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!