MAY MARKET UPDATE - RECOVERY IS HERE

The tightest real estate market in at least a decade got tighter last month, as inventory continued to fall to unprecedented levels and buyers continued storming the market as Denver's powerful real estate recovery rolled forward.

At the end of April, there were just 10,254 homes for sale in the Denver MLS, a drop of 43% from one year earlier.  A total of 4,721 homes went under contract during April, up from 3,775 during the same period a year ago.

But it together and you have a 43% drop in listings with a 20% increase in the number of contracts, pressure which is driving prices higher below $400,000 and sparking bidding wars through much of the metro area.

Below $250,000, the change is even more remarkable.  The number of listings for sale - 2,818 - is down 65% from the 8,007 homes that were on the market in this price range one year ago.  A total of 4,675 homes are currently under contract in this price range, which basically means three out of every five homes listed for sale below $250,000 is currently under contract.

The overall absorption rate, which was 5.37 months one year ago, is at just 2.22 months today.  Below $250,000, the absorption rate is just 1.37 months, which means at the current pace of sales it would take less than six weeks to sell every single home on the market today, regardless of price or condition.  

Foreclosures are now back to 2002 levels in Colorado and the state currently ranks 44th in the country in terms of mortgage delinquencies... a far cry from when Colorado led the nation in foreclosures per capita during 2005 and 2006.

First-time buyers continue pouring into the market, driven by soaring rents and incredibly low interest rates that make owning significantly cheaper than renting in most parts of town.

A shaky economy has capped the so-called "move up" market, which means there are fewer privately owned homes coming on the market at the same time bank-owned inventory has dwindled.

And, in an interesting twist, many of the more than 40,000 households that were foreclosed on back during those dark days of 2005 and 2006 are cycling back into the market, eager to own once again but approaching things much more conservatively this time around.

Add it all up and you have the formula for an amazing inventory crunch, the likes of which we haven't seen in many years.  As long as rates stay low, rents keep rising and builders stay mostly on the sidelines, you can expect it to continue for some time to come.

LIFELINE ON THE WAY FOR CONDO MARKET?

Three years after the condo market brutally tanked, hope may be on the horizon.

FHA has announced that it plans to revisit the drastic steps it took in 2009 to effectively get out of the condo market, steps that killed the primary funding source for condo loan in the US and sent values plummeting as a result.

Due in large part to the high number of investors and speculators who used FHA financing to fuel a condo bubble in cities like Miami, Las Vegas and San Diego during the boom, FHA announced in 2009 a new set of rules that essentially disqualified 60% to 70% of the nation's condo developments from FHA financing.

These rules included:

· Not lending in developments where FHA insures more than 30% of the units

· Not lending in units where owner occupants occupy less than 50% of the units

· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments

· Not lending in units where a single investor owns 10% or more of the units

· Not lending in units where the HOA isn’t withholding sufficient reserves

Because FHA makes 40% of the nation's mortgage loans, and over 60% of the loans below $200,000, the loss of FHA financing was a crippling blow to condo communities and condo owners alike.

In an ironic (but predictable) twist, FHA's attempt to shut down future condo lending also sent hundreds of thousands, if not millions, of existing FHA loans into foreclosure, further sinking the agency in red ink.

Regulators have now announced, however, that FHA plans to look at easing up on these rules as the housing market improves and the economy recovers.  That would be a huge lift for the millions of condo owners who have been holding on, waiting for some good news in the most distressed sector of the US housing market.

THE BIG FIVE

Home inspections can be highly stressful for all parties involved.  There is no such thing as a "perfect" home, and there never will be.  

Generally speaking, a thorough home inspection should last two to three hours, and it will address the key components of a home, including the roof, foundation, HVAC, plumbing and electrical components.

There may also be comments about the paint, siding or drainage, as well as comments about commonly ignored areas of deferred maintenance.

Most inspectors will tell you, however, that home inspections really boil down to five key things:  foundation, roof, HVAC, plumbing and sewer line.

The "Big Five", so to speak, are the items that can make or break a deal, because they affect the overall health of a home and repairs can cost thousands and thousands of dollars.

How buyers and sellers respond to inspections is subjective.  Some people take things with a grain of salt, while others have severe reactions when they are informed of flaws or potential flaws that exist with a home.

Inspections are a trying time, and this is really where a skilled agent is needed to hold a deal together.

Ignore or miss something big, and brace for an angry outburst (or potential litigation) from the buyer somewhere down the road.  Nitpick the seller to death on small things, and the entire deal may come unraveled when the seller decides to take a hard line.

The market plays a role in how this process plays out, as well.  In the market of 2008, 2009, 2010 and even the first half of 2011... sellers were often desperate to sell and they would accommodate some large quests.  Today, however, with buyers swarming the market and inventory at record-low levels, buyers must be much more realistic about what they ask for.  Many sellers do not fear going back on the market when homes are selling in days instead of months.  

How buyers, sellers and agents handle the inspection process is often the most critical component in holding a deal together once a home has gone under contract.  And it is one of the key reasons why experience is such an important factor when choosing representation.  Hire an agent who has seen it before, and chances are he or she will come up with solutions.  Hire someone who hasn't, and brace for a bumpy road.

The key is to assemble a competent team, giving unbiased assessments, with no agenda other than protecting the client's interest.  If you get that right, chances are excellent that you will survive the inspection process.

THE CHANGING FACE OF NEGOTIATIONS

Does the current red-hot nature of the Denver housing market affect negotiations?  Of course.

In a market where sellers are routinely seeing multiple offers, buyers need to bring their highest and best offer upfront.  No more lowballing, hoping to go back and forth for a few days before arriving at a middle ground.  That’s so 2011.

The new model works like this:  a home comes on the market, six buyers see it, three write offers.  One lowballs, one comes in near list price, and one comes in over list price.  Instead of negotiating with all three, the sellers quickly discuss qualifications with their agent.  Who’s got the largest downpayment?  Who has a reputable lender?  Does the agent on the other side actually close deals?  If it’s the buyer with the highest offer, the game is over right there.

Why not spark bidding wars?  Sometimes they happen.  But good agents know one of the primary challenges in this market is actually getting listings to appraise for what buyers are offering.  That’s because appraisals look backwards, and things are changing so rapidly in this market it’s hard for appraisers to keep up.  If the comparable sales are from November, January and March, chances are the older sales are going to be for less, because they were sold in a different type of market.

That’s not to say you can’t get a great deal.  It’s just going to take longer, and you’re going to need to be more patient.  Lots more patient. 

If you want to actually buy a house in a reasonable period of time, you’re going to have to change your thinking. 

That means you come in hard with your best offer quickly, and make it easy for the seller to say yes.  Does that sound different than what you’ve heard for the past five years?  Absolutely.  Because this

market is absolutely different from any we’ve seen in the past six or seven years. 

Today’s successful buyers are now playing to win, instead of playing not to lose. 

BUYERS HAVE LOST THEIR FEAR

More evidence that the real estate market in Colorado has turned… homes that were listed and didn’t sell in 2009, 2010 and 2011… are selling in 2012.

Last week I lost out in a multiple offer situation on a home in Littleton that was listed for six months in 2011 at $205,000, without any takers.  It was relisted for $200,000 on April 14 and went under contract, above list price, four days later, with multiple offers.

The Littleton home didn’t magically change.  It didn’t get new windows, new carpet or a new roof.  No one added new landscaping or fresh paint.  The only thing that changed was the market.

And that’s the big difference in 2012.  Whereas buyers for the past five years have often chosen to deliberate, buyers in 2012 are taking decisive action.  At least the buyers who are actually putting homes under contract, that is. 

When working with buyers, it is increasingly important to make sure your clients understand the dramatic shift that has taken place since last summer.  The way buyers shopped for a home in 2011 is not the way they are shopping for homes in 2012. 

Lowballing is out.  Highest and best offers are in.  Deliberation is out.  Decisiveness is in.  Fear is out.  Confidence is in.

A percentage of the market is still working under an expired paradigm.  And that’s okay, to start.  It's hard to change your thinking, when defensive, fear-based attitudes about housing have been the norm since 2007.

If you are purchasing something as important as a home, you must have confidence about what you are doing.  But after writing two, three, four, five failed offers… many buyers eventually figure it out.  The home buying landscape is different in 2012.

I have used the analogy repeatedly that the housing market of the past five years has been like a sick, bedridden patient.  Foreclosures and short sales have been like a serious illness that kept the patient fevered and motionless.

But distressed homes now make up just 18% of the market, down from 45% of the market 18 months ago.  You can’t foreclose on homes forever, and truth is, since 2008 the quality of home buyer has improved dramatically because of far stricter underwriting guidelines. Most neighborhoods have stabilized, with the exception of the very high end of the market.  Values in many parts of town are (what's that word?) appreciating.

The night is almost over.  Dawn is breaking on the Denver housing market.  After five long years, daylight is coming up over the horizon.

GOODBYE TO THE LOGICAL MARKET

I’ve finally come to terms with it.  The logical market is gone.

Let me explain.

If you are someone whose thoughts are dominated by logic… if you are someone who uses deep, thoughtful analysis and caution when preparing an offer… if you are intent on paying less than the last guy who bought a home down the street… you have missed this market.

It doesn't mean you're a bad person.  I'm just like you.  I am a "high logic" thinker, and if you have ever sat down with me and I didn't (at some point) break out a spreadsheet, consider yourself lucky.

But logic and deliberation are slow, and this market is fast.  During the first quarter of 2012, I have written more than a dozen "failed offers", most often the result of using painstaking analysis of past sales and historical trends.  The people who are actually getting homes under contract are thinking about tomorrow, not yesterday.

Inventory is down 42% market wide from a year ago, and the number of homes under contract is up 32% from a year ago.  Buyers are everywhere and the foreclosures are gone.  Short sales are now just 10% of the market.  Very few people are moving up because they still carry the bruises of the past six years.  Lots and lots of buyers, no sellers.

Do you follow that?

Let me show numbers from the Denver MLS:

Number of homes FOR SALE April 2011:  17,707

Number of homes FOR SALE April 2012:  10,325

Number of homes UNDER CONTRACT April 2011:  5,768

Number of homes UNDER CONTRACT April 2012:  8,374

One year ago, there were 3.44 homes on the market to each one under contract. Today, there are 1.20 homes on the market to each one under contract.

I have used the word “stunning” repeatedly over the past several months to describe this shift taking place in our market.  If I had a stronger word to use, I would use it.  So I’ll just say again, this is STUNNING!

MSN Real Estate generated some buzz for Denver last week when it reported that the Denver housing market was the fastest recovering real estate market in the United States.  Based on what I’m seeing, I don’t dispute that for a second.

Remember that Colorado led the nation in foreclosures per capita in 2005 and 2006, while the rest of the country was still in party mode.  Guess what?  That first generation of foreclosed homeowners is now cycling back into the market, competing with all the first-time buyers and disillusioned renters who are all looking to lock in a low fixed payment (with rates in the 4's) for the next 30 years.  

That's called foresight, not hindsight.

Recovery is here, and it’s now.  And it will be totally clear before long that buying real estate in 2012 was a prudent, well-timed moved for everyone with the courage to stop looking backward and start looking forward.

APRIL MARKET UPDATE – THE MIDDLE OF THE MARKET CATCHES FIRE

For all of the talk about the “sudden recovery” in the Denver housing market, the truth is that things began to improve noticeably all the way back in August of last year.  On September 15, 2011, I wrote a post on this blog entitled “Where Has the Inventory Gone?”  Seven months later, I long for the number of homes we had for sale back in September!

My April market report shows more of the same – falling inventory levels, increased demand and absorption rates that are dropping to unprecedented levels. 

Absorption rates, if you’re new to this space, are a hypothetical calculation real estate economists use to determine the strength of activity in a market.  A six month inventory of homes (which economists use as the benchmark for a “balanced” market) means if you had 60 homes for sale on the market and 10 went under contract in the past 30 days, it would take 6.0 months to deplete that inventory.  That would be a normal, healthy market.

Now check out what’s happened to absorption rates at these price points over the past year:

April 2011 absorption rate for homes below $250,000:  4.43 months

April 2012 absorption rate for homes below $250,000:  1.46 months

April 2011 absorption rate for homes between $250k-$400k:  7.33 months

April 2012 absorption rate for homes between $250k-$400k:  2.09 months

April 2011 absorption rate for homes between $400k-$600k:  11.34 months

April 2012 absorption rate for homes between $400k-$600k:  3.31 months

For those who like percentages, that's a 68% drop in market time for homes below $250,000; a 71% drop in market time for homes between $250k - $400k; and a 72% drop in market time for homes between $400k - $600k.

Read any book on real estate investing, and you’ll see that one reason people like real estate is that values tend to move up or down more slowly than they do in the stock market.  It's more stable, more predictable, and less stressful.  But when you look at these numbers, it’s hard to imagine much downside in pricing right now when you see how flooded the market is with qualified buyers.

And who are these qualified buyers?

First and foremost, we have first-time buyers.  Tons of them.  For the past five years, the normal ebb and flow of new homeowners coming into the market has been disrupted by the bad economy.  Kids living at home longer, young people renting instead of owning, less upward mobility in the economy, and nearly 100,000 homeowners in Colorado losing their homes to foreclosure.

Today, with prices generally 10 to 15% off the peak and the first generation of foreclosed homeowners cycling back into the market, buyers literally are everywhere.

And with short sales and foreclosures, which made up over 40% of our market 18 months ago, now accounting for just 18% of housing inventory, there is a huge shortage of homes for sale to accommodate this crushing demand.

Make no mistake, prices below $300,000 are rising in almost every area of town.  Yes, I said that.  Values are RISING!

And between $300,000 and $600,000, there is more stability (a precursor to appreciation) than we have seen since 2007. 

Housing is a leading indicator, and the snowball of positive news in the Denver housing market bodes very well for our city, our state and our economy during the balance of 2012 and beyond. 

These numbers demand your attention.  The shift is so dramatic, so sudden and (still) so underreported that the real economic impact of this improving market is nowhere close to being felt.

DAYS IN MARKET

In real estate, sellers often track a statistic knows as “Days on Market”, which simply calculates how long (on average) homes stay on the market before a ready, willing and able buyer comes along.

The new statistic to watch, however, is what I call “Days in Market”, which is the period of time it takes a buyer to find a home, write a contract and (yes) actually go under contract in a market where inventory is down by more than 40% and buyers are literally swarming over new listings.

I closed a transaction this morning with clients whom I first met 753 days ago (March 15, 2010, to be exact).   And while their case is extreme, there is no denying that it is taking buyers much longer to write successful contracts because of the lack of inventory and the intense competition.

I have other buyers right now I have been working with since January of 2012; December of 2011; October of 2011; and March of 2011.  I have had buyers drop out of the market this year after spending months pursuing limited inventory.  And I have had sellers who failed to successfully sell their homes in 2010 or 2011 find full price offers coming their way in days (not weeks or months) so far in 2012.

Demand changes the rules, and the rules in this market have changed.

The logical market is over.  If you see a home listed for $200,000, and the recent comps are $191,000, $193,000 and $194,500, you might find it “logical” to write an offer at $195,000 (or perhaps less).  Here’s the problem:  time and again, by the time you write that offer someone else has written one at $206,000.  Game over.

I do not advocate offering more for a home than it is worth.  And for years, I have built a very loyal clientele by injecting huge doses of logic, common sense and patience into the home buying process.  It’s simply too big a decision to get wrong.

But here’s the thing – the numbers always tell a story.  And the numbers in this market (more buyers than sellers, hardly any foreclosures, and interest rates in the 4’s) make the buying decision so obvious to people that it’s easy for buyers to write “over list” offers. 

It’s okay to take your time.  It’s okay to be patient.  But when you see what you’re looking for at a price that isn’t crazy, you had better be prepared to strike fast.  Because as you read this, someone else is already writing that offer.

DRIVE

A few months ago, I read Dan Pink’s book “A Whole New Mind”, which talks about the evolution of our culture from a left-brained, analytical workforce to a right-brained, creative society. In “Drive”, Pink shifts the conversation to motivation, and specifically, how to more effective motivate others (and yourself) in a post-modern society.

The evolution of motivation, according to Pink, follows this model:

Motivation 1.0 – People work to live (the Agrarian Age)

Motivation 2.0 – People work for money (the Industrial Age)

Motivation 3.0 – People work for meaning (the Creative Age)

Pink argues that for all the creature comforts and prosperity that exists in our world, even after the Great Recession, the next great motivational force in the world is not food or money, but meaning.  And employers (and independent contractors) who incorporate meaning into their professional lives will better connect with people and create more long-term sustainability than those who simply use a “carrot and stick” approach to make people perform tasks.

One of my personal, written goals for 2012 is to devote four full days – one per quarter – to charitable and philanthropic efforts.  My daughter, Victoria, and I served meals to the homeless in Denver a few weeks ago, and we’ll be working with kids in the foster care system at the end of April.  The point is, for more and more people, mission and purpose are just as important as productivity and achievement.

In “Drive”, Dan Pink argues that meaning is the next great revolution, and by creating an environment where significance is as important as sustenance, we can build more sustainable families, businesses and communities. 

HOW THOROUGHLY SHOULD A BUYER HAVE A HOME UNDER CONTRACT INSPECTED?

A physical property inspection is something that I will recommend to every buyer, every time.  It's simple common sense. 

But there are limitations to what a regular home inspector will examine.  For example, the inspector's standard disclaimer will remind you that it is a visual inspection only, and limited to things the inspector can see with the naked eye.  No cutting into drywall, no tearing apart electrical systems.

Most property inspectors perform a basic, visual inspection.  And that service is well worth the $300 to $400 most inspectors charge.  If an inspector cites something unusual, or out of his area of expertise, then it is common for the inspector to suggest additional follow-up inspections.

So how far do you go with this?  The answer is, it's completely up to you.

There are nearly 20 different "secondary" inspections that a buyer can perform on a home. 

These include:

* Electrical systems

* Heating and air conditioning

* Lead-based paint

* Mold testing

* Foundation assessment

* Soil stability

* Roof inspection

* Survey

* Sewer scope

* Septic system

* Radon gas

* Asbestos

* Chimney

* Wood-destroying pests

Most buyers will not do all of these tests, or anywhere close to all of these tests.  Based on what the general home inspector finds, it's not unusual to ask an HVAC person to take a look at the furnace, or have the sewer line scoped for breaks.  But every home is different, and every situation is unique.  I'll never advise a client to skip over an inspeciton if he or she thinks it's important.

The point of this is simply to educate and inform, and let you know that as a buyer you should satisfy yourself as to the condition of the home you are purchasing before you get to the closing table.  And if you have concerns about any of these areas, you should discuss them with your agent or your home inspector as early on in the process as possible.

A MAD SCRAMBLE FOR INVENTORY

The calendar says February of 2012, but it’s feeling a lot more like February of 2005 in the Denver metro area housing market.

Insatiable buyer demand for extremely limited inventory, especially at the lower price points, is resulting in multiple offers, sparking bidding wars and rapidly dropping days on market averages.  Buyers are scrambling to take advantage of low interest rates at a time when year-over-year inventory has dropped 42% overall, and by more than 60% for homes priced below $250,000.

Snapshots from the past week:

-  I searched all Broomfield listings below $160,000 for a north area client in search of a first home – there are 16 such properties in the MLS, and (amazingly) all 16 are under contract.

-  My client then asked that I expand the search out to include Westminster.  There are 18 such properties in the MLS (including short sales), and 12 are under contract.

Lump the two together and you have 34 properties on the market below $160,000, and 28 of them are under contract.  And most houses under $160,000 are not exactly turnkey opportunities!

This dramatic decline in inventory, accompanied by demand that is essentially unchanged from a year ago, is sparking bidding wars and leaving many buyers utterly frustrated.  For single family homes priced below $200,000, there is appreciation happening right now in almost every part of town.

(The condo market, as an aside, remains mostly stagnant due to ongoing financing restrictions and the fact that a majority of condo projects lost their FHA approvals at the end of last year.  Condos have also been hit harder by foreclosures, causing more homeowners to be “underwater”, which has depressed sales and caused more short sales, both of which are bad for values and further slow recovery.)

Multiple posts in this blog over the past six months have discussed what happened to the inventory – namely, far fewer foreclosures and hardly any “move-up” buyer activity, due to a lack of equity and a lack of confidence in the economy. 

However, the one group mostly unaffected by the economic downturn of the past four years is first-time buyers, who are looking at rates in the low 4’s, along with prices that had fallen 10% to 15% in most areas, although those prices are definitely recovering right now.

Take a look at how radically things have changed in 12 months:

- In February of 2011, there were 3.45 homes for sale under $250,000 to each one under contract.  That meant each seller was basically in competition with 3.45 other homes for the next buyer.

- Today, that ratio is 0.95, meaning there are actually more homes under contract below $250,000 than there are homes on the market.  And that includes all the distressed short sale inventory, meth labs, and abandoned homes in total disrepair.  There is, frankly, hardly anything to choose from right now.

These are not “seasonal” changes brought about by the warmer weather.  These are apples-to-apples, year-over-year comparisons that paint an entirely different picture than we saw in 2011.

- In the $250,000 to $400,000 price range, the absorption rate one year ago was 7.11 months.

- Today, it is 3.49 months.

Even the higher end of the market has shown improvement, although things were so bad a year ago improvement was almost unavoidable:

- For homes between $400,000 and $600,000, the absorption rate has fallen from 9.25 months to 4.86 months.

- Between $600,000 and $1 million, the absorption rate has fallen from 15.13 months to 7.40 months.

The bottom line is that, after years of stagnation, our market is at a pivot point.  Recovery is starting at the bottom, as it always does.  The hope is that, eventually, rising entry-level prices will create enough equity to unlock the next level of “move-up” buyers, who simply are on the sidelines today.

Sellers, especially those with homes below $250,000, have more leverage today than at any time in the past five years.  Inventory is down to levels not seen in nearly a decade, while buyers (albeit mostly entry-level) are pouring into the market.

It’s a scramble out there, but it’s a healthy scramble, and one that should create positive ripple effects throughout our housing market and the Denver economy in 2012 and beyond.

WHAT HOA DOCUMENTS SHOULD BE DELIVERED TO A BUYER?

Senate Bill 100, which was signed into Colorado law in 2006, requires sellers in Common Interest Communities (CIC's) to provide buyers with certain HOA documents by the title deadline in the real estate contract.

The purpose of this law was to ensure that buyers are adaquately educated about associations finances, rules and regulations, bylaws, and governance policies. 

In summary, Senate Bill 100 requires the seller to provide the following documents to a buyer:

a. the bylaws and the rules of the association;

b. the declaration;

c. the covenants;

d. any party wall agreements;

e. Minutes of the most recent annual unit owners' meeting and of any executive board meetings that occurred within the six months immediately preceding the Title Deadline;

f. the association's operating budget;

g. the association's annual income and expenditures statement; and

h. the association's annual balance sheet.

Buyers in common interest communities are required to sign a document acknowledging receipt of these governing documents, and a copy of that document is to be turned over to the HOA at closing.

Because the law requires it, however, does not mean that everyone complies.  Banks, for example, often will not provide these documents to buyers of foreclosed homes despite the fact they are legally required to do so.  And many HOA's will charge fees for copies of these documents... sometimes as high as $200 to $300. 

The bottom line is that buyers need to know what they are entitled to have, and then take steps to make sure they receive that information.  HOA's, like businesses, operate with different levels of control, regulation and financial health.  It is the buyer's responsibility to understand what is happening with the HOA and to have a comfort level before closing on a home.