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
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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%
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