THE FRENZY CONTINUES

As I stated in a recent post, the two numbers I plan to watch closely in 2015 are the unemployment rate and the inventory of homes for sale.

Unemployment is crazy low – currently just 3.6% in Denver.  And inventory is crazy low – as of this morning, there are just 4,535 homes for sale in the Denver MLS, another all-time low dating back to the creation of the Denver MLS in 1985. 

Hopefully, unemployment remains low.  If it remains below 4%, this is going to be another lid-lifting year for housing in Denver.  Even if it rises to 5%, we’ll still have a highly functional market.  Lower is better, but our employment market is so strong right now that we are a long way from any serious concern.

With inventory, the picture is a little different.  Inventory is going to rise this spring – it has to.  But how much must it rise to make a difference?

The magic formula, as I have described before, is lining up the number of homes under contract at any point in time and comparing that to the active inventory.  A 2 to 1 active to under contract ratio is normal, which means 60 to 90 days to sell your home, 3-4% appreciation and a nice, calm orderly life for real estate professionals.

This market (nor the life of full-time real estate professionals) hasn’t resembled normal in over three years!

As of this morning, there 5,681 homes under contract in the Denver MLS, compared to the active inventory mentioned above of 4,535.  Under the 2 to 1 theory, we would need 11,362 homes on the market to hit equilibrium.  We are at 39% of that number. 

Which means inventory could DOUBLE and it would still be a seller’s market!

Having said that, I still think the numbers will tell the story of where we are headed in 2015.

My working theory about this market is that when it calms down – and it has to calm down at some point – many people will be caught off guard.  That’s because there are thousands and thousands of sellers on the sidelines who are just sitting tight, biding their time and enjoying their accumulating piles of equity.

When things start to slow down – or more accurately, when the media starts to report a slowdown (which, in fact, will be several weeks or even months after insiders see the changes occurring) – inventory will shoot up quickly as everyone tries to get out at the top of the market. 

That’s exactly what happened in California at the end of 2005, as I was on my way out the door, and it will happen here.  Sellers will wait too long, market conditions will change, and suddenly the whole universe of "market timers" will all list at once.  

Will that cause values to fall?  I seriously doubt it.  You simply have too many high quality employed buyers with real down payments and solid credit scores.   They’re not going to bail out at the first sign of change the way subprime buyers did almost a decade ago.

But the insanity of multiple offers, bidding wars, over-list price offers and contingency waiving will eventually go away... sellers will have to work, wait and negotiate to get their homes sold.  Just like in the old days (which means, pre-2013).  

Selling a home is not supposed to be this easy, and one day down the road, it won’t be.  But for now, sellers are experiencing the greatest market conditions in at least 30 years.  Enjoy them while they last, because one day, you won't have the unbelievable leverage that you do today.

AIR TRAFFIC CONTROL

I listed a townhome in Lakewood today for $168,000.  Twelve hours later, I have had 22 showings, six offers in hand, several others on the way and a bidding war is in progress as I write this at 8:45 in the evening.

Will it ever end?  The shortage of entry-level housing product in the metro area is amazing to behold.  Five years ago this week, there were 6,774 homes for sale in the Denver MLS under $250,000.  Today, there are 558.

To drill deeper, try this on for size.  As I just mentioned, right now there are 558 homes on the market priced below $250,000.  There are 660 homes in the Denver MLS priced over $1 million.  So there is more million dollar inventory in the Denver MLS than entry-level inventory. 

That is simply unprecedented. 

Now let’s flip it over and look at homes currently under contract.  Below $250,000, there are 1,948 homes currently under contract.  Above $1 million, there are just 118. 

So while the number of homes for sale below $250k and above $1 million are basically the same, there are almost 17 times as many homes under contract below $250,000 as there are above $1 million.

If you aren’t tracking on this, let me make it simple.  There is nothing for sale under $250,000 and there are literally thousands and thousands and thousands of prospective buyers racing around town trying to find something, anything, in this price range.

I listed a home in November for $244,000 in a good part of Wheat Ridge that drew a dozen offers in four days.  I listed another sub-$200k home in October that had 34 showings and a top offer $27,000 over list price.  In fact, when I list anything below $250,000 these days, I pretty much block out two solid days on my calendar because all I’m going to do is take calls from buyers, answer questions from agents and do my level best to skillfully manage the bidding wars that are almost certain to break out.

Is it all about top dollar?  Sometimes, but not always.  It's important to know who is in your transactions.  That means I want to know who the buyer is, why they have an interest in this neighborhood, how they met their agent, and of course, how much commitment their offer shows.

I want to know about the agent.  Does the agent sell homes, or is he or she a part-timer?  Can they demonstrate a track record of solving problems?  How did they meet the buyer?  How well are they educated?  Have they written offers on other homes?  Are they prepared to waive appraisal contingencies, jack up the earnest money, take the home “as is”, or come up with other ways to make their offer stand out?

Who is the lender?  Local?  Or some obscure Internet company?  You can offer $1 million for my $168,000 listing and it doesn’t matter if it never closes.  Show me proven results.

There is nothing about this enjoyable for buyers, or agents.  Including the listing agent.  About the only ones having fun are the sellers, who are cashing out with big profits and feeling pretty good about the whole thing.

As an agent, managing a feeding frenzy / barroom brawl is hard to do, especially if you are legitimately trying to give everyone a fair chance while doing what it takes to fulfill your obligations to your seller.  Namely, to get the best offer from the strongest buyer, ethically, while mitigating risk and protecting your seller’s interests.   

Tomorrow, we’re going to sift through a pile of offers and have a series of conversations with agents who are just as tired of showing houses as their entry-level buyers are of chasing after them.  Ultimately, there will be one winner and a disgruntled group of frustrated also-ran’s who once again gave it their best shot, only to get nothing. 

For prospective sellers, I want to caution you.  It will not always be this way.

In fact, at some point a market transition is going to happen.  And when it does, I suspect we’re going to see a whole lot of inventory show up very quickly, because when people sense we’re near a top, everyone wants out.  I’ve seen it before, and I know it will eventually play out this way again.

If you choose to wait a while longer, you may pick up a few more dollars.  But if you overplay your hand, if you want until the market tops and then tips the other way, you will miss the best seller’s market in the history of Denver. 

The best time to buy is when no one is buying.  And the best time to sell is when no one is selling.  End of story.

BREAKAGE

In a hot market, it always happens.  As interest in real estate surges, so do the number of agents.  In a hot market, everyone feels like a winner, everyone is a genius.  Optimism abounds.

That is, until you head out into the trenches.  

Every year, NAR puts out statistics which only vary slightly from year to year.  Fifty percent of all new agents will quit the business inside of 12 months.  Three out of four newbees will never renew at the end of their first licensing cycle.  Truth is, real estate is the ultimate revolving door business, with thousands of freshly-minted optimists coming in and thousands of downtrodden skeptics going out every single year.

I'm not here to wish for the demise of new agents, or to live in fear that someone else is going to come along and "steal" my clients.  I believe there is plenty of business to be had, if you (and here's the big IF) know how to create value for people that others do not.

For 20 years, I have built what I call an "others-based" practice.  By making your clients' goals your own, and by looking after every transaction as if it were your own, you create value.  By making the time and energy investment to attend high-level training classes and learn negotiation strategies others don't take the time or won't spend the money to learn, you become more valuable.  By occasionally sticking our neck out, by leveraging your own resources or reputation to get a deal done for someone you truly care about, you earn long-lasting relational equity, which is the lifeblood of this business.

But in the grown-up world of real estate, where stress, drama, and yes, fallible humans reside... sometimes bad things happen.  One of the reasons so many people go out of this business by their heels is that they cannot handle the emotional fallout of rejection, failure and even betrayal.

Rejection happens... it's a sign of life.

Failure is an opportunity to learn, correct and improve... let it teach you.

But betrayal is the most difficult to process, because it cuts to the core.  You just have to let it go.

We've all got stories of being hung out to dry.  Sometimes it's being undercut when another broker sweeps in at the eleventh hour and offers to list a home for a lower commission.  Sometimes it's when one of your clients wanders into a builder's office on a whim and is charmed into signing a contract for new construction without representation.  And sometimes it's showing someone houses for month after month after month, only to have them give up without ever taking the bat off their shoulder.

Real estate (and sales in general) is a world full of paper cuts.  Things happen that hurt.  But whether you let them take you down or use them to become stronger is totally up to you.

The bottom line is I live in a world where I take responsibility for everything that happens, because that's the only way you can grow and mature.

Failure, at any level, can make you bitter or make you better.  My coping mechanism involves processing bad outcomes quickly, grieving them fast, looking for the lesson, correcting where necessary, and then moving on... quickly... to other productive things I can be doing for others starting right now.

Whatever you give your mind over to grows and gets stronger.  Think failure, and failure becomes your dominant thought.  Think fear, and your fears take root.  But think solutions, and your brain will work to solve problems.

There is plenty of business in the world, if you can master the art of creating value and survive the bumps that are inevitable in any sales environment.  You don't need to let one person derail your momentum, or undermine your commitment to faithfully being the best version of yourself you can possibly be.  

Pick yourself up, dust yourself off, and get on with it.

PRICE AND PAYMENT

Markets are interesting, but even more interesting is the way different people respond to them.

Denver’s real estate market is so strong these days, with total median price appreciation averaging 17-20 percent just in the last two years, that buyers have one of two reactions.

Either…

I can’t believe how much prices have gone up.  My friends got better deals than me.  I’m not sure if I can afford to buy a home.  What if the market crashes? 

Or…

Our economy is strong and I have a great job.  Show me a house I like and I’ll buy it.  I’ll beat out anyone who thinks they want this more than me.  Rates are so low that I’ll happily take this payment for the next 15 or 30 years, regardless of what prices do. 

Guess whose offers are getting accepted?

This is a very difficult market to navigate as a buyer’s agent, especially a cautious one with a deep addiction to logic and a strong desire to see everyone do well.

Fact is, buyers did better two or three years ago.  But it's also a fact you can't go back in time, and today's decisions need to be based on today's market, which remains incredibly robust and healthy.

I want the numbers to make sense.  I’m sympathetic to the angst many buyers are feeling in today’s record-low inventory, high-demand market. But that same logical streak that whispers to be cautious also tells me that the fundamentals of this market are so strong that boldly going forward remains the wiser choice.

As I posted a few days ago, there are two numbers I plan to watch in 2015.  One is the inventory of homes for sale, the other is the unemployment rate in Denver.  Because these two numbers will tell you the overall health of our market.

If inventory is low and everyone is working, then pricing is built on a very firm foundation. 

Jobs, not affordability, drive housing markets.  If the unemployment rate remains below 5.0% (currently 3.6% in Denver and 4.1% statewide), this market will be driven by confidence and optimism.  If the inventory stays low, it means sellers are not seeing enough value in selling, which means prices aren’t high enough yet to change prevailing behaviors.

And with fewer than 6,000 homes on the market, an all-time low for the Denver MLS (which dates to 1985), we are incredibly thin on inventory.  In fact, to reach balance in our market, we would need to see somewhere between 13,000 and 14,000 homes for sale, which means we could double the current inventory and still have a seller's market.  

Is there a day down the road when we reach a tipping point, when confidence finally dries up and the market levels off?  Yes, of course.  The question is whether that day is six months out, 24 months out or 60 months out… and what is the opportunity cost of sitting on the sidelines waiting for conditions to change?

Fact is, there’s an opportunity cost to waiting.  It’s called rent.  Unless you are a cash buyer or living in your parents’ basement, you’ll either pay rent or pay a mortgage.  It’s your call to make.

I showed a home last night listed at $449,000 to a young couple expecting a first child.  They really like the home, it checks most of the boxes on their wish list.  But the comps for the neighborhood are mostly in the $410k - $435k range. 

“Do you think it’s worth $449,000?” I was asked. 

“If you base it on past sales, the answer is no,” I said.  “But this market isn’t about past sales.  It’s about present demand, and present demand says they’re going to get this number, whether it appraises or not.”

The home came on the market yesterday and mine was the seventh business card on the counter.  That’s a ton of showings for a $449,000 home in one day.  Four years ago, seven showings was a good month for a home at this price point.

While we agreed the home may be $10,000 to $15,000 overpriced, based on past sales, there was another factor that I felt my buyers were neglecting to adequately consider.  And that is interest rates, which have currently dropped back down to the 4% range.

With a $360,000 loan at 5% over 30 years, the principal and interest payment is $1,933 per month.  At 4% over 30 years, the monthly payment is $1,719.  That’s $214 per month of savings, which multiplied over 12 months comes to $2,568 per year in lower payments, simply because of prevailing interest rate conditions. 

Funnel that money back into your mortgage with added payments to principal, and you’ll pay off your 30 year loan in less than 15 years, and you’ll cut your interest costs in half.  So now, rather than talking about paying $10,000 more than past comps support… we should also be giving consideration to an interest rate environment that will allow for more than $100,000 in interest savings over the life of the loan, and owning this home in 12 to 15 years instead of 30.

Price and payment.  They’re both important, but too many buyers who fail to recognize the value of low rates are making decisions based solely on price.  

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!

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.   

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.  

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.

WHAT ABOUT THE NEXT GENERATION?

Many years ago in Southern California, I had an interesting conversation with an agent colleague of mine who revealed he had systematically acquired five different single family homes as rental properties over the span of about six years.

“Impressive”, I said, “you’ve got yourself set up for an early retirement.”

“No,” he replied, “it’s not that.  I’ve got five kids under 14, and if we didn’t buy these now, by the time they’re old enough to need homes of their own there will be no hope for them here.”

That was an eye-opening conversation, and it has resonated with me for a long time.  It was one of the reasons we purchased rental properties in Fort Collins immediately after moving to Colorado almost a decade ago, but now I’m getting really worried about whether my kids will ever be able to afford a home of their own as Denver’s housing market continues spiraling to new heights.

Earlier this week, I wrote an offer on a $169,000 listing in Lakewood for an investor-client who has already purchased two rentals in the past few years.  We offered $13,500 over list price, as is, with some other candy thrown in to try and sweeten the offer.

Turns out we were one of 35 offers submitted on this property, and of course our paltry little $13,500 premium over list price failed to make the cut.  I asked the agent if we were in the top 10 offers, and she said she really didn’t know.  They looked at the cash offers first, picked their winner, and tossed everyone else aside. 

We could have been 5^th, 15^th, 25^th or 34^th.  I suppose it doesn’t really matter.

The era of sub-$200,000 housing in Denver is completely over.  Soon, the era of sub-$250,000 housing may be over.  The numbers I ran earlier this week out of the Denver MLS showed just 927 homes (attached or detached) on the market below $250,000.  Three years ago at this time, there were 4,561. 

The absorption rate for homes priced below $250,000 is currently 0.49 months.  A “normal” market, which would mean 2-3% appreciation and 60 to 90 days to sell your home, is 5 to 6 months of inventory. 

I have been keeping my own monthly inventory statistics from Denver MLS data dating back to 2007, and I kept similar numbers from Southern California MLS data for nearly a decade before that.  The 0.49 months of inventory is the lowest absorption rate I have ever seen at any price level in any market in my entire life.  And that absorption rate stands at 0.49 months despite the fact that most homes in this price range have already gone up 25% to 50% in value (sometimes more) in just the past three years. 

It’s unbelievable.

When you have this kind of total imbalance between buyers and sellers, prices can only go up.  There is widespread panic among many first-time buyers, who (thanks to new technology) now see new listings show up on their mobile apps Wednesday, only to be under contract on Thursday. 

I understand both sides of this.  I just listed an entry-level home in Wheat Ridge that drew 44 showings and 12 offers in five days.  I just listed another sub-$200k home that had 24 showings and 11 offers in three days (with a top offer $37,000 over list – I kid you not!).  

I do not know how long this can continue, but the panic among buyers below $250,000 is at a fevered pitch.  When does it end?  How much must prices rise before buyer demand cools off?

Now one thing to understand fully is that we still live in a tiered market. 

What that means is while the absorption rate below $250,000 is 0.49 months, between $250k - $400k it’s 0.92 months.  That’s still crazy hot, but there is at least a little bit more breathing room for buyers.  From $400k - $600k the absorption rate jumps to 2.51 months, still a seller’s market but getting closer to normal.  From $600k to $1 million, you have 4.63 months of inventory.  Now you are talking 2-3% appreciation and 60-90 days to sell your home.  Above $1 million, the absorption rate is 10.09 months… no appreciation at all to speak of there, with prices flat or even declining.  That’s the only price bracket where buyers have the upper hand. 

So now I am thinking about my kids again.  In 10 years, will Denver be totally out of the question for them?  Or will they live in a tiny little micro-apartment downtown?  Or perhaps a small condo along the light rail line? 

Will Denver be full of real estate “equity millionaires”, like San Francisco or Santa Barbara?  Or will all this settle down at some point? 

For all the good vibes around Denver real estate these days, I don’t like what’s happening.  I believe this boom is real, and it has legs.  But I don’t like what it means for the next generation of kids who have grown up here, who may need to leave for Omaha or Oklahoma City to find something resembling the life they will leave behind in Denver.

DMAR METRO MAYORS FORUM

Growth, sprawl and affordable housing were among the hot button topics at the Denver Metro Mayors Real Estate Forum held Wednesday at the Wheat Ridge Recreation Center. 

Mayors Bob Murphy (Lakewood), Joyce Jay (Wheat Ridge) and Marc Williams (Arvada) were joined by Jefferson County Commissioner Don Rosier in a wide-ranging 90 minute discussion about the key issues driving the Jefferson County real estate market.

In a market where prices have risen 20 to 30 percent in just the past three years, affordable housing remains a critical issue.  And Colorado's controversial "construction defects law", which essentially creates uncapped liability for developers of multi-family residential housing, remains one of the biggest challenges to creating much needed entry-level housing inventory.

"The trial lawyers in this state have essentially killed multi-family construction," said Rosier, who is hopeful that a newly-elected group of legislators will enact reform during the 2015 legislative session.  As a result, virtually all of the high rise construction going on in Denver these days is apartments, not condos.  

Lakewood mayor Bob Murphy spoke of his city's recent well-publicized efforts to mitigate the impact of the construction defects law at the city level.  "We haven't built a condo in Lakewood in six years," he said.  "That has got to change."

Lakewood's measure, which passed the city council on a controversial 7-4 vote last month, gives developers and builders the right to repair defects before facing litigation and would require condominium association boards to get consent from a majority of homeowners - rather than just the majority of the board - before filing suit.

Until a more sensible statewide law is passed, Murphy said, the affordable housing shortage in the Denver metro area will only intensify. 

Mayor Joyce Jay of Wheat Ridge pointed to a number of infill developments in her city currently under construction or in the planning stages which specifically target older residents.  A new development under construction at 24th and Vance will create 50 new housing units, while another infill development for patio homes near 32nd and Wadsworth will offer seniors lower maintenance patio homes.  

"We've got to find a way to create new housing options for seniors to free up single family homes in many of our older neighborhoods," she said.  "If seniors can't move out, younger people can't move in."

Because of the soaring costs of land, labor and construction, urban density is here to stay.  Going forward, she said, more developments will be based on sustainability, efficiency and access to FasTracks, which will transport thousands of people each day to and from Union Station.

Arvada Mayor Marc Williams talked about much of the new development and redevelopment going on in his rapidly-growing city of 110,000 residents.  Massive new single-family construction projects in Leyden Rock, Candelas and Whisper Creek are putting huge pressure on the city's infrastraucture and transportation corridors, while redevelopment of the Arvada Triangle (now known as the Ralston Creek area) will include dense urban infill projects including apartments, condos and mixed-use neighborhoods.  

"One thing we're going to see going forward," Williams said, "is with thousands of convention visitors coming to Denver each year, more and more of them are going to get out of the city, hop on the Gold Line and make day trips to places like Olde Town Arvada."

Another topic of much discussion is the county's overall graying population.  

"We have the largest number of residents 60 and older of any county in Colorado," said Rosier.  "And that number is going to double in the next six years."

Senior housing options are a front-burner item for almost every city in Jefferson County, because the homes seniors are in today could be freed up for younger families (with larger incomes and more spending power) if seniors simply had better options on the other side.

Each of the mayors talked about up and coming areas of their cities.

Nearly 75 acres of land in Denver's Federal Center will soon be redeveloped to accommodate between 700 and 1300 new homes.  Ryland Homes has significant plans for the Green Gables area, including patio homes, apartments and mixed use neighborhoods with residential units over retail spaces, similar to those found in Belmar.

But affordability is not an easy problem to solve.  Land costs are higher.  Labor costs are higher.  Material costs are higher.  Permitting and environmental impact costs are higher.  Infrastructure will be paid for by homeowners through special taxing districts.  The net effect is that building the same home today is significantly more expensive than it was just four or five years ago, and those costs are passed directly through to the homeowner.

"We simply don't have $200,000 entry-level homes anymore," said Rosier.  "I fear those days are gone for good."

KNOCKOUT OFFERS

“Showings begin at 12 p.m. Thursday.  Offers will be reviewed at 2 p.m. on Monday.  All offers must be received by 12 noon on this date.”

So read the broker showing notes of a property I listed not too long ago.  It’s an increasingly common tactic… putting a desirable home on the market for a fixed period of time and letting agents and buyers fight, gladiator style, to the bitter end. 

This particular home ended up with 12 offers, all of which were over list price, including two cash buyers. 

It is no fun to be a buyer in the Denver market these days.  Insane competition and limited inventory lead to competitive shootouts on a daily basis, with buyers including escalator clauses, waiving appraisal contingencies and often agreeing up front to take the home “as is” – especially for homes under $300,000, where there is simply no inventory to speak of.

For lower down payment buyers, the chances of landing a turnkey home in this price range are becoming increasingly remote, as cash buyers, large down payment buyers and “appraisal waivers” repeatedly win the day.

I ran into one of these situations a few weeks ago with one of my buyers, but rather than take the words appearing in brokers comments section of the MLS at face value, we challenged them. 

For this particular listing, which hit the market on a Friday morning, the sellers said they would not review any offers until Monday night.  Which seemed to be a shame, because my client truly loved the home and was willing to fight to get it.

Now every buyer is different, and the playing field in real estate (as in life) is often not level.  Those with cash or enough money in the bank to waive appraisal clauses have a significant advantage.  And that was the case with my buyer on this home.  He was making a sizable down payment and could live with a low appraisal, although I felt the home was priced right for this market and that we could probably get it to appraise.

So we wrote what I call a “knockout offer”.  We swung hard, swung fast and gave the seller a short deadline to accept on the premise that my buyer had a very short timeframe for closing on a home and needed to get one locked down that weekend. 

Our offer was pretty terrific: $3,000 over list, as is, no appraisal objection, buyer pays for title insurance, earnest money was doubled ($1,000 of which went “hard” upon acceptance with another $2,000 going “hard” after the inspection), and closing in 21 days.  Plus we included a bank statement to show we had the resources to deal with a low appraisal, should one occur (it didn’t). 

The total investment of the over list price offer, title insurance and “as is” provision probably added about $5,000 to the seller’s list price.  Truth is, it was my belief that had this property been shown over the weekend, with multiple offers a foregone conclusion, it may well have cost my client more than $5,000 out to outbid the herd on Monday, not to mention he could lose the property all together.

And so with a short deadline for acceptance and some strong persuasion on our part, the seller accepted our “knockout offer”.  The property went under contract that night and weekend showings were cancelled, sparing my buyer his date with the gladiator’s ring. 

I listed another home recently using the same “fixed time frame” listing period strategy, only to have another agent issue a knockout offer (or what he considered to be a knockout offer) for my property.  It was $11,000 over list price with a 20% down payment.  But it didn’t waive the appraisal clause, it didn’t let any of the earnest money go hard until the Loan Objection Deadline, and it didn’t offer to take the home “as is”.

A great offer?  Yes.  A knockout offer?  No.

Knockout offers are not for the faint of heart.  I don’t necessarily recommend them, unless it is an extraordinary property and you are truly willing to put your money where your mouth is.

More than anything, you need to know that they exist, that people are trying them and they are (sometimes) having success with them. 

The red-hot Denver real estate market is a rough and nasty place these days, and buyers are willing to do fairly desperate things to get a good home under contract.  I have never seen anything like this in 20 years, and I’d personally be pretty happy if things would just calm down a little bit and we could get back to something a bit more normal.

But I don’t make the rules, nor do I make the market. 

My job is represent my clients (both buyers and sellers) with all the skill and creativity I can muster, ethically, in hopes of getting them the very best outcome possible.    

Cash buyers and large down payment buyers do have an advantage, though, and some are willing to write knockout offers to prove it.

THE SIX MONTH RULE

I showed a home on Monday that was listed three days earlier for $219,000.  Good neighborhood, clean property, updated with a newer roof, newer windows, and a new furnace in the basement. 

The sellers weren’t looking at offers until noon on Tuesday, so we were still okay on timeframes. 

The problem with this house, at least from my perspective, is that it was simply too obvious.  These days, if there is nothing blatantly wrong with a house and the price is anywhere close to reasonable, especially at the lower price points, a bidding war is simply a foregone conclusion. 

And so as we turned the corner and walked into the kitchen, there they were… 31 business cards from 31 different agents.  I called the seller’s agent to get the scoop – 14 offers in hand, and counting.  Multiple all-cash buyers. 

“If your buyer can’t waive the appraisal clause,” she said, “don’t bother.”

And there you have it.  The story of the Denver housing market in 2014 for buyers under $250k. 

It’s demoralizing, really, whether you are a buyer or an agent.  The fact is that 31 agents (at least) showed this home before I got there, 14 of them wrote offers, and in the end… one gets a paycheck (but only if his buyer is all-cash or willing to waive the appraisal clause).

For all the good news you hear about the Denver housing market, there’s another side to it.  And that is the high number of agents (especially buyers’ agents) who are literally being starved out of the business by the amount of competition in pursuit of limited inventory.

When markets get crazy and emotional (like this one), bad behaviors become more common.  While most agents have integrity and strive to do the right thing, not everyone plays by the rules.  

This leads to some agents lying about cash offers, some agents lying about their buyers’ (supposedly) strong motivation, some agents making up stories about why this house or that house is “the one” for this buyer.  Some agents will say their buyers plan to take the home “AS IS” (if it’s not written in the contract, don’t assume it is so), some agents will say their buyers have mom and dad on speed dial if the property doesn’t appraise, and so on, and so on, and so on. 

It is a good listing agent’s job to verify all of it.  Verify the down payment funds, verify who the lender is, verify the buyers’ story, verify the agent’s production history, verify where the money is coming from if it’s a cash deal. 

Here’s what I know, based on 20 years of doing this:  when the agent wants the deal more than the client, you are in trouble. 

If you are planning to buy or sell a home, I think you need to pay attention to this. 

Does my agent have the integrity and resources to look out for my interests, or is my agent simply desperate for a deal – any deal - so he can make his next car payment.

I’ve thought about this a lot, and I really believe if your agent doesn’t have six months of cash reserves in the bank, you may want to consider walking.  Seriously.

Now I don’t know how easily you are going to be able to verify this, or if your agent is going to be willing to drive over to Wells Fargo with you this afternoon and have the teller print out a balance receipt in your presence, but I am not kidding around.  Agents/people with no money do desperate things.  Agents who don’t sell houses do desperate things.  People living beyond their means do desperate things.

A license doesn’t guarantee ethics.  A lack of ethics increases that odds you eventually won’t have a license, but a license itself simply means you are clear of felony convictions and you passed a test.  That’s not the same thing as ethics. 

“Does this agent want the deal more than I do?”

That’s the question you need to ask yourself.  If you can’t answer it or aren’t sure, you need to back away, fast. 

Buying or selling a house is a big deal with serious financial consequences.  If your agent can’t afford to think about your needs first, you are in a bad spot. 

If asking for a bank statement is too uncomfortable, then simply ask the question:  Do you have six months of cash reserves in the bank to get you through the down times in the market? 

Maybe you want to require 12 months.  Heck, maybe 24 is your number.  Go crazy.  See what your agent does with the question. 

But take it seriously, and don’t automatically count on others to have your back.  However you choose to do it, make sure the people who say they are on your team are actually on your team.