Wednesday, December 31, 2014

HIGHLIGHTS AND LOWLIGHTS

New Year’s Eve is upon us, and as I look back over 2014, there is so much to talk about.

First and foremost, I am incredibly grateful for an amazing year.  Record sales volume, a near-record for personal transactions, and definitely a record for most number of offers written!  And I can say with complete integrity that, as a whole, I have never worked with a better group of clients.

The market of 2014 was also the most fevered, competitive and cutthroat marketplace I’ve seen in a long time.  There were some terrific victories and takeaways, as well as some things I’d be just as happy to forget about.

Here are some highs and lows of the year that was…

HIGHLIGHTS

- Successfully helping relocating clients from California, New Jersey, Illinois, Florida, Washington, New York, Minnesota, Louisiana, and Texas make the move to Colorado;
- Hitting a year-end total of nearly 80 “Five Star” reviews on my Zillow profile, currently the fourth highest number for any single agent in Colorado (thank you Zillow Reviewers!);
- Holding a spectacular Client Appreciation Event in September at the Denver Botanic Gardens which drew over 100 friends and past clients on a gorgeous fall afternoon;
- Two outstanding Client Appreciation Events with suites at Coors Field, although our June 8 game turned into an unfortunate mashup of tornado warnings, rain delays and Clayton Kershaw domination of the Rockies;
- The most expensive home I sold this year was a breathtaking $704,000 Willow Springs Spanish style villa in the foothills of Morrison;
- The most unique property I sold this year was a $538,000 custom-built panoramic mountain view home in Evergreen constructed high into the hillside of a 15 acre, south-facing parcel with its own hiking trails and rock outcroppings;
- I turned three “backup” offers into successful contracts by putting together highly competitive, incentivized bids on homes that were already locked up by other buyers who, as it turns out, were not as committed as we were;
- I sold homes three doors apart to two brothers who apparently really wanted to live close to each other;
- I helped a client purchase a historic commercial building in the Baker neighborhood who plans to change the zoning, renovate it, and convert it into an architecturally stunning residential unit; 
- While all listings were good listings in 2014, I had three listings draw 10 or more offers (all of which sold $10k or more above list price), sold my listings for 98.9% of original asking price and sold them all in an average of 5.6 days on the market – not 56, 5.6!

LOWLIGHTS

- In the red hot market of 2014, I wrote a total of 46 “failed offers”… which probably matches the number of unsuccessful offers I wrote from 2010 – 2013 combined (I had never bothered to count them up until this year!);
- Buyer clients were sometimes forced to deal with low appraisals, sellers who refused to fix anything and unreasonable listing agents who routinely left money on the table for their sellers by cherry-picking easy to work with cash buyers over well-qualified and often more motivated financed buyers;
- Thanks to “Coming Soon” signs and agents more committed to double-ending deals than serving their sellers’ interests, a large number of properties sold without ever hitting the MLS – a serious disservice to most sellers and something flat out unfair to buyers;
- Escalator clauses, taking homes “as is” and letting sizable chunks of earnest money sometimes go hard as early as seller acceptance became necessary practices for committed buyers;
- Too many conversations with listing agents that ended with unprofessional overtures of "take it or leave it";
- Too many prospective sellers who chose to stay put because they were shocked to find out that the upleg homes they wanted to purchase had also gone up in value;
- Too many buyers who threw in the towel after weeks or months on the hunt because the market was just too competitive;  
- Too many conversations with everybody that ended with "it's already under contract".  

One sad lowlight was sitting at a closing table as my buyers purchased from a young couple who had lived in their home 22.5 months, just 45 days short of hitting “tax free” status on a $60,000 capital gain.  

Their agent had said nothing to them about the consequences of selling before their two year anniversary, which led to some anxious moments and uncomfortable contortions at the closing table as the title company informed the sellers of the tax hit they were about to take.    

The painful twist is that I had actually brought this issue up the day we submitted the contract, because I pull ownership and encumbrance reports and title history every time I write an offer.

The agent said she didn't know about it, didn't think the sellers would care, and left it at that.  Turns out, they didn't care because they didn't know.  Next April 15, that lack of knowledge is going to cost them a five-figure check, made payable to the IRS. 

Which leads to the best advice I can give anyone looking to buy or sell a home in 2015, because it's the same yesterday, today or tomorrow… get good help!

Monday, December 29, 2014

THE TWO NUMBERS I WILL BE WATCHING IN 2015

I have always thought of myself as a contrarian, someone who thinks “summer all winter” and “winter all summer”.

With that in mind, and given how hot our real estate market has been for the past 36 months, it's wise to begin looking for signs of change. 

Truth is, almost of the important indicators – employment, migration, inventory, demographics – are in alignment and in amazingly good shape for continued growth and appreciation.  But no cycle can last forever.  Change has to happen, eventually. 

So the real question is not if, but when, things will start to turn.   And when things turn, what will that look like?

If the market turns in 2016, then buying in 2015 may not be a wise decision.  But if the next market turns in 2018 or 2019, and prices are 20% or 30% higher than they are today, then jumping in now with rock bottom interest rates still makes a lot of sense.

Hindsight is always 20/20, and that’s the problem.  We all know today what we should have been doing yesterday.  It’s a lot harder when you peer into the future, and that’s why it’s critically important to get good help.

As many of you know, in the fall of 2004 I began to see things happening in the Southern California real estate market that were “pattern breakers”.  Specifically, I saw marginally-qualified subprime buyers (a new dynamic) entering the market at a time when inventory was trending flat (instead of dropping off, as it usually did during the fall and winter months).  The change was subtle to most, but discernible to those who were paying close attention to the numbers.   

This one-two punch of previously-excluded buyers coming into a slower moving market signaled to me that the end was near… and so within six months I sold my home, packed up and started a new phase of my life in Denver, just months before the California market imploded.

My eyes are wide open again, because what we have seen in Denver since the start of 2012 has been historic.  Specifically, we have seen appreciation of between 20% and 50% in just three years (with lower-priced homes scoring the biggest gains), while inventory has plunged to an all-time low.  The median-priced Denver home has seen $60,000 or more of gain in 36 months, a potentially scary scenario for buyers entering the market today.

Zillow reports metro Denver real estate gained $26 billion of value in 2014, after roughly $21 billion of gains in 2013.  If you own a home, the wealth effect of all this newfound equity not only allows you to sleep well at night, it’s starting to finance a lot of new stuff, like cars, boats and European vacations… just as it did in California back in 2005.  

Meantime, rents are also soaring, which is interesting because the rental market usually flattens out when the housing market gets hot (as people transition from renters to owners).  This time, rents and prices appear to be moving in tandem, which is in large part due to the fact we had virtually no new construction between 2008 and 2013 and our statewide population growth has been so strong over the past few years, with a surge in educated and immediately-employable Millennials leading the way. 

So what signs will I be watching for that might signal change in the months to come? 

When you cut through all of it, I believe there are two key numbers to watch:  inventory and unemployment.

Let’s start with inventory… as of today, there are 5,600 homes for sale in the Denver metro area.  That’s down from 18,000 homes in 2011, 23,000 in 2010 and more than 31,000 homes for sale in 2007.  In fact, the December inventory has reached an all-time low for the Denver MLS, which dates to 1985, when the population was less than half of what it is today. 

Remember that I study numbers, and have done so for 20 years.  What’s going on right now is so breathtaking there are hardly words to describe it.  For comparative purposes, in a “normal” market (60 to 90 days to sell a well-priced home, 3% to 4% annual appreciation) you would typically have about twice as many homes for sale as you have under contract at any point in time.

With 6,458 homes currently under contract in the Denver MLS, you would need approximately 13,000 homes for sale to hit market equilibrium.  That means that even if the current inventory doubled, with no increase in the number of contracts, you would still have a seller’s market! 

So the first number to watch is inventory, although we are so inventory-starved there appears to be no problem heading into the new year.

The second number to watch is the unemployment rate.  In virtually every housing recovery, housing growth and job growth have gone hand in hand, with job growth leading the way.  Today, the unemployment rate in Denver is a ridiculous 3.6%, and in Colorado it’s just 4.1%.

Anything below 5.0% is a strong job market, with wage growth a near certainty.  The government considers an unemployment rate of 6.0% to be full employment.  California, by contrast (an overpriced housing market once again falling into stagnation), is struggling under the weight of a 7.3% unemployment rate, with many of those unable to find jobs now leaving for stronger employment markets like Denver.

I also believe you should be watching for changes in underwriting guidelines, as the credit-integrity of today's buyers provides the foundation for tomorrow's market.

There are many other factors that can influence a housing market (interest rates, vacancy rates, fuel prices, etc.) but I believe the two numbers that best encapsulate what’s going on with all of the others are inventory and employment.

Watch them, because where they go, the housing market is sure to follow.   

Saturday, December 20, 2014

PRICING IS AN ART, APPRAISING IS A SCIENCE

If I go the grocery store and buy an apple, I know that it’s going to cost somewhere between 75 cents and a dollar.  It’s pretty easy to determine value, because I can just compare what King Soopers is charging versus what Safeway is charging for the same variety, and make a decision from there.

Generally speaking, apples are apples.

Valuing a house is a lot more complicated.  There are many variables that go into determining the value of a home.  Condition, location, amenities, schools, proximity to shopping, access to roads and public transit, neighboring re-development… there are countless components that go into the overall value proposition found in a home.

These days, with home prices skyrocketing in Denver, appraisals have become a real issue.  With lower-priced homes especially, somewhere between 25% and 33% of all financed deals are hitting snags on the appraisal, mostly because appraisers look backwards (at past sales) while buyers are simply trying to outbid the masses to get a home under contract before prices go up even further. 

Which leads to a question… how accurate is an appraisal, and does an appraisal really determine what your home is worth?

I meet with appraisers regularly, as I don’t leave things to chance and strive to engage appraisers personally on each and every one of my listings.  If you have properly marketed a home and have multiple offers, you can pretty much bet the appraisal is going to be a challenge. 

So showing up with a list of improvements and upgrades, hand-selected comps and (hopefully) a stack of competing offers goes a long way toward getting a home to appraise at the contract price.

But does an appraisal determine value?

Appraisals serve an important role, which is (mostly) protecting the lender’s interest in a transaction.  No lender wants to loan $400,000 on a $375,000 home.  That’s bad business. 

While the buyer pays for the appraisal, in my opinion that appraisal is mostly for the benefit of the bank.  The buyer’s agent ought to be the one looking out for the buyer.  The appraisal serves as a backstop to make sure there is some basis for the contract price, but if a low appraisal is news to the buyer’s agent, chances are that agent is either clueless or not looking out for the buyer’s interest.

Now let me tell you where the appraisal process comes off the tracks.

I had a client reach out this week who purchased a starter home for $212,000 back in March.  She knows the market is hot, because we talk regularly, and she knows that interest rates have dipped again.  Therefore, she wanted to know if there was any chance of refinancing with a 20% equity position, which would allow her to drop her mortgage insurance and significantly lower her monthly payment.

Now I follow her neighborhood closely and I know exactly what I would do if I was listing her home today.  I would have no hesitation putting her home on the market at $235,000 to $240,000, because I believe buyer demand is so strong (and her home would show so well) that she would get it.

But an appraiser is going to see things very differently, because the only two model matches to hers which have sold since March were a trashed out HUD home (for $199,000) and a marginally-updated resale (for $223,000).  Both of these homes needed work, but as comps, there they sit, gumming up the works.

If an appraiser is simply asked to do an appraisal, without the compensating factor of three or four offers in hand in the high 230s (or even 240s), the appraiser is going to default to using these two comps.  Sure, he or she will make some basic adjustment for condition, which may add $10,000 or $15,000 of value, but could an appraiser take closed sales of $199,000 and $223,000 and get to $240,000? 

Highly unlikely.

Truth is, the more reliable indicator for what your home is worth in today's market is determined by what a ready, willing and able buyer will pay for it.  And that may be very different than the value an appraiser comes up with, if that appraiser has nothing else to go on but past sales.

That’s why hiring a strong listing agent is so incredibly important.  Leave that appraisal to chance, and you may get a random outcome.  But show up with four offers in hand, a list of improvements, interior pictures of the discredited model matches, a list of area homes that have similarities (and have sold at higher prices) and a copy of your resume, showing that you are closing a large number of deals and that you have been doing this for 20 years… and you very often will get the benefit of the doubt, and the higher price for your seller.

Pricing a home to get top dollar is an art.  Appraising a home is much more of a science.  There is an inherent conflict between the two, and it’s the listing agent’s job to bridge the divide. 

For my past client, I don’t think her home is quite ready to appraise at a high enough number to drop her mortgage insurance.  But could she sell it at a price that's 12-15% above what she paid for it nine months ago?  That’s a different question, because in this market, properly staged and marketed, I believe she could.  

Thursday, December 4, 2014

LATEST INVENTORY DROP SAYS THE SURGE WILL CONTINUE

Here it comes, again... the inventory of homes for sale in Denver today is down nearly 30% from a year ago, while the number of homes under contract in the past 30 days is up over 24% from the same period in 2013.  

These are strong, strong numbers that demonstrate our market is losing none of its momentum going into 2015.

As you know, I have been a student of housing market data for nearly 20 years.  Every month, I pull my own data from the MLS, studying active inventory, homes under contract and the number of homes that have sold.  I look at distressed inventory, foreclosure filings, and employment figures.  

These charts and spreadsheets form the basis of my buyer and seller consultations, because the numbers always tell an important story.    

When inventory began diving in 2011, I saw it early and encouraged my buyers to get serious.  When inventory continued falling in 2012, I challenged my buyers to swing fast and hard, before prices started climbing.  In 2013, as double digit appreciation became the norm in many parts of town, I showed people it was "real" because demand was far outstripping supply and both job growth and migration supported higher prices.

And as 2014 comes to an end, it is happening again. 

Even in the face of bidding wars, cash offers and record-high prices, inventory is diving again.  It's down 29.50% from one year ago, which again reflects massive demand swamping limited supply.

Here's the trend, month by month, since the summer:

- June.. 7,957 homes on the market, down 3.20% from June of 2013 
- July... 8,663 homes on the market, down 5.70% from July of 2013 
- August... 9,406 homes on the market, down 6.20% from August of 2013 
- September... 8,783 homes on the market, down 17.10% from September of 2013 
- October... 8,302 homes on the market, down 19.80% from October of 2013 
- November... 6,865 homes on the market, down 29.50% from November of 2013

When our market is ready to cool off, it will look 180 degrees opposite from what is happening today.  There are currently 7,470 homes under contract in the Denver MLS and only 6,865 homes for sale, a ratio of 0.92 homes on the market to each one under contract.  In a "normal" market, that ratio would be 2 to 1.  In November of 2010, just four years ago, it was 4.64 to 1.  

Absorption rate, which should be around five months in a normal market, is currently 1.42 months, a strong seller's market.  For entry level homes, below $250,000, it's 0.49 months.  For homes between $250,000 and $400,000, it's 0.92 months.  When absorption rates fall below three months, appreciation is essentially guaranteed.  When it's below one month, continuing price appreciation is automatic.  

It is my contention that the three year period between 2011 - 2013 will go down in history as the best Denver metro home buying opportunity in our lifetime, especially at the lower price points.  Three years ago, there were more than 4,500 homes on the market priced under $250,000.  Today, there are 927.  The reason?  Homes under $250,000 basically don't exist anymore.  

When this market starts to tire out, if it does, the first place you'll see it will be in the inventory.  On a year-over-year basis, it will start leveling off, then climbing slightly.  The minute you see that, you will know it's time to start changing your approach.  (And, factually speaking, that will happen.  The question is, how much higher will prices go before we hit that point of equilibrium?  And what will interest rates look like at that time?) 

The other key indicator is the jobless rate.  With unemployment in the Denver metro area at just 3.7% (and just 4.3% statewide), everyone who wants a job has one.  And when people are employed, they buy houses.

It is confidence, more than affordability, that drives markets.  If affordability drove the market, then everyone buying today would have bought in 2009 or 2010.  Affordability is nice, but employment matters more.

The average Denver area home has appreciated over $57,000 in the past two years alone.  Over $16 billion in new equity has been created in the metro area, unleashing spending power that is creating jobs and opportunity for anyone who wants it. 

Constructions projects are everywhere you look.  Companies are coming to Denver in record numbers.  Consumers are spending.  Oil, gas, technology, tourism... it's all booming.  

There will come a day when this market stabilizes.  When prices level off.  When supply balances with demand.  When things get back to "normal".  I am watching closely for signs of a market top, but right now, there are none.  The numbers say this is real, and it's not done yet.

My last four listings priced under $300,000 have drawn a total of 37 offers.  Thirty three of those buyers are still out there, frustrated, looking for homes.  

If you're not prepared to fight with other buyers, don't bother coming off the sidelines.  Because it's competitive right now, and only the most motivated buyers will prevail.  

If you own, these are the best of times.  And if you don't, it's quite possible you may be watching your opportunity for home ownership sail off into the Rocky Mountain sunset.