Sunday, June 30, 2013

THE NUMBERS ALWAYS TELL A STORY

Many of you are familiar with this large, bulky, slightly weathered binder that I often break out during listing appointments and buyer consultations.

It is a binder full of laminated spreadsheets, over 90 of them, dating back to 2006.  Each spreadsheet provides a “snapshot” of what our market has looked like on a on a month-by-month basis, with data personally extrapolated from the Denver MLS on the 10th of each month.

In 19 years as a real estate broker, one core conviction that I have developed is that the numbers always tell a story.  And if you’re paying attention, you can see the story being written.

From 2005 to 2010, our market here in Denver went through some dark times.  Colorado actually led the nation in “foreclosures per capita” in 2005 and 2006, driven in large part due to the fact that until 2007, Colorado was one of only two states in the county (Alaska being the other) that had no kind of licensing or registration program of any kind for mortgage lenders.

Lose your license in Miami?  "Come check out the Rocky Mountains!" Busted for fraud in Vegas?  "Hey, they are hiring in Denver!"

That nonsense finally ended in 2007, when Colorado got serious about regulating its mortgage finance industry, but not until terrible damage had already been done. 

Between 2005 and 2008, over 83,000 homes were lost to foreclosure in the seven county Denver metro area.  Banks dumped homes on the market, literally piling them on top of one another, until we had more than 31,000 homes for sale in the Denver MLS by the middle of 2007. 

In 2008, over half of the homes listed for sale in the Denver MLS never sold.  Buyers were fearful, spooked, afraid.  The economy tanked.  Interest rates plunged.  The foreclosures continued, and continued, and continued.  With prices falling and few buyers to be found, new construction vaporized.  Builders abandoned communities in mid-development.  Contractors and construction workers were fired en masse.  The stock market plunged. 

In 2009 and 2010, the government got involved, offering tax credits and rebates to home buyers.  Many stepped forward, taking advantage of low rates and temporary government subsidies.  But still the foreclosures continued. 

By the end of 2010, most people had internalized a new set of beliefs about real estate.  Housing was bad.  Houses make you poor.  Smart people rent.  Only fools buy real estate.  And over one-third of the real estate licensees in Colorado quit the business (because it was really, really hard!).

And then, like a passing summer storm, it ended.

If you were paying attention, by early 2011, you could see it.  Small patches of blue sky behind the dark clouds.  Inventory began to thin, absorption rates began to drop.  Foreclosures started to dry up.  Rents began to increase.  Cash buyers suddenly materialized and became very, very active. 

At the start of 2011, there were 18,000 homes on the market.  By the end of 2011, there were 10,000 homes on the market.  Foreclosures and short sales went from 45% of our market to less than 20% of the active inventory.  Change was happening, and it was tangible.

By early 2012, the numbers were in a full reversal.  Between January of 2012 and May of 2012, the overall absorption rate for homes in the Denver MLS plunged from 5.88 months to 2.22 months – a staggering shift and a complete flip of the supply / demand ratios we had seen during the downturn.

Buyers began finding themselves in multiple offer situations.  Days on market plunged.  Urgency replaced passivity.  Prices began to rise.

Now, halfway through 2013, in most parts of town, it has turned into a shootout.  Over 40% of all homes sold in the Denver MLS so far this year were on the market less than 7 days.  I have seen properties with 7, 15, 25 competing offers.  I have sold listings before they went in the MLS, with motivated buyers pouncing on nothing more than a “Coming Soon” sign in the front yard. 

Zillow says home prices have increased 13.4% in Denver in the past year.  Case-Shiller reports a 9.8% increase.  Core Logic’s estimate is 10.5%. 

The newspapers and television stations now bemoan our “terrible inventory shortage”.  We hear new terms like “price aggression”, which is what happens when sellers list homes 10% over the most recent closed sale.  (It’s the exact opposite, by the way, of “lowballing”, which buyers practiced without fear or remorse when the market was declining)

And just this morning, I saw online that Wells Fargo and B of A are now once again offering “piggyback” loans, second mortgages which are piled on to an 80% first mortgage to lower down payment requirements. 

Interesting how everything old suddenly feels new again.

Now, there are notable differences between this market and the one that crashed seven years ago.  For one, today’s buyers must have excellent credit and real down payments.  New construction essentially ceased to exist for five years while the population in Colorado increased by 2% per year.  And even with 30-year fixed rates on the rise, the affordability of this market is just crazy compared to what we saw when prices peaked in 2006, when rates were in the high 6s and occasionally over 7%. 

That’s the power of tracking numbers.  They always tell a story.  And if you pay attention to them, it’s much easier to anticipate what the next chapters will look like before we actually turn the pages. 

Will this current run on housing last forever?  Of course not.  But before it changes, the numbers will begin to whisper.  And if you’re paying attention to them, you’ll know what to do.