Wednesday, November 28, 2012


The good news for homeowners in Denver just keeps on coming.

Case-Shiller reported yesterday that home prices in the Denver Metro area increased 6.7% year over year in September, reaching the highest levels we have seen since 2007.

Case-Shiller uses a scoring matrix (instead of an average or median price) which gave the Denver area a rating of 134.01, meaning that prices at the end of September were up 34.01% over prices in 2000, which Case-Shiller uses as a baseline year.

Prices nationally rose 3.6% over the past 12 months, so value increases here in Denver nearly doubled the national figure.

So what does this mean?

Let's say that 12 months ago, you purchased a $200,000 home with a 3.5% FHA down payment and you had your closing costs paid by the seller.  Your total up front investment in the home is $7,000.

Now, assuming your home's value increase matched the Case-Shiller report and went up 6.7%, its new real-time value is $213,400.  Under this scenario, you have $13,400 of equity appreciation.

If your initial investment was $7,000 and your first year return is $13,400, your one-year "cash on cash" return is 191%!

(Please call you financial advisor immediately and ask if he or she can provide these kinds of returns!)

These incredible yields don't even take into account the fact your mortgage payment is likely lower than comparable rent, that your taxes and mortgage interest are likely tax deductible, and that you might actually like the home you are now living in.

I have always taken a cautious approach to this business, in good times and bad.  I am not saying you should speculatively buy a home in hopes of massive appreciation, but in this market, facts are facts.

While the market remains sluggish above $600k and there's only modest gains above $400k, everything else is in full recovery mode.  At the lower end of the market in particular, prices are rising quickly and virtually all of the key indicators point toward continued growth.

What are those key indicators?

1) Three-quarters of the builders in Colorado filed bankruptcy or left the state between 2006 and 2009, meaning new construction has essentially vaporized compared to historical levels;
2) Colorado's population has consistently increased by 100,000 or more each of the past five years (one of the top 10 growth rates in the country), meaning upwards of 500,000 new residents have moved to our state since the economic downturn began;
3)  Over 50,000 Colorado households were foreclosed on in 2006 and 2007 -  with many of those households now coming back into the housing market (and competing with first-time buyers) as their credit is restored;
4)  Foreclosures and short sales, which were providing 45% of our inventory two years ago, now make up just 8% of active MLS listings;

When you look at those kinds of dynamics, you see the framework for an incredible supply crunch, which is what we are experiencing right now. 

Couple this with the fact interest rates remain in the 3's (still completely absurd) and you can lock in an artificially low payment for however many years you choose to live in your home... and the value in this market is so obvious almost everyone can see it.

This is why we have transitioned into a market where multiple offers are common, days on market have plummeted and absorption rates are near all time lows.

I mentioned to one of my networking groups yesterday that the only people getting homes under contract in this market are those buyers who are fully committed to going on offense.  The mindset of this market is a complete reversal from 2008, 2009, and 2010, when buyers thought defensively, negotiated aggressively and deliberated endlessly.

Those who are finding success in this market are properly educated, fully pre-qualified and ready to take action immediately.  All others are likely to remain on the outside, looking in, while the most motivated buyers are taking advantage of low rates and riding the front end of what figures to be a significant wave of appreciation for the foreseeable future.