Wednesday, April 15, 2015

WHEN THE MUSIC STOPS

I’ll be the first to admit I’ve had challenges adjusting to the current housing boom in Denver.  Call me crazy, but I lived through 2006 – 2010 and I saw what it looked like.  31,000 homes for sale in the Denver MLS.  Seventy percent of the inventory bank-owned or short sales.  Retail sellers with no prayer of being able to sell in the face of gutted, discounted competition. 

You should have seen it!

What, you were there?  You saw it?  Really?

That’s hard to believe, because the people overrunning the Denver market these days bear no resemblance to the people I was spending all my time with from 2006 to 2010, the ones who swore that buying a home was like standing over a trap door.  The ones who would never offer “full price” for anything.  The ones who said that smart people rented.

So how do you reconcile that with today? 

Already this year, I have listed homes that received 32 offers, 19 offers, 14 offers, 12 offers and 8 offers.  Those homes had top offers $33k, $24k, $21k, $12k and $11k over list price.  (Not that we accepted every “top” offer… if you don’t address the appraisal clause in an offer like that, you’re not being serious)

This is the most emotional housing market I have ever seen in 21 years as a broker.  Buyers (and their agents) are literally making crazy offers to try and get homes under contract.  Often, I have to wonder if the agents want the deals more than their clients.

Working with buyers in this market has become darn near impossible, at least under $300k.  That’s because crazy now makes the market.  All too often, well-qualified, well-counseled, legitimate buyers get completely blown out by crazy agents with crazy buyers who write offers that make no sense at all. 

But too many sellers and their agents are enticed by the siren song of a crazy offer, significantly over list price with no chance to appraise.  I’ll say it again – if the buyer’s offer doesn’t speak to the appraisal clause (i.e. waiving the appraisal clause altogether, or willing to go $5k over appraised value, or whatever the buyer feels is appropriate), then you are asking for trouble.

I am spending a lot of time right of now trying to project 12 months into the future.  This kind of emotion can’t last forever.  Right now we’re number one in the country for home price appreciation.  Next year, we won’t be.  Even if we were number four or number five among all fifty states, the headlines in the Denver Post will ominously read “Denver Market Losing Steam”, or “Denver Housing Cooldown Continues.”  It’s predictable.

There will come a tipping point, probably something that none of us can see.  It could be an international event.  It could be a shake up on Wall Street.  Or maybe it will just be a surge in interest rates. 

With all of the new construction in the metro area six to 12 months from completion, what would happen if rates went to 5.5% this fall?  How many buyers under contract right now (with rates in the 3s) would fail to qualify at 5.5%?  If that happened, what would happen to the new construction market?  How many buyers would walk away?  How much unsold inventory would there suddenly be?  Who would make payments at 5.5% when the guy across the street closed on the same home 12 months earlier at 3.5%?

Do I anticipate this will happen?  No, I don’t. 

But could it?  Yes, it could.

I am disturbed at how “drunk on housing” everybody seems to be right now.  I realize that rents are skyrocketing and rising home equity is creating a massive wealth effect.  But everything has a season. 

How long will this season last?  As I wrote earlier a few months ago, the two numbers I will be watching in 2015 are the number of active homes on the market and the area unemployment rate. 

Right now, unemployment in Denver is 3.5%, statewide it’s 4.1%.  We are at the top of every national list for jobs, growth, consumer confidence and projected future appreciation.  If the employment market remains strong, then housing should continue to march in lockstep.

Today, buyers have real jobs, real credit scores and real down payments.  That wasn’t always the case in 2006, and that means our buyer pool is significantly stronger today than it was then.  Even if some of their offers are crazy, at least buyers are employed.

The inventory of homes - currently about 5,300 - is down 15% from a year ago.  The ten year average for homes on the market during the spring is around 16,000, so inventory remains incredibly tight.  

But I still have to listen to that still, small voice that says nothing lasts forever.  When everybody is heading east, you have to at least give some thought to heading west.  Or at least take a few steps in that direction.

Twelve months from now, we’ll all know exactly what we were supposed to be doing in the spring of 2015.  Buying.  I mean selling.  I mean moving to Fort Collins.  I mean moving to Charlotte. 

It’s not easy to make decisions in the moment, just as it wasn’t easy to leave California in 2005 after a ten year run on housing and move to Denver.  People said I was crazy.  I wasn’t. 

I’m not leaving Denver.  I love it here.  And I think our market is still legit.  But it’s less legit that it was a year ago, and certainly a lot less legit than it was three years ago, when people unknowingly walked into small fortunes just by signing on the dotted line. 

The numbers made incredible sense, then.  They make less sense today.  Although you would never know it if you walked into any builder’s office at 2 p.m. on a Saturday afternoon.