Friday, November 29, 2013


By now, everyone knows that the housing market had an amazing year in 2013.  In Denver, price increase estimates range from 10.1% (most recent Case-Shiller) to an amazing 13.9% year-over-year increase (Zillow). 

But in the field, it’s not that simple. 

As I’ve advanced for years, there is not “one” single housing market in Denver, but at least three.  Those markets are essentially the entry-level market, the move-up market and the luxury market.  They are all different, and they all perform differently.

In simplest terms, the largest gains have been posted this year at the lowest price points.  In some areas of town under $200,000, homeowners have seen price gains as high as 15-20%.  At $1 million, however, any gains have been negligible. 

The biggest reason for this disproportionate gain at the lower price points has to do with the basic concept of “replacement cost”.  In most areas of Denver, the break-even point for builders starts at about $325,000, meaning they can’t build single family homes for less than this with any kind of profit.

So they don’t.

That means you have a limited and finite supply of the types of homes most people want – the affordable ones.  But at the higher price points, builders can build to meet (and exceed) demand fairly quickly, which means your upside on higher-end homes is capped by the fact there can always be an increase in supply.

Which brings us to the subject of condos.

For the past five years, condos have been the “red-headed step child” of the Denver housing market.  (For a detailed discussion about this, see my post from May 21, 2012, linked here, or my post from January 26, 2010, linked here).

With lenders unwilling to lend, homeowners walking away and HOA’s swimming in red ink since 2009, the Denver condo market has been a basket case.  Many associations have been unable to keep up with basic maintenance demands, newer associations have been awash in litigation and falling prices have sunk thousands of homeowners into negative equity positions.

In other words, it’s been a season of great opportunity for those who know what they’re doing.

It has been my contention that, because of these problems, the condo market has been lagging the housing market recovery in Denver by 6 to 12 months.  Now, with prices on single family homes soaring and the overall feel of the housing market completely different than it was 24 or 48 months ago, the condo market is next up for a major advance.

With price rising and defaults sinking, lenders are showing a new willingness to finance in the condo market.

Earlier this month I sold a condo listing to a buyer who came in with just a 5% down payment – a rarity since most lenders have required a 10% to 20% down payment on condos since the market tanked (or was blown up by FHA) in 2009. 

With FHA taking itself out of the picture, lenders responded by essentially eliminating low down payment options.  Without FHA to finance first-time buyers, investors took over the market.  And since most investors simply will not pay retail, selling a condo became nearly impossible for most private owners – unless they were willing to sell at a big loss. 

In 2010, Fannie Mae and Freddie Mac decided to impose their own set of restrictions, and with that, the freefall was underway.  

Foreclosures flooded the market, investors bought them for cheap, and the remaining “retail” owners were left with the difficult decision whether to sell short, walk away, or wait it out.

While FHA has yet to get back into the condo market, I believe that day is coming soon.

As Fannie and Freddie begin to relax guidelines (as illustrated by my 5% down payment buyer) and single family prices continue to move out of reach for many first-time buyers, the condo market is becoming much more viable.  And should FHA begin lending into more condominium communities again, the surge in buyer demand will be both sudden and dramatic.  

One last note - because HOA’s play such a large role in condo life, it’s important to emphasize that you MUST look carefully at the financials of each HOA before making any buying decisions.  Some are so deep in red ink their recovery may lag for years, but for others, who have navigated the downturn with prudence, forethought and fiscal discipline, better times are coming soon.