Tuesday, January 28, 2014

HGTV EQUALS “NOT REAL”

It’s amazing to me how many people I come across who derive their perceptions of real estate from HGTV.

Including my daughters.

Yes, it’s true, my 13 and 14 year old daughters are HGTV junkies.  “Love It or List It”, “House Hunters”, “Property Virgins”… my DVR is like a never-ending loop of nightmarish real estate programming.

Here’s the problem – it’s all bogus.

I have actually tried to wade through a few of these programs with them, and I always end up in the same place… embarrassed, demeaned, and feeling like I just wasted another valuable hour of my life.

While there might occasionally be some miniscule thread of reality actually running through these “reality” shows, you have to search hard to find it.

Egotistical, golf-loving real estate agents.  Overly-zealous property stagers salivating over the prospect of a five-figure design budget.  Clueless buyers with no regard for value, negotiation or exit strategy.  It looks absolutely nothing like reality, or at least reality for someone actually selling homes to clients who actually matter.

There is a firm 80/20 rule in real estate, as there is in life.  Twenty percent of the agents do 80% of the business, and everyone else is fighting for table scraps.  Or trying to launch their acting career on HGTV.

HGTV is not for the doers.  It is for the posers.  Most of the agents on these shows are not serious professionals.  In fact, I would love it if HGTV would actually post sales production history next to each character’s name.

“Bob Smith, Real Estate Agent.  Sales in Past 12 Months – 3.  Income - $17,213.  Lives with his mom.”

“Randy Raccoon, Real Estate Agent.  Sales in Past 12 Months – 5.  Trust Fund Baby.  Scratch Golfer.”

The people who are actually selling homes, the top 20%, are far too busy closing deals and helping people to participate in this nonsense.  So you end up in a parodied world of clich├ęs and cluelessness, scripted by screenwriters and directors who know nothing about the real world of real estate.

It doesn’t bother me.  It humors me.  But it also concerns me when people poised to make decisions involving real money with real consequences show up utterly clueless when it comes to their understanding of what a real estate transaction should look like. 

Most people will only buy a few homes in their lifetime.  Therefore, these outcomes are important.  You don’t buy a home for its cabinets or its carpet.  You buy a home based on value, based on its location, based on its resale potential, based on the improvement in your quality of life that comes from signing that purchase offer and negotiating that deal. 

If you’re smart, you buy guided by logic, not emotion.  You assemble a team of competent, ethical professionals and approach it seriously.  You shun the spotlight because there’s serious work to be done and important decisions require your full attention.    

Look, if you want to watch HGTV, have at it.  There’s far worse stuff on television.  Just realize that what you’re seeing is about as real as Marge Simpson’s blue hair.  

Thursday, January 23, 2014

CONSPIRACY OF THE COMPETENT

This post is probably going to ruffle some feathers, but I think it’s worth putting out there.  I showed some restraint in posting it, however, because I actually wrote this in the fall of 2013 but held on to it for a few months so as to protect the identities of those (most recently) involved.

There’s a conspiracy going on in real estate right now.  It’s the “Conspiracy of the Competent”.

What does that mean?

It means that, all things being equal, agents who do deals prefer to do deals with agents who do deals. 

In a hot market, sellers have far more leverage than they have had in many years.  In a cold market, buyers get to set the rules of engagement.  In any market environment, the leverage shifts from one side to the other based on whose side the numbers are favoring.

Right now, if you’re selling a home, the name of the game isn’t simply “getting an offer”.  It’s getting the RIGHT offer, from the RIGHT buyer, with the RIGHT agent, with the RIGHT terms. 

Sound farfetched?

If you understand what this market is, it’s not farfetched at all.

One of the classic mistakes lower-producing agents make is that they fall in love with any deal, because they think that being under contract is all that matters.

Well, that’s like saying it doesn’t matter who you get engaged to, as long as you are engaged.

As the father of two daughters, I can tell you that kind of thinking is preposterous!

It completely matters who you contract with, because for the next 45 days, you’re going to be in an intense relationship that is almost certain to have dips, turns and drama at some point.  If both sides are committed to the interests of their clients, it’s almost inevitable.

So why would you knowingly contract with an agent who sells five homes a year when you could find someone successfully selling 20 or 30? 

Now it’s true, there are a handful of really good agents out there (perhaps semi-retired) who only sell a few homes a year by choice.  And there are some "high producing" agents who you would be well-advised to stay away from.  That’s why I get on the phone and ask questions.

I also do my diligence to figure out who the buyers are.  How did the agent meet them?  Past client?  Referral?  Blind call from a bus bench ad?  It matters.

Then we talk about the lender.  If it’s Quicken Loans or the Bank of Zimbabwe, you might want to pass.  I strongly prefer lenders who are locally-based and who have established relationships with their real estate agents, because again, teamwork and solving problems is at the core of making it to closing in one piece.

Three years ago, I didn’t vet things so invasively.  That’s because three years ago, you weren’t going to get multiple offers.  Buyers were scarce and sellers were plentiful.  That meant buyers got to call the shots, and sellers who wanted to sell had to deal with a very thin buyer pool.  And that meant sometimes you simply needed to contract with people who might cause more problems than they solve. 

Of course, every situation is unique and sometimes I do choose to work with agents who don’t sell a lot of homes.   Maybe they have an incredibly well-qualified buyer, with bank statements submitted to back up a large down payment.  Maybe they are new to the business but are working under an accomplished and well-respected agent.  Or maybe, on occasion, every now and then you simply have no choice but to contract with someone who doesn’t sell a lot of homes.  Those are often the deals that hasten ongoing hair loss and these stupid crows’ feet next to my eyes.

But all things being equal, I’m drawn to competence and proven results.

If you’re working with your hairdresser or your cousin who just got his real estate license, you might not want to hear this.  But good agents prefer to work with good agents.  

Thursday, January 16, 2014

HOW MUCH HIGHER WOULD YOU LIKE YOUR PAYMENT TO BE - 12%, 18% or 24%?

I am convinced that 2013 will go down on record as the best year in our lifetime to buy a new home.  It’s pretty simple – prices were near the bottom and interest rates were ridiculously and artificially lower than at any time in history, thanks to the Federal Reserve’s efforts to jack up the economy with “free” money (okay, nearly free).

Last February, I had one client close on a 30 year loan with a rate of 2.875%.  That is a fixed rate.  Yes, it really happened.

Many others closed at 3.25%, 3.50% or 3.75%.  Again, all utterly ridiculous in the context of historical norms (see chart to right).

The fact is, that with just over 10% appreciation (last year’s average in Denver) and a 1% increase in rates (which happened over the course of the year), the monthly payment on a new purchase December 31 was 26% higher than it was on January 1. 

That’s why last year was the best time ever to purchase a home.

So what does that mean today?  Have you missed the market? 

Of course, everyone must make their own decisions, but for reasons I have outlined extensively on this blog, I think there’s plenty of gas left in the tank – but with a strong bias toward better performance at the lower price points.

As I discussed in my 2014 Client Letter, the Federal Reserve has announced it will discontinue its policy of “Quantitative Easing” (printing money for banks to use on mortgage loans, then buying back the notes at below market rates) by the end of this year. 

That’s $1 trillion in mortgage capital annually that the Fed has said will go away. 

Does that mean higher rates?  Assuming the economy continues to make strides and there are no unforeseen global disruptions (terrorism, war, chemical attacks on US soil, etc), I would place the odds of higher rates by year end in the 90th percentile.

So have you missed the market if you didn’t buy last year?

Well, let’s consider a couple of scenarios.

Let’s say real estate matches its performance of 2013 (optimistic, but possible).  If values go up 10% and rates go up 1%, your payment one year from today will be 24% higher than it is today.

A $250,000 purchase with a 10% down payment would have a $225,000 loan.  At 4.5% over 30 years, your monthly principal and interest payment is $1,010. 

A $275,000 purchase with a 10% down payment would have a $247,500 loan.  At 5.5% over 30 years, your monthly principal and interest payment is $1,254.

That’s a 24% increase.

You can easily run scenarios on other projections as well.

A one percent increase in rates coupled with 5% appreciation leads at an 18% increase in payment.

And for the naysayers… let’s say housing is flat in 2014, with no appreciation at all.  A one percent increase in rates will drive your payment 12% higher.

That means the likelihood of higher payments at year end is a virtual certainty.  That means your dollar goes further now. 

And remember that mortgage payments, unlike rent, do not adjust for inflation or future market conditions.  A $1,200 P&I payment today will be the same payment in 2019, 2024, 2029 or however far out you wish to project. 

It’s mid-January and the market is already teeming with buyers.  Inventory remains near all-time lows.  Distressed sales are history. 

With each passing day, housing will become more expensive, meaning that when it comes to making a move, sooner truly is much better than later.

Wednesday, January 1, 2014

2014 CLIENT LETTER (LONG FORM)

Here is the long form version of my 2014 client letter, which goes out in the mail next week.  (Only the true housing junkies will make it through all six pages!)

Enjoy - DB

******

Dear Friends,

Greetings, and Happy New Year!

On New Year’s Eve, the Denver Business Journal released its list of top news stories for 2013.  Ranked #1?  Denver’s remarkable housing recovery, which featured record-low inventory, an increase in sales of nearly 20% and a top-five ranking in several national surveys. 

It also featured appreciation.  Lots of it.  Here are the most recent 12-month appreciation projections from various reporting sources:

Core Logic: 10.2%
Trulia:  9.6%
Zillow:  9.3%
Case-Shiller:  9.5%
Metro Denver Economic Development Corporation:  9.2%

The growth in values triggered 2013 equity gains of over $21 billion in the Denver metro area alone.

And that growth in equity resulted in increased consumer spending, which resulted in increased hiring, which resulted in increased new construction of homes and apartments, which resulted in the best year for overall economic growth since the recession began in 2007.

But what does it mean going forward?

While 2013 was a record-breaking year for housing, I believe there’s more fuel in the tank for 2014.  However, it’s going to look different.  Appreciation rates are going to drop back to more traditional levels, as higher rates and higher prices cause buyers to think longer and harder before pulling the trigger.

The fact of the matter is that when you combine interest rate increases with price appreciation, homes are significantly more expensive today than they were 12 months ago.  One recent report shows that with 10% appreciation and 30-year mortgage rates going from 3.25% at the start of the year to 4.50% today, purchasing a home on the last day of 2013 would be roughly 26% more expensive than purchasing it on the first day of 2013.

That’s going to slow some people down.

Which is a perfect lead in to the concept of “market velocity”.  I believe the low prices and low rates we saw during the first half of 2013 created a near-perfect storm for buyers and sellers alike, which resulted in unprecedented market velocity. 

Market velocity is simply a fancy term for how quickly things sell.  During June of 2013, half of the homes that went under contract were on the market less than six days.  That is simply astounding, and in 19 years as a broker, I’ve never seen anything like it.

I listed one home in February that had 29 showings and 4 offers in 48 hours – and we were not giving it away!  To the contrary, this sale established a new high for the neighborhood, but with rates being so low and payments being so much cheaper than rent, buyers were climbing over one another to take advantage of these conditions.  (We also did an amazing job of staging it, but that’s a separate conversation)

So while the conditions were great for buyers, they were just as good for sellers.  Multiple offers, over-list price offers and “escalator clauses” became very common through the middle months of the year.  Sellers made excellent profits while buyers still felt they were getting great value.  It truly was the best of times.

As I referenced above, it’s going to change some in 2014, but I believe we’re still in a good place.  Zillow recently ranked Denver as the fifth strongest housing market in the country, and the highest ranked market in the country not located in California (which saw value losses of up to 50% during the downturn, compared to losses of 10 to 15% in Denver). 

Zillow’s “Market Health Index” gave Denver an overall score of 8.1, meaning that the fundamentals of the Denver market are stronger than 81% of the metro areas in the United States.  Over 86% of all homes sold in the Denver metro area during 2013 were sold at a gain, and only 11% of mortgages remain in a negative equity position.  Prices today are higher now than they were at the peak of the market in 2006.

So clearly there’s plenty that’s going well, but there are also some things to keep an eye on in 2014. No market cycle lasts forever, and the truth is that part of our upward trajectory has been caused by unprecedented government involvement in housing. 

Let me share with you some reasons the housing recovery still has legs, as well as things to watch for that could signal a change in the future direction of the market. 

POPULATION GROWTH
If you have spent any time on I-25 in the past three years, this isn’t news to you:  the population in the Denver metro area is exploding. 

The US Census Bureau recently reported that Colorado has picked up over 839,000 new residents in the past three years, a stunning annualized growth rate of 4.76%, fourth highest of the 50 states.  A growth rate between 2 and 2.5% is considered average.

So where are these 839,000 new residents going to live?  In the past three years, there have been fewer than 100,000 permits pulled for new homes and multi-family units.  That’s a dramatic shortage which is keeping rents at all-time highs and vacancy rates at all-time lows, while also ensuring a continuing demand for housing.    

ECONOMIC GROWTH
Denver’s unemployment rate fell from 7.0% at the start of 2013 to 5.9% at the end of 2013.  The national unemployment rate began the year at 7.9% and was 7.3% as of the end of October, according to the Bureau of Labor Statistics, so Denver continues to significantly outperform the rest of the country.

Consumer confidence for the Mountain Region (which includes Colorado) hit a six-year high of 80.7, more than 10 points above the national level of 70.4.  Significantly, while consumer confidence nationally has fallen by 1.7 points since the beginning of the year, the Mountain Region reading is 18.5 points higher than it was at the start of the year. 

The NASDAQ was up 38%, the S&P 500 increased 29% and Bloomberg’s Colorado Index improved by over 28% during 2013.  Coupled with housing’s huge comeback in 2013, people are feeling the “wealth effect” of newfound equity for the first time in at least seven years.

Let me make one important disclaimer, however, about the economy.  If you have a job, own a house, and have a significant portfolio of stocks, these are good times.  Unfortunately, 35% of the population rents and an even larger percentage has no stake in the stock market.  For these people, the economy remains extremely challenging, and I don’t see it getting better. 

Right or wrong, the divide between the rich and poor is growing wider, and you need to be aware of this when you make housing decisions. 

FORECLOSURES, SHORT SALES NO LONGER RELEVANT
At the start of 2011, 45% of the homes for sale in the Denver MLS were short sales or foreclosures.  Today, that number is 5%.  From a housing standpoint, foreclosures and short sales are statistically irrelevant. 

The disappearance of foreclosure inventory is one the big factors in our overall lack of inventory.  As of today, there are just over 8,000 homes for sale in the Denver metro area, down from a high-water mark of nearly 31,000 (most of them foreclosures) during the summer of 2007. 

When you consider that over 83,000 homes were lost to foreclosure in the seven-county Denver metro area during the peak of the recession, and many of these “boomerang buyers” are now re-entering the market, you see how lopsided the supply-demand imbalance has become.

And because builders cannot build anything with a profit below about $325,000, and most of these first-generation foreclosure folks are looking for homes well below that price point, it’s not hard to envision continued upside at the lower price points.

REPLACEMENT COST
As I just referenced, while builders are most definitely cranking out the homes again, it’s virtually impossible to find a new single family home below $325k (unless you are willing to move to Fort Lupton, Firestone or Lochbuie, where the land value is essentially zero). 

Replacement cost is a very important number in the context of understanding real estate values. 

Many of you have heard a story I told repeatedly this year of a client who sold a home here in Denver in order to move to Las Vegas.  He made an offer on a 3,000 square foot ranch home on a golf course that was built in 2007 and originally sold for $525,000.  The Las Vegas property was bank-owned and he ended up in a bidding war.  The bank listed it for $255,000 and he ended up going all the way to $280,000 (and outbidding several other buyers) to get the home under contract.

When he asked me what I thought of his deal, I suggested that he take a hard look at replacement cost.  And sure enough, when the insurance company went to the house to prepare an insurance quote, Allstate estimated the replacement cost at $440,000. 

If you can buy something for $280,000 that costs $440,000 to rebuild, you are not overpaying.  And that’s why you’ve heard stories of 25% to 30% price appreciation in places like Phoenix, Las Vegas and the hardest-hit foreclosure markets during 2013.    

Because of the absolute stupidity and mismanagement of the financial crisis by the banks and the government, homes have been selling at absurd discounts, with the losses offset by the Federal Reserve and banking regulators (or, if you want to be painfully precise, current and future taxpayers).

Lower-priced homes are going to continue to be the safest bet in housing because the supply is limited, the demand for them is extreme and builders can’t build them for a profit.  Even with prices coming off the bottom, entry-level housing is still the most secure place to invest in real estate.

NEW CONSTRUCTION
Now playing in a city near you.  There’s plenty of new construction once again, although as I referenced, very little of it is what we would call “affordable”. 

New construction is booming because money is cheap, homeowners in the mid-price ranges now have equity and builders can’t help themselves. 

Are we overbuilding again at the higher price points?  I believe we are.  And when interest rates go up, eventually, new construction will be the first sector of the market to feel it.

New construction is most often an emotional purchase based on wants and desires, not need.  When economic conditions change, luxuries go out the window and people focus on what they need, not what they want.  As always, be careful with new construction in 2014.

CONDOS
Conversely, I think there is evidence to support the theory that the condo market is about to get healthy. 

Truthfully, condos are very rarely a “first choice” when it comes to housing, but I believe we are living in an economy where second choices are going to become a primary alternative (out of necessity) to more and more people, especially at the lower price points. 

And that’s what condos generally are – more affordable entry-level properties that give people a foot in the door when it comes to housing.

In the boom market of 2000 – 2006, condo buyers could get in with little or no money down.  And that’s pretty much how it went.  For five or six years, most condo buyers put no money down and had zero equity.  When the market turned, they had the least incentive to stick around, and so condo foreclosure rates soared and property values crashed. 

During the recession, conventional lenders took an exceptionally hard line on condos, with many refusing to do any loans for buyers who didn’t have 20% down.  That further thinned the buyer pool, which caused more value losses and even more foreclosures.  Then FHA essentially abandoned the condo market in 2009, and it just got awful.  This regrettable cycle finally bottomed in 2011, but now it’s starting to turn. 

I just sold a condo in November to a buyer who purchased with a 5% down payment.  Now that we’re done with foreclosures and the market is improving, more lenders are getting back into the game. 

When that happens, and you let more 5% and 10% down payment buyers into the arena, the buyer pool expands.  And since we don’t have any more foreclosures and inventory is so low, condo prices figure to continue trending upward.

Condos are not for everybody, but after avoiding them at any price for five years, I expect to sell more of them in 2014.

QUANTITATIVE EASING
Finally, we can’t discuss housing without some mention of Quantitative Easing (known as “QE”).  If you don’t know what this terms means, you should get educated quickly.  (I wrote about it extensively on my blog September 20, 2013 – go to www.DaleBecker.com for the five-minute crash course)

In short, Quantitative Easing is a policy the Federal Reserve began implementing during the darkest days of our financial crisis back in 2009.  To keep the mortgage market from completely collapsing, the Fed began printing money to fund mortgages and purchasing the notes at below market rates.  The overreach is that, five years later, they’re still doing it.

That’s how buyers have been able to get rates in the 3’s and 4’s over the past two years, when market conditions would warrant a higher rate of return for investors (and higher interest rates for buyers). 

The Fed has been pumping $1 trillion a year into the economy via the QE program, and it has done its job.  It has stabilized the market and now it has fueled significant price and equity gains, which is what the government has wanted all along. 

It’s time to stop printing money, but I fear the government lacks the courage to do it. 

QE purchases are supposed to slow by $10 billion per month starting in January, and the Fed has said it plans to be out of the market entirely by December.  I personally don’t see it happening because the benefits of low rates and soaring home prices are just too tantalizing for the government to back away from (especially in an election year), but for the future sustainability of the market, I hope it happens. 

If you have made it this far, I commend you for you diligence and desire to understand the housing market.  I have always said that I want my clients to be best-educated buyers and sellers in the marketplace, and that is why I write this annual overview at the beginning of each year.

This will be my 20th year as a real estate broker.  In those years, I have seen all types of markets.  The one constant is that I have always worked to protect my clients and help them create opportunities for success. 

I am deeply humbled by your continued support, your ongoing friendship and the amazing quantity (and quality) of referrals you send my way. 

I wish you and your loved ones all the best for a happy, healthy and prosperous 2014!



Dale Becker, CRS
RE/MAX Masters
(303) 416-0087