2012, there will be fewer than 4,000 homes on the market below $250,000.  Over the past three months of the year (traditionally the slowest three months of the year), we have averaged over 1,500 homes per month going under contract below $250,000.

With inventory down 60% from one year ago and the number of monthly contracts up roughly 50% from the same time period, how can we not be on the verge of price recovery at the entry level?

These are not small shifts – this is a 60% reduction in inventory with a 50% increase in demand! 

Very few of the buyers I am talking to have any idea how dramatic this change has been, or what it should mean for prices going forward.

The bottom line is this:  if you can buy a home in today’s market with prices that are 10% to 20% off the peak, with a rate in the 4’s, you should be in fabulous shape for many years to come. 

In a few years, when rates work their way back up to historical norms, FHA assumptions will become as common as short sales, and today’s buyers will see future buyers paying a premium to assume their partially amortized loans with rates in 4’s.

In case this isn’t clear, let’s review one more time:

· The overall inventory of homes for sale is down 36% from one year ago
· The overall inventory of homes for sale below $250,000 is down 57% from one year ago
· Overall demand for homes under $250,000 is up 50% from one year ago
· With just 1.25 homes for sale to each one under contract below $250,000, and an absorption rate of just 2.97 months, there is hardly anything for first-time buyers to choose from and sellers have far more leverage than they have had in four or five years

I’m looking for listings under $250,000 right now, because these homes are salable, and they should be salable at prices better than we were seeing one year ago, or even six months ago.

There is no new construction coming online to compete with these homes, there are far fewer of them being foreclosed upon, and we are seeing a new generation of very well qualified buyers replacing a generation of marginally qualified buyers who were never equipped to make it for the long haul.

The beginning of 2012 will reveal a housing market below $250,000 that is very, very different from the one we have seen over the past few years, and buyers who wait are going to have to be willing to spend a little more and perhaps settle for a little less as values in many neighborhoods begin moving higher.

While the higher end of the market will continue to suffer, the entry level will start the year red hot and burn even brighter by spring.  You can bank on it.

HOW MANY TIMES SHOULD YOU REFI?

I have been in my current home for six years and I have refinanced on two occasions.  A few years ago, when rates first went below 6%, I felt like I was being given a gift and I locked in a rate in the mid 5's.  Then, last year, rates dipped below 5% and I felt like there was just too much money to be saved by refinancing once again.

Now, 30-year rates are near 4% (with 15-year rates in the mid 3's) and I'm hearing the siren song again.

I do not want to paint the picture that refinancing is automatically a great move for everyone.  It can be an expensive proposition, and unless you shorten up your loan term (which I recommend if you can afford to do it), you essentially recast your loan onto another 30 year payment schedule.

You also need equity in your home, which is not something everyone has these days.  And if you made a 20% down payment (to avoid mortgage insurance) and your home has lost value, you may either have to bring in a large amount of money to pay your loan balance back down to 80% of current appraised value, or take on the extra expense of mortgage insurance.

So there are reasons to avoid refinancing, or at least think critically about it, before you sign on the dotted line.  But when the savings are just too great to ignore, it's hard to resist.

The one constant through my six years in this home is that I've always made additional payments on my mortgage each year, without fail.  I set a housing budget six years ago and I've stuck to it... so now, even though my payment is significantly less than when I first moved in, I make the full payment as if it's still my original loan. 

Generally speaking, one additional payment each year on a 30 year loan will shorten the life of your loan by about 13 to 14 years.  That's a huge savings opportunity and solid financial planning.

So now, with 30-year rates around 4.00% and 15 year rates even lower, what to do? 

If I refinance into a 15-year loan with a rate in the mid 3's (essentially the same payment I had on my original 30-year loan, which was in the high 6's), I'll have my house paid for in less than 20 years.  That basically means I own my house free and clear 30% faster than with my original loan.  That's a good deal.

The best thing to do, as always, is to gather enough information to make informed decisions.  Talk to a mortgage lender you trust and see how much money there is to be saved by taking advantage of today's incredibly low rates.  And if home values are a concern, give me a call and I'll be happy to pull some comparable area sales information so you can proceed with clarity and confidence.

NOVEMBER MARKET UPDATE

If this isn’t a shifting market, I've never seen one!

The overall inventory of homes for sale in the Denver MLS fell 34% last month when compared to October of 2010, the ninth straight month of year-over-year declines.  Below $250,000, the number of homes for sale fell by a breathtaking 50%!

Where did all the inventory go?

As I said last month, there are two driving factors which have drained the market of inventory.  First, the number of foreclosures is down over 30% year-over-year in Colorado, and foreclosure filings are well over 50% off of their peak in 2007. 

Second, poor economic conditions have essentially frozen the “move-up” market, which used to provide the entry level inventory that first-time buyers would purchase.

Fewer foreclosures and fewer move-up buyers equals no inventory, which creates an interesting and potentially inflationary impact on prices as qualified and motivated first-time buyers continue pouring into the market.

In fact, during the reporting period from October 11 through November 10, the number of homes that went under contract increased at every one of the five price brackets we track when compared to the previous 30 days.  That normally does not happen as we move closer to the holidays.

What it means is that there is less inventory and that sellers who are listing their homes are doing so because they are motivated to actually sell them.  No more sellers waiving appraisals from 2007 that have little relevance to today’s market.

It also means that people are hungry to take advantage of well-priced homes with rates in the 4’s.  They feel there is value there that will hold up well as the economy starts to recover, and we all know that rates in the 4’s are more fairlytale (thank you QE1 and QE2) than fact.

In large part because of the strong demand at the entry level, the overall absorption rate for the entire market fell to 4.71 months, last month, the first time it has been below 5.00 months in the past five years. 

Overall, there are just 2.18 homes for sale to each one currently under contract, and below $250,000, there are just 1.25 homes on the market to each one under contract.  That, pure and simple, is a severe shortage of inventory.

So what does it mean?  To cover ground we’ve addressed before, it’s a reminder that any recovery in the Colorado housing market is going to come from the bottom up, where demand is strongest. 

At $1 million and up, there are currently 11 homes for sale to each one under contract, or about one-eighth of the demand that exists for homes priced below $250,000.

So pick your market.  If it’s the entry-level, it’s red hot, even as the temperatures drop.  If it’s high end, be prepared for a long, cold chill. 

With one-third of all real estate transactions nationally involving cash buyers, there is tons of money flowing back into real estate.  And with rental vacancy rates at 10-year lows, landlords are going to have a ton of leverage as the demand for affordable housing far outstrips supply.

At the entry level, there is more demand than supply, both for purchase transactions and rental homes.  And when supply and demand are out of whack, the outcome is almost always higher prices.

JD POWERS RANKS REMAX #1 FOR CUSTOMER SATISFACTION

The 2011 JD Powers and Associates survey of consumer satisfaction for real estate companies and the findings are not surprising:  RE/MAX is number one among both home buyers and home sellers!

This post is not merely an attempt to “pump up the brand”. The fact that RE/MAX was ranked number one is because the entire RE/MAX model is based on recruiting and retaining the most productive agents in the industry by allowing them to keep more of their commissions… while charging a fixed monthly "pay to play" fee structure that simply will not work unless you are selling a large number of homes.

Recognition by JD Powers comes at a price. Although JD Powers has conducted surveys since 1968 recognizing top performers in a variety of industries, the licensing fee to use the JD Powers trademark and logo for commercial purposes starts at $275,000 per year. Because RE/MAX was honored for top performance with both home buyers and home sellers (two different categories), RE/MAX will pay $550,000 to fully promote its JD Powers ranking in the coming year.

That explains why you only see a few select companies – like Honda Automotive, for example – broadly using JD Powers recognition in television and print.

I recently attended a RE/MAX event in Denver where company founder and CEO Dave Liniger challenged every RE/MAX agent to embrace the award and what it represents.

As many of you know, I moved to RE/MAX five years ago because I wanted to be associated with the most powerful, professional and productive brand in real estate.  The JD Powers recognition affirms once again that RE/MAX is the most trusted brand in real estate.

WHAT BUYERS DON'T WANT

Last week, I wrote a post on things most buyers are looking for in a home today. This week, we’ll turn the coin over.

Here are things to be careful of in a fear-based market:

1) Obsolescence – on a busy street? Too close to the train tracks? Back to a gas station? All of these things are trouble for sellers in today’s market.

2) McMansions – real estate investors will tell you that the best value in housing is finding the “WOB in the MOB” (that’s the Worst on the Block at the Median Price or Below). Conversely, anything oversized, non-conforming or which is negatively affected by its neighborhood is toxic in the minds of most buyers.

3) Dated – the fastest way to guarantee vicious lowballing is to list a home that is dated. Whatever improvements need to be made, assume the buyer will double the cost, then deduct if from your list price. There are only two markets today: wholesale and retail. And if you are not retail, you're wholesale.

4) Dark homes – if you don’t have great natural light, then start painting the rooms! Many buyers are in a dark mood before they even get to your home. If the bedrooms are midnight blue, it’s only going to get worse for you.

5) Unkept landscaping – got overgrown trees? Get ready to pay. Shrubs beating on the side of the house when the wind kicks up? That’ll cost you. Limbs dangling over your powerlines? Buyers smell “wholesale.”

6) Large lots – there are still some people who want to live on an acre, but there are fewer of them than there used to be. And since many people in the Great Recession have fired their lawn guy, a 40,000 square foot lot isn’t as appealing as it used to be.

7) Pools – in Colorado, appraisers will tell you that a nice pool adds exactly $0 (zero) to the value of your home. Twelve months of maintenance, three months of use. Instead, call up your friend with access to the HOA or community pool and invite yourself over.

8) Above ground power lines – a fact of life in most older neighborhoods, but the fact remains: many buyers are paranoid about living under electrical currents 24 hours a day.

9) Three story homes – tri-levels are okay, but true “3 levels” are just too non-conforming.

10 Bi-levels - quick decision:  up or down.  Apparently that's confusing to a lot of buyers, and I've had many clients tell me right off the bat that bi-levels are not an option.

11) High Schools – a good elementary school can help value, but proximity to almost any high school will hurt it, due to crazy traffic, loud kids, and events that run day and night.

12) Condos – for a little while longer, it’s still going to suck owning condos. FHA has just killed (killed killed killed!) the market with its asinine financing restrictions, which will loosen up again in time. If you can hang in there for the long haul, you can get some amazing value right now… but just be careful if you need to sell in the next two or three years.

IN SEARCH OF THE PERFECT HOUSE

So much has changed over the past few years in the housing market. But one of the biggest changes I have seen is that people have shifted their attitudes, and where housing was once seen as an asset, many people now view a home as a liability.

With that change in philosophy, buyers have become much more focused on buying for the long term. What does that mean? In part, it means that homes with obsolescence (located on busy streets, next to industrial areas, irregular floorplans, etc.) are shunned because buyers believe the home they buy today is the one they will live in for the next 10, 15 or 20 years.

So what characteristics do buyers desire most? Based on my experience, here’s a list of what I think buyers desire most heading into 2012:

1) Value – there it is, the bottom line. Buyers want to know that whatever they buy today will be saleable tomorrow. That means whatever they purchase needs to be priced right and be marketable to other buyers. The three most important words in real estate remain “buy it right”.

2) Location – with buyers looking long-term, the emphasis on quality neighborhoods has never been greater. Buyers want safety and predictability, which means stable neighborhoods around good schools.

3) Condition – if buyers are going to pay “retail” for a home, it needs to shine. No deferred maintenance, no inherited deficiencies. Buyers have very high expectations about the condition of a home, which often makes the inspection resolution process loads of fun for sellers these days.

4) Orientation and Floorplan – for years, I have gotten a lot of mileage from the phrase “Light, Bright and Airy” in my listing descriptions. You know why? Because buyers like like, bright and airy. Especially today, there’s a premium for south facing homes (snow melts faster in the winter) and homes with pass-through light. Our mood is affected by our surroundings, which means it’s hard to sell a dark house, and even harder in the winter.

5) Walkability – another trend on the rise. Because “staying in the new going”, people want walkable neighborhoods with good amenities. Parks, shops and schools in walking distance all count for a lot.

6) Privacy – no one likes a neighbor’s house perched up on the hill overlooking your bedroom. In fact, I can’t think of one buyer I’ve worked with who has said, “Gee, I’m glad my neighbor can watch me get dressed in the morning.” Lot location and orientation is important – privacy is an intangible that sells.

7) Ranches – as the population ages, there's strong and growing demand for one-floor living. Builders can’t build ranches affordably because the land costs too much and buyers are reluctant to pay a premium… but as the Baby Boomers continue downsizing and flatsizing, ranches will come with a greater and greater pricing premium.

8) Space and Flow – If buyers like “Like, Bright and Airy”, they love flowing, open floorplans. Connectivity between rooms is all the rage these days, while “single use” rooms (like dining rooms and living rooms) are on the way out. Show me your great room, baby!

9) Finished Basements – with 28 million adult children living at home today, need we say more?

10) Three Car Garage – those with toys can’t afford to store them and with HOA’s that don’t allow them to be on display, the value of a three car garage (or two cars and a boat, or motorcycles, or jet skis) is going up.

11) Large Closets – I have a middle schooler, so I get it. Kids need lots of clothes, especially in a four season state. Having grown up in Southern California, I would say you need a closet that’s at least 50% bigger to hold all of your seasonal clothes, shoes, jackets, etc.

12) Master Bath – since household size is increasing (thanks to those grown kids coming back home), a nice master bath is a must.

13) Cul-de-Sacs – no passthrough traffic is always a plus, especially if you live near a school.

14) Green Features – there definitely as a rising awareness of all things green, but as the economy has tanked I’ve seen people pull back from this. Can you expect to get your money out of a solar panel installation? In today’s market, I would say no. Good windows count for tons, and a competent home inspector can tell you the difference between quality insulation and toilet paper shoved between sheets of drywall.

THE LOSS OF THE MOVE-UP MARKET

The overall inventory of homes for sale currently stands at 15,533, a stunning 32% drop from one year ago, when we had almost 23,000 homes for sale in the Denver Metrolist MLS.

When you focus only on inventory priced below $250,000, the decline in inventory is a full 50%!  This is a sharp and dramatic disappearance of inventory which demands some explanation.

At this sub-$250k price point, there are just 1.43 homes on the market for sale to each one currently under contract. The absorption rate stands at 3.45 months, well below the 6 to 8 month supply economists refer to as a “balanced” market.

The numbers always tell a story, and because I study numbers and I've been at this for 17 years, I can see the trees clearly through the forest. In fact, what's happening right now is fairly obvious if you simply string the numbers together.

Historically speaking, first-time buyers make up about 40% of the buyer market. So-called “move up” buyers make up the next 40%, with the remaining 20% consisting of downsizers and investors.

In analyzing these numbers, the reality is clear: the move-up market has essentially disappeared.

What does this mean?

In short, it means the homeowner in a $250,000 home who historically would sell to buy one for $375,000… isn’t selling. He has neither the equity nor the confidence in the economy to take on such a move, and so he stays where he is.

The homeowner at $400,000 is even in worse shape. If he’s thinking of selling, it’s to get out from a large housepayment and either buy down or rent. He most certainly is not looking at $700,000 homes. And so it goes all the way up to the $1 million market, where you currently have 15 homes on the market to each one under contract (compared to 1.43 below $250,000).

If you think of it as a conveyor belt, the first leg of the belt, consisting of first-time buyers, is rolling at full speed. There is absolutely no shortage of first-time buyers looking to buy at discounted prices with rates in the 4’s. Any recovery that takes place in housing will most definitely be from the “bottom up” (again, that’s experience speaking), and so these folks who are buying homes at 2011 prices with 1940s interest rates really are in fantastic shape.

The challenge for these buyers today is not fear of the market, but simply a lack of inventory. Because first-time buyers (by definition) have avoided the housing troubles of the past five years, they arrive with clean credit, strong motivation and a better understanding of what mistakes others have made.

The second leg of the conveyor belt, which covers homes priced between $250,000 and $400,000 is running much slower. Buyer demand is not as strong here (although there is still demand). There are currently 3.15 homes on the market to each one under contract, with a functional 6.09 months of inventory.

From $400,000 to $600,000, the pain starts to really set in. Here, there are 4.93 homes on the market to each one under contract and 9.25 months of inventory. This is a surplus of inventory that shows clearly you have more sellers than buyers, and in that situation value loss is almost a certainty.

At $600,000 to $1 million, there are 8 homes on the market to each one under contract. That means that each new seller is competing with 8 other homes – hardly a favorable ratio. Inventory surges to 15.07 months at this price point.

Finally, at $1 million, you have a staggering 15 homes on the market to each one under contract and gruesome 29 months of inventory. Hopeless.

So where is the opportunity in today’s market? Clearly, it’s with first-time buyers and sub $400,000 buyers who have the patience to wait for a great deal.

With three-quarters of Colorado’s builders no longer around, there’s not going to be much new construction coming online any time soon. And because builders cannot build profitably at today’s prices, most will simply wait until there is significant recovery before getting back into the game.

That means first-time buyers today figure to be well-protected for the next several years. With 61% of all contracts coming from just 34% of all listings (the sub-$250k range), recovery starts here.

For first-time buyers today, the hardest part of this market is simply finding something to buy. Because with foreclosures down 50% from the peak and very few people selling entry level homes to move up, there’s hardly anything for sale.

REDFIN’S RADICAL GAME CHANGER

It was called the most disruptive, game changing move in the real estate industry in at least a decade.  And it lasted all of four days.

Redfin, the online-based discount real estate company which only recently expanded into the Denver market, set off waves of panic last week when it launched “Agent Scouting Report”, a new service on its website which did the unthinkable:  it displayed MLS closed listing and sales information for every agent in markets all across the country.

In other words, it pulled back the veil and showed consumers which agents produce, and which agents don’t.  And it was met with howling screams of protest from the moment it launched.

First, some background. 

Myself, I am all for disclosure.  I am for disclosure because I work my tail off, I close more transactions that 90% of my competitors and I have absolutely nothing to hide.  So bring it on.  The Redfin app made me look great, and for those three glorious days of full disclosure, I was walking on air as I strategized how to leverage this awesome windfall of information into even more business for myself.

Behind the scenes, however, Redfin’s move set off fire alarms within the industry. 

Nationally speaking, there are about one million active members of the National Association Realtors.  This year, there will be about four million residential resales.  Do the math, with two transaction sides per deal (buyer and seller), and you see that it averages out to about 7.5 transactions per year, per agent. 

You cannot call yourself a full-time agent, nor provide for your family, on 7.5 paychecks per year. 

Real estate has always been the ultimate turnstile business, with half of all new licensees quitting in their first year and three-quarters of all new real estate licensees walking away during their first three years in the business.  Only the strong – or those with other means of support – survive.

And there’s the rub… because the consumer at home has always had a difficult time figuring out just exactly who is who.  Are you a producer, or a pretender?  Do you close deals, or do you dabble in the business?  Redfin’s new app cranked up the floodlights and put the data out there.

So what happened?

Within hours, backlash and threats of litigation filled the air, most of it tied to the use of MLS data to publish these reports.

MLS, for the uninitiated, is short for Multiple Listing Service.  In most cities, the MLS is a subscriber-based service that collects membership fees from real estate brokers (up to $1,000 per year, in many areas) and provides an online platform for sharing and promoting new real estate listings.  Companies sign "subscriber agreements" with the MLS systems which govern what can and can't be done with the data. 

And in the case of Redfin, a whole lot of agents and companies felt that public disclosure was a violation of those rules.  Many agents called their local MLS boards to complain, or to threaten withdrawl, if Redfin was allowed to publish production data. 

Agents who belong to teams (or who previously have been on sales teams) immediately complained that the data lumped their sales under their team leaders, which made them look unproductive while making team leaders look like giants.  Smaller companies (which often welcome lower-producing agents) felt betrayed by the MLS systems they support, and so the outrage was real and immediate.

With 96 hours, Redfin pulled the plug, finding that the potential price of facilitating this disclosure of information was just too high.

And so, today, the consumer once again lives in the dark. 

It will be interesting to see what happens going forward, because once the Genie pops out of the bottle, it’s hard to put him back.  I am sad to see Redfin’s play foiled, but if it advances the agenda of making more data available to the public and helping the public think more critically about who they are working with, then it has been worth the drama.

A RECURRING CONVERSATION

I’ve been having a recurring conversation lately and it goes like this: “My landlord is raising my rent again it I think it would be cheaper and smarter if I just bought a place instead.”

Three times in the past month, at least six times since the start of the summer, I’ve had somebody bring this story to me. It is not an aberration. Tenants are upset that landlords are raising rents and good units are harder than ever to find.

It’s not going to change any time soon.

Rising rents are a reality, and there is a simple, obvious supply and demand dynamic at work here. When you have 100,000 foreclosures in the Denver metro area, which we have had since the beginning of the housing crisis, you are essentially taking 100,000 households that used to own and converting them back into renters – for at least the next seven years.

And because most of these owners got used to the idea of living in houses, they don’t want to go back to living in apartments.

While apartment vacancy rates are around 5% in the metro area, the vacancy rate for rental is homes is 2%... two percent!!!

In that type of environment, how can you not have rising rents?

For today’s landlords, who are buying foreclosures at discounted prices and locking in mortgage payments with rates in the 4s, there is tremendous long-term upside to this market. For renters, you can see the writing on the wall.

I mentioned at the beginning of this article that I have been meeting with a number of renters who are upset about rising rents. And while I empathize with that, I also want to point out that many landlords have been dealing with years of low rents, high vacancy rates and sinking property values. I’m not going to begrudge them the opportunity to recover some of their losses when the market finally supports higher rents.  This is the market landlords have been waiting on for nearly a decade.

Now I understand that some landlords are jerks – tenants have a right to hot water, clean surroundings and a safe environment. And if your landlord is a jerk, then you should move.

But in my experience, the vast majority of landlords (and certainly the ones I have worked with) are good people who are simply trying to invest profitably in the real estate market. They are neither predatory nor cold… on the contrary, they are exactly the types of people you would want as landlords. They simply don’t get the same press that jackasses do.

And for those people, the investors who have hung on through years of depression in the rental market, there is finally some light at the end of the tunnel.

Economies change. Opportunities shift. For landlords, today’s market is the most promising one we’ve seen in a generation. For renters who can buy into today’s market, with discounted prices and low, long-term fixed payments, there is sweet opportunity.

The truth is, I expect to hear from a lot more renters who think that owning is a better option. And I expect to hear from even more investors looking to take advantage of a red hot rental market.  If you can get your foot in the door of today's market, chances are there are some excellent opportunities for you.

SUPER DIAMOND

My next Client Appreciation Event is coming up October 22, when Super Diamond plays at the Ogden Theatre in Denver.  For the uninitiated, Super Diamond is a nationally-recognized Neil Diamond Tribute Band that puts a contemporary twist on classic Neil Diamond songs, including such well-known hits as "Sweet Caroline", "I'm a Believer" (originally a Neil Diamond song, stolen later by the Monkees), and the patriotic anthem "America".

Just my way of expressing thanks once again to my clients, friends and referral partners.  If you would like tickets to see the show, please contact me.  It's going to be a great time!

18% OF ALL REAL ESTATE CONTRACTS CANCELLED IN AUGUST

Nationally, nearly one in five homes under contract was cancelled during August, with most of those cancellations resulting from low appraisals.

The National Association of Realtors reported this week that 18% of deals under contract were cancelled in August, up from 16% in July and up from just 9% in August of 2010.

We continue to live in a very fear-based economy, and it’s affecting appraisers, underwriters, buyers, sellers and agents. It is more difficult today to see a transaction through from start to finish than at any time in recent memory, which is why there continues to be a massive migration of agents heading out of the business while buyers and sellers spend more time seeking out the top agents in their markets.

In short, everyone has different fears, but they are all wrestling with something

APPRAISERS – are afraid of losing their standing with banks and lenders if they appraise properties which later go into foreclosure. Therefore, they appraise conservatively with a “better safe than sorry” philosophy on value and condition.

UNDERWRITERS – are afraid of losing their jobs if loans they approve go into default. Therefore, they ask for more documentation, underwrite more cautiously and decline files which would have sailed through in a better market.

BUYERS – are afraid of overpaying, plain and simple.

SELLERS – are afraid of moving up (and often do not have the equity or job security to do so), leading to less inventory on the market and fewer homes to choose from.

AGENTS – have a choice to make: either work harder, smarter and more efficiently… or get out of the business.

There’s not a lot of comfort for anyone in today’s market, but it’s the market we have and we must become comfortable navigating these uncomfortable waters.

We all have a choice - we can view this market as a burden, or we can view it as an opportunity.  We can choose to complain, or we can choose to elevate our game.  We can think about how things used to be, or we can focus on getting better each day so that we can compete and win in a market where so many others are simply quitting and leaving.

WHERE HAS THE INVENTORY GONE?

There is a fairly dramatic and ongoing trend in the Denver real estate market today, and it is a lack of inventory.

I’ve been talking about this with clients for the past few months, but it’s gone from an interesting observation to a dominant reality that will affect both prices and expectations for some buyers and sellers in the coming months.

As of September 10, the inventory of single family homes for sale in the Denver MLS is down a stunning 28% from one year ago. That is almost a seismic shift, but it’s even more dramatic than that at the entry level.

Let’s compare available inventory right now to one year ago, breaking it down by price point:

Price Point         Sept 2010          Sept 2011          Decline
$0-$250k               10,409               5,533               - 46.9%
$250k-$400k           7,250               4,795               - 33.9%
$400k-$600k           3,727               2,775               - 25.6%
$600k-$1M              2,428              1,870               - 23.0%
$1M and up             1,435              1,089               - 24.2%

Below $250,000, where most of today’s buyers are looking, inventory is down a remarkable 46.9%. For all homes below $400,000, there are 41.6% fewer homes on the market than 12 months ago.

Why the disappearance of homes for sale?

Historically, there are two main drivers in the housing market: first-time buyers, who traditionally make up 40% to 45% of the market, and move-up buyers, who traditionally make up about 40% (downsizing buyers make up the balance).

So here’s the deal: foreclosure are down 50% from the peak in Colorado, and the move-up market is dead because buyers simply don’t have the confidence to sell $250,000 homes to purchase $400,000 homes in today’s economy.

So when the supply of foreclosures dries up on first-time buyers, and existing owners (many of whom have little or no equity) in the $250k to $400k range don’t want to sell for economic reasons, you suddenly don’t have any homes for sale.

What we’re seeing right now is historic, and if the trend continues, it’s going to mean higher prices at the entry level.

I have several buyers right now who are quite frustrated by this total lack of supply. And, to be fair, many buyers are still under the increasingly untrue assumption that they hold all the cards in today’s market.

When inventory falls 46.9% at the entry-level, one of two things has to happen: buyers either start paying more, or they must be willing to accept a few more defects in a property because sellers are done cutting on price.

From an aerial perspective, the drop in inventory is actually an indicator of healing in our market, although I will say yet again that any improvement is going to be mostly concentrated below $400,000, because the move-up market simply isn’t generating enough buyers to absorb the higher end inventory.

But if you own a home under $200,000, you are looking at the first significant opportunity to see appreciation in at least five years. It’s going to take time – it always does – because buyers and sellers are almost always behind the market when it comes to perceptions.

Buyers still think that finding a great home for cheap is easy – it’s not. For a long time, sellers refused to acknowledge the reality of falling home prices, and as a result, the market was littered with overpriced, unsalable inventory for years.

Now, at last, it appears the pendulum is starting to swing.

With no new inventory coming online, interest rates at historic lows, rents rising rapidly and vacancy rates near zero, there are simply more buyers than sellers below $250,000.

Buying a home is still a sweet deal for most folks today, but it is hard and sometimes frustrating work.

And over time, buyers are going to have to adjust their expectations about what’s out there, how much it is worth and how quickly they will need to take action to secure a contract. It’s a totally different market than the one we knew 12 months ago, and it will be interesting to see how much lower inventory falls before more sellers start wratcheting up their expectations after several dry years with little or no appreciation.

CRUSHING IT IN THE THANK YOU ECONOMY

Meet Tony Eitzel.

Tony is a professional photographer based in Denver.  He has worked with John Fielder (the "dean" of Colorado nature photographers) and actually rents space in a Fielder gallery in the Santa Fe Arts District. 

We first met Tony a few weeks ago on a Friday afternoon art walk through the Arts District downtown.  We have been looking for a particular piece of artwork to go over our living room sofa for some time, and we have said "no" this summer to more pieces than I care to remember.

Then we met Tony.  While art will always be subjective and "in the eye of the beholder", we were drawn to the depth and character of Tony's pieces, whether cityscapes downtown or soaring mountain peaks.

We engaged Tony in a conversation about one particular piece - a grove of aspens near Independence Pass - and Tony stopped what he was doing, told us the complete backstory of how and when he found this particular grove, and asked us what we thought of it.

We liked it, we liked it a lot.  But the frame was wrong and the matting behind the picture wasn't quite perfect.  We were looking for blacks and greens, and the matting was sand and the frame was white.

"No problem," said Tony.  "I'll make it however you want it to be."

With that, we agreed to the sale and Tony asked for a few days to reframe the photograph.

A few days later, Tony called us again.  

"Do you mind if I bring the picture out to your house, so I can center and mount it myself?" he asked.

It was clear that Tony took as much pride in how the picture would hang in our living room as he did in taking the picture itself.

This morning, Tony came by with his ladder, his tape and his level.  Thirty minutes later, his gorgeous photograph was ours.  Perfectly framed, perfectly spaced, perfectly level.  

Why do I bring this up in a real estate blog?  Because Tony Eitzel gets it.  

Here is someone who loves his craft and wants total satisfaction for his clients.  Tony is not going to have to ask for referrals, he's going to attract them by the way he runs his business.

When you deliver value in excess of cost, you create fans.  Tony Eitzel knows what it takes to succeed in "The Thank You Economy".

THE THANK YOU ECONOMY

Social media isn't a platform, it's a culture.

So says Gary Vaynerchuk in "The Thank You Economy", which dives headfirst into the realm of social media and its game-changing effects on how businesses engage consumers in today's market.

In Vaynerchuk's view, everything old is becoming new again.

In the old days, word of mouth meant everything.  If you had a bad experience at the corner store, you told your friends and neighbors, and the impact of lost goodwill on the store was immediate.

Then, from about 1970 to 2000, corporations took over the world.  Businesses were gobbled up by larger competitors, communication became "one way" and the customer lost all power.  But since 2000, social media has changed the game again.

Today, the consumer is once again empowered through sites like Facebook, Twitter, Yelp and Trip Advisor.  Businesses have to care what people think, because the Internet is for consumers what the printing press was for writers - a platform for leveraging their thoughts and ideas into something far more powerful than had been the case when communication was merely a one-to-one proposition.

Social media is a brand-equity building machine, according to Vaynerchuk, while SEO is a fad.  Search Engine Optimization provides exposure, but it does not build relationships, and relationship selling is the power tool of the 21st Century.  Social media can be used to build an emotional bond between retailer and customer, between service provider and end-user. 

I have seen the power of social media firsthand over the past three years, and it has allowed me to leverage my thoughts and build my personal brand with over 300 "friends" on Facebook while connecting with hundreds of others on Twitter and YouTube. 

But the key is to remember that, as Vaynerchuk says, social media is not a platform - it's a culture.  It's not me with a bullhorn; rather, it's me looking to connect, create value, be an authority and most of all, remain available to the hundreds of clients I have worked with through the years.

I'll close this post with my favorite quote from the book:  "If you think everything in your business is fine, it means you have stopped caring."

My goal is to continue to grow not just my sales, but my value to others.  I am continually working on ways to do a better job, be more efficient, incorporate more technology, leverage my personal brand and help my clients get what they want. 

When you master those skills, you will master the market, no matter what that market looks like.  Because value is a quality that transcends markets, and if you can create it, the market will come to you.

ABOVE THE LINE

I taught a class this morning to a group of real estate agent entitled “Getting It to Appraise”. The subject, obviously, was strategies for getting your listings to appraise in a market where buyers, lenders and appraisers are often fear-based and/or predatory in their assessments of what a home is worth.

On this subject, there is one caveat that must be declared up-front: when making representations to an appraiser (or a buyer, or anyone else), all data must be factual. There is to be no cheating, no distorting of information and no known misrepresentations of fact.

As listing agents, it is our job to provide as much concrete, accurate and factually-supported data as possible which protects and defends the interests of our clients.

Having said that, here is a list of strategies one can use in supporting a home’s value in today’s market:

• Current comparable sales from the MLS

• Old comps from the MLS (can’t necessarily be used, but does support argument for historical value baselines)

• Comps from public records not appearing the MLS (FSBO’s and new builds)

• County assessor records

• List of upgrades and updates

• Previous appraisals (again, won’t necessarily be used, but does provide historical value baseline data)

• Neighboring appraisals (a “hidden gem” if you are willing to ask neighbors if they have refinanced or had their homes appraised in the past six months)

• Rental surveys (establishes rental value, which can influence market value)

I often refer to appraisal data as “above the line” or “below the line”. What that means is that some data supports value at or above the contract price you are looking to support. That is called “above the line” data.

Conversely, there is also data that can undermine your price – that is called “below the line” data.

The name of the game is to provide as much factual, honest, above the line data you can to support your price. That, in my opinion, is your job as a listing agent and a fiduciary to your seller.

The old “4P” approach to selling a home – Put a sign in the front yard, Put a lockbox on it, Put it in the the MLS, and Pray for a buyer – simply isn’t enough.

It’s hard work to list a home, hard work to negotiate a contract, hard work to support an appraisal and hard work to close the deal. That’s why one-quarter of all contracts fail to close, and why nearly one-third of the agents in Colorado have quit the business in the past three years.

There is, however, no point or purpose in complaining. Shut up and do your job. And do it well. That’s real estate in 2011.

CHANGES FORTHCOMING TO THE MORTGAGE INTEREST DEDUCTION

A few months ago, I received an urgent "Call to Action" from the National Association of Realtors.  The mortgage interest deduction, a key driver for home ownership and an indisputable benefit to homeowners, was under attack.

At the time, I felt there was no way the government would eliminate (or even reduce) the MID.  It simply plays too large a role in the overall value of housing, and with the GSE's (Government Sponsored Enterprises) Fannie Mae, Freddie Mac and FHA touching 90% of all mortgages being made today, I could not see the government putting a gun to its own head.

As more and more time passes, I'm starting to think I was wrong. 

Very connected industry insiders are saying there's now a "75% chance" the mortgage interest deduction is going to be scaled back by the end of 2011.  It will probably start with a cap on the deduction, limiting the deduction to the first $500,000 or $750,000 of one's mortgage, but the precedent will have been established.

The government isn't broke... it's $15 trillion in debt.  And the demand for new sources of revenue is simply too strong to think that housing is going to escape unscathed.  If the mortgage interest deduction is scaled back, I think it will be at least a few years before the issue is revisited, but the damage this will do to the high end of the market is undeniable.

As I have stated in post after post this year, we are living in a very segmented economy with a very segmented housing market.  The million dollar market in Denver, which already has 40 months of inventory, is going to get hit even harder.  The "trickle down" will roll all the way down to homes at or near the $500,000 range... I simply cannot see anything priced above this level holding value in the years to come.

If we are getting poorer as a nation, the demand for so-called "cheaper stuff" is going to increase.  And housing is part of this equation. 

There is already zero inventory below $250,000, and since it's no longer profitable to build, nothing new is coming online.  The population continues to increase by 3% to 4% per year, and people will always need places to live. 

Landlords are already feeling the "boom effect" of a poorer population.  Rents are rising because demand for affordable renting housing is hot.  It's only going to get hotter over the next few years, until rents become so high that the scales of affordability tip back toward homeownership as the more affordable alternative.

All this is to say that change is a constant, wealth is under attack, and you need to be able to read the tea leaves to figure out how to protect and provide for your family. 

High end housing is in big trouble, and the upcoming reduction of the mortgage interest deduction is going to make it worse.

JULY MARKET UPDATE

In July of 2008, there were over 26,000 homes for sale in the Denver metro market area.  Today, there are fewer than 18,000 homes on the market. 

Lack of inventory continues to be, in my mind, the big story in the Colorado real estate market today. 

Below $250,000, there are just 1.65 homes for sale to each one currently under contract.  And since that number includes short sales (of which there are many), the reality is that the market is even tighter than that. 

When half of the homes listed for sale in any price range are under contract, you have an inventory problem.

Above $1 million, the story is 180 degrees reversed.  In the luxury market, you have nearly 13 homes for sale to each one under contract, reflecting a continuing trend in which the high end of the market will continue to lose value for some time to come. 

Absorption rates help to tell this story.  The absorption rate, as we have explained before, is a mathematical calculation intended to show how many months of inventory exists on the market today.  Real estate economists will tell you that six months of inventory reflects a balanced market, favoring neither buyers nor sellers.  Below six months of inventory reflects a tight market, generally favoring sellers, while inventory above six months indicates that a buyers' market exists.

Check out these current absorption rates:

* Below $250,000... 4.03 months

* $250,000 - $400,000... 6.48 months

* $400,000 - $600,000... 8.00 months

* $600,000 - $1 million... 13.86 months

* Above $1 million... 40.25 months

That's about all you need to see to understand today's market.  The low end of the market has a shortage of inventory, but no shortage of buyers.  The middle of the market is okay, but hardly robust.  And the high end is a mess, and will continue to stay that way for quite some time to come.

I don't think that articles which discuss the overall market serve much purpose at all, because the $200,000 buyer has virtually nothing in common with the $1 million seller.  When The Denver Post and other news outlets report on overall trends, I think the information is often misleading and skewed.

Markets are about price point, condition and location.  And frankly, I am working with no shortage of buyers at the entry level who feel a disconnect from what they hear on the news when there is no inventory to look at and the nicest homes come off the market in days, not weeks or months. 

Successfully navigating this market requires specialized knowledge, and that's what competent brokers are supposed to provide.  The agents who are closing deals are the ones who understand the market.  Now more than ever, competence matters.

DAZED AND CONFUSED AT THE DENVER POST

Here is the opening paragraph from today's real estate article in the Denver Post:

"The metro Denver housing market continued its rally in June.  The number of homes put under contract last month increased 22.5% from a year ago - the second consecutive month that homes under contract showed large increases over 2010."

The article then goes on to quote a number of Realtors and other happy-talk professionals, painting a picture of recovery and momentum for everyone with four walls and a roof over their heads.

Not so fast.

There's one simple, obvious, huge omission from this article, and it's the fact that the two large and lucrative tax credits being offered to first-time buyers and move-up buyers came off the table April 30, 2010.  With the incentive to buy gone, sales crashed through the floor in May and June of last year.  Therefore, comparing this year to last year is a totally distorted comparison, and the Post real estate writer should know this.

Although I would love it if the facts matched the headline, there's only one sector of the market that is performing strongly, and it is the entry level.

At the mid-level and higher price points, fear is keeping buyers out of the market while sellers outnumber buyers by a large margin.

Lack of inventory is the dominant theme today, especially at the lower price points.  Overall, there are nearly 21% fewer listings on the market today and than a year ago.  But below $250,000, there are 37% fewer listings on the market today than one year ago.  There's simply nothing out there for buyers at the entry level. 

While inventory is also down (although not by nearly as much) at the higher price points, there are no buyers looking at luxury homes.  In fact, only 28 contracts were written on $1 million homes last month in the entire metro area. 

I suppose the happy headlines in the Denver Post will help buyer confidence, but when it comes to making huge financial decisions, I'd rather base them on facts instead of poor reporting.

INFLUENCE: THE PSYCHOLOGY OF PERSUASION

"Consistency is easier than thought."

So says Robert Cialdini in his excellent book Influence:  The Psychology of Persuasion. 

According to Cialdini, people often adjust their thoughts to match decisions they have already made.  Understanding that most decisions are made before a sales presentation even takes place can radically alter (and improve) the effectiveness of how sales presentations are made. 

Understanding how "social proof", "social jujitsu" and the "principle of association" affect persuasive psychology can also dramatically improve the impact and effectiveness of your sales presentations.

Under the theory of social proof, consumers can be heavily influenced by the actions of others.  That's why claims about being "the number one brand" or being recommended by "4 out of 5 dentists surveyed" are so effective.

Social jujitsu is a theory that states if a few people inside of a group can be herded in the right direction, the rest of the group will follow.  This is why, in many opera houses and even Broadway theaters, proprietors hire "professional clappers" to applaud and cheer loudly at pre-determined moments to bring the rest of the audience along.

Finally, under the "principle of association", persuaders attempt to connect themselves with positive or popular events.  That's why radio stations will repeat their call letters before every hit song, and it explains why every concert, sporting event and college bowl game has a presenting sponsor.  

How can the Psychology of Influence make you a more effective salesperson?  

For me, the goal has always been to provide value.  By understanding what motivates people, I am better able to give more effective presentations.  In essence, I can give people more of what they want, and less of what they don't.

Similarly, understanding influence is a valuable skill when it comes to marketing more effectively, especially with listings.  Popular neighborhoods, school performance or community awards can all be leveraged in positive ways to help the salability of a home.     

A career in real estate is about so much more than homes and land.  It is first and foremost a marketing job, starting with yourself. 

Influence:  The Psychology of Persuasion is a terrific and timely read that will sharpen the sword of any committed sales professional.

FIVE STARS, AGAIN

Found out this week I have been named a "Five Star Professional" by 5280 Magazine once again in 2011.  For the second consecutive year, I have been ranked in the top 7% of agents in the metro Denver area, based on surveys sent to over 10,000 recent homebuyers and over 250 Colorado mortgage and title companies.

Just like last year, survey respondents were asked to evaulate their real estate professionals based on customer service, integrity, market knowledge, communication and negotiation skills, closing preparation, marketing skills, and overall satisfaction.

In less than six years, I have established myself as a top tier agent in Denver and I am so grateful to everyone for their support. I have worked exceptionally hard for more than 100 local home buyers and sellers since relocating to Colorado in 2005 after 11 years as a licensed broker in California.

My clients know firsthand that nobody works harder to educate and inform them than I do, and that my relationship-based philosophy is all about creating customers (and a steady referral stream) for life.

If you work hard, study hard, negotiate hard, live with integrity and have passion for what you do, you'll never have to worry about finding your next client. I believe with all of my heart that success is found by attracting new business, not chasing it.  And you become an attractor of business when you deliver value, expertise and integrity over and over again, and when you take time to build relationships which last beyond your transactions.

Thank you for naming me a Five Star Professional.  It is my honor to serve you.

JUNE MARKET UPDATE

With the inventory of homes for sale in the Denver metro area now down 16.5% from one year ago and down nearly 35% from three years ago, we are living in strange and confusing times.

Because the Denver Post continues to fail to adaquately explain the realities of today's market (including a pathetic article this week discussing the state of the market in May), I continue to find home buyers and sellers who have no understanding of how different this market is from just one year ago.

Below $250,000, there is hardly anything for sale (just 2.08 homes for sale to each home currently under contract) and lots of buyers are on the hunt.  But here's the catch - what buyers want above all else is value, and they simply won't pay retail prices for junk.  So you have swarms of buyers pursuing one type of house... the well-priced piece of real estate in good condition which is priced for the market of 2011, not the market of 2008. 

If you can list this type of home, you'll sell it in a week.  But the moment you get unrealistic about price, or if the condition isn't up to par with the competition, buyers move right on down the road to the next house in pursuit of that price/condition combination,

There are two reasons I can see why inventory is down so dramatically.  First, banks aren't foreclosing on as many homes, and the ones they are foreclosing on are generally at higher price points.  And second, sellers have finally figured out that if your home is in good condition and in a good area, it's no fun to sell it at 2011 prices.

At higher prices, there is going to continue to be distress ("deleveraging" as I call it) for some time.  While the absorption rate below $250,000 is just 3.45 months, at $1 million there is an 18 month supply of homes.  There is no price support for the high end of the market, and as people continue to hunker down and think smaller about housing, help is not on the way.

In between $250,000 and $1 million, there are pockets of opportunity, but they still call for caution.  I regularly remind clients not to count on the market bailing them out if they make a questionable purchase, and to do all pieces of diligence up front.  If you're smart about what you're buying and where you're buying it, there are excellent opportunities.

Buyers need to be realistic about the market and the moment we are living in.  Prices have come down in many areas (and continue to fall at the higher price points) and interest rates are in the 4's.  There's no new construction coming online (it simply isn't profitable to build at these prices) and the population continues to grow.  If you're buying a home today and looking at the big picture (and you plan to stay in it for a few years), the combination of discounted prices and absurdly low rates simply shouldn't be passed up. 

But it's a professionals' market, which calls for expertise and understanding.  Now more than ever, assembling the best possible team to help you with your purchase or sale should be your highest priority.