APPRAISAL PLUS

Here’s the current state of the market… I listed two homes this month, they were on the market a total of six days (combined), drew 86 total showings and 17 total offers.  All 17 offers over list price, and eight modified or waived the appraisal clause. 

In any other market, all 17 of these offers would have been winners.  But in this unforgiving low-inventory, high-demand environment, 15 of the 17 offers ended up as losers, with those buyers headed back to the drawing board (or the next open house) to continue their search.  

With both of these properties, our top offers were clearly beyond where these homes were going to appraise.  And since I represent the sellers, and it’s my job to get them the best price and terms possible, these deals basically now live and die with what buyers choose to do with the appraisal clause.

In short, any financed buyer is going to need a formal property appraisal.  And under traditional lending guidelines, the buyer’s lender is going to offer financing to that buyer based on the LOWER of the contract price or the appraised value.

Let me explain how this works.

Let’s say a property is listed for $285,000.  But in our supercharged multiple-offer environment, a  motivated buyer chooses to offer $300,000 for the home.  If the buyer plans on making a 10% down payment, that’s a $270,000 loan with a $30,000 down payment.

But let’s say the appraiser then does his site visit, compares the home to others that have sold in the area, and comes back with an appraised value of $290,000.  That means the lender is only going to loan 90% of $290,000 (the appraised value) instead of 90% of $300,000 (contract price).

90% of $290,000 is $261,000… but since the contract price is $300,000, that buyer would now need to bring in $39,000 instead of $30,000 for a down payment.  Is the buyer willing to do that?  And does the buyer have the means to do so?

This is the stumbling block for many transactions right now, and it’s the first topic of conversation between agents when it comes to evaluating offers. 

In the “old” days, before Denver became what it is today, a low appraisal was bad news for the seller, because 99% of the time the buyer would ask the seller to lower the contract price to match the appraisal, and with no other offers or buyers on the horizon, sellers would often capitulate.

Today, however, when a property fails to appraise, 99% of the time the seller is going to say “tough luck” (or some other variation of toughness) and the buyer is going to have to figure out how to come up with the money or lose the house.

The purchase contract states that any financed buyer has the right to get an appraisal.  The contract also further states that if the property fails to appraise, the buyer has the right to terminate the contract. 

Of course, all contract clauses can be modified by mutual agreement, and that’s where motivated buyers obtain separation from the pack.

In this environment, financed buyers basically have three choices when it comes to the appraisal clause:

WAIVE THE APPRAISAL CLAUSE – the most motivated and serious buyers will waive the appraisal clause up front.  This basically says “no matter what the property appraises for, I am willing to proceed with the contract, and make up the extra down payment required by the lender from my own funds if it fails to appraise.”  If you were selling and wanted a committed buyer, wouldn’t this be the offer you choose?  This type of offer is even more impactful when it shows up with a bank statement showing the buyer has the cash to back up his words. 

MODIFY THE APPRAISAL CLAUSE – modifying the appraisal clause says, up front, that if the property fails to appraise for the contract price, the buyer agrees to pay some fixed amount ($5,000… $8,000… $15,000… whatever number fits the buyer’s tolerance for a shortfall) above the appraised value, not to exceed the contract price.  In our example of a $300,000 contract price, let’s say the buyer agreed in the original offer to pay $8,000 above the appraised value, not to exceed the contract price.  If the property appraises at $290,000, all parties have agreed up front that the final contract price will be $298,000, with the buyer bringing in any extra funds required by the lender to cover the shortfall.

KEEP THE APPRAISAL CLAUSE – by not addressing the appraisal clause, the buyer is essentially saying if the property fails to appraise, the deal is toast unless the seller lowers the price to match the appraised value.  In this market, that’s not likely to happen.

For sellers looking at anywhere from three to 12 offers on any good piece of real estate, the appraisal clause is a critical determining factor in which offer is going to be chosen. 

As someone who lists a fair number of homes, this is where the rubber meets the road when it comes to evaluating offers.  Show me a buyer willing to write an offer representative of the market, with the fortitude to modify or waive the appraisal clause, and I’ll show you someone who is going to be under contract soon. 

Keep the appraisal clause intact, and I’ll show you a buyer who is going to see his contracts landing in the circular file again and again until all the serious buyers have come through.  Then, when prices are higher and the competition finally thins, it will be your turn, assuming you have the stomach to deal with months of rejection and you’re okay with paying five to 10 percent more than you would have paid by taking more committed action sooner. 

Which brings us back to a simple truth.  Buying a home is serious business, and it’s your job to be seriously educated.  If you believe in the law of supply and demand, that higher prices are inevitable when every home is drawing multiple offers and there is a 31-year low in inventory, that unemployment of 3.2% in the metro area and 270 people per day moving to Colorado will continue to positively impact the market… then it only makes sense that the smart move is to do whatever it takes to buy sooner rather than later.

To be jelly-legged about the appraisal clause is to say you don’t trust the market, you don’t trust the numbers and you don’t trust yourself to make a sound decision.  If that’s the case, then walking away now and signing another lease is probably the better move, because if you don’t have the fortitude to compete, it’s best not to climb into the ring.  

SAYERS AND DOERS

Colorado’s overall population increased by about 1.7% last year, from 5.7 million to 5.8 million. 

But there’s another subsector of the population that’s growing at a clip about five times faster – and that’s the number of licensed real estate agents now pouring into the business.

Four years of a thriving market, rising home prices and an endlessly-looping array of so-called reality real estate programming on HGTV has convinced a lot of people that, yes, you too can sell homes for a living.  (While driving a nice car and working just six hours a week!)

The first year I sold real estate in Colorado – 2006 – there were more than 17,000 dues-paying MLS subscribers in the metro area.  By 2010, after the scorched earth markets of 2007, 2008 and 2009… there were barely 10,000 agents left.

By my own informal count (done by searching the last names of agents in the MLS by each letter of the alphabet), I tally a total of 16,948 subscribers to the Denver MLS today.   

That’s up 8.2% from one year ago (15,682) and 14.3% from two years ago (14,821). 

The only thing keeping up with surging Denver home values is the commensurate rise in new real estate license applications.  

Now we need to talk about some cold, hard facts. 

The real estate business can be a difficult, unforgiving place.  In fact, NAR reports that 50% of agents who take out a license don’t survive their first year in the business, and nearly three out of four will not renew their license at the end of their first three or four year licensing cycle.

Part of this is because, regardless of how big you talk or what you aspire to do, your paycheck every two weeks is exactly… zero.  In fact, you probably owe money, since your broker is going to ding you for a desk fee, MLS access and an electronic contracts subscription fee.  Plus you have licensing fees, marketing costs and E&O coverage to pay for.  Not to mention the gas, insurance, and maintenance costs for your rolling mobile office. 

Real estate is the ultimate turnstile business, with scores of agents enthusiastically bursting through the front door, only to slink out the back door months later, broken and (often) broke. 

I am an adherent to Malcolm Gladwell’s well-known theory that mastery of any subject takes a minimum of 10,000 hours of devoted study and practice.  That’s five years, full-time. 

I have consistently ranked in the top two percent of agents in Colorado by (get ready for this)… working about 12 hours a day, about seven days a week.  And doing a great job for my clients, whom I care about deeply and invest in fully.

It takes two things to succeed – a good plan, and a tenacious, badger-like work ethic. 

In my old corporate life, I mentored and trained new agents coming into the business for the world’s largest Century 21 franchise.  Truth is, it takes less than a week to figure out if someone has what it takes to succeed in real estate. 

The world is broken down into “sayers” and “doers”.  Sayers say they are going to do something.  Doers do it. 

Sayers are plentiful, doers are few.  Sayers are dreamers, doers are realists with dreams. 

Saying is easy.  Doing is hard.  Identify if someone is a sayer or a doer, and you’ll know very quickly if they’re built to last or destined to crash.  

COULD YOU AFFORD THE HOME YOU ARE LIVING IN TODAY?

Lately, I’ve been posing this hypothetical question to more and more of my past buyer clients.  Simply put, if you had to purchase the home you are living in today at today’s prices, could you afford to do it?

For more and more of them, the answer is no.

With homes prices posting double-digit percentage growth gains for four consecutive years, many homes in the metro area (especially at the lower price points) have gone up 50% or more in value since the start of 2012. 

So the question becomes… if you paid $250,000 for your home in 2012 and it’s worth $375,000 today, could you afford to buy it? 

If the answer is no, it means you aren’t moving anytime soon. 

I’ve seen this dynamic in Southern California, where I grew up and spent my first 12 years as a real estate broker.  The home I grew up in cost $42,000 when my parents bought it in 1972.  Today, Zillow estimates the value of that home (which we sold more than 15 years ago) at $833,645. 

In that type of environment homes eventually became so expensive that no one could afford to move… which is a big reason subprime financing became so popular (and abused) in the early 2000s. 

People wanted to buy bigger and nicer homes… but under traditional qualifying guidelines, there was no way to do it.  So subprime financing essentially allowed people to make up their income, buy what they wanted to buy, and supplement their insufficient incomes over time by sucking home equity out of their appreciating properties to cover the difference.

Worked great, until the whole system crashed.

Today, there is no subprime financing… and so if you can’t qualify, you’re not going to be able to buy. 

Which means a whole lot of people are never going to move, either until they die, win the lottery or move out of the metro area. 

That means the available inventory of resale homes will remain artificially low, which means demand will continue to outstrip supply… and that will go on until prices get so high that businesses and those looking to relocate here from even higher cost states decide to go elsewhere.  Then prices level off and the cycle pauses.  

(Note that I said "pauses", and not "reverses".  As long as buyers are forced to have real jobs, real credit and real down payments in order to purchase a home, the market has legitimacy and foundation  When you don't have that, the market becomes a house of cards.)

There’s not really a clean solution to any of this. 

I believe inventory is going to be low for a long, long time.  And with tens of thousands of educated transplants living in apartments and holding good jobs, the demand for resale housing is going to remain very strong.

What that means, going forward, is that when it comes to housing, the same dollars are going to get you less and less as time goes by. 

Which means buying sooner rather than later is not only a good idea, it’s imperative.  

ABOUT BROCK OSWEILER

99.9% of the time, this blog is about nothing but Denver real estate.  Today is that 0.1% of the time it’s about something different. 

Broncos quarterback Brock Osweiler has signed with the Houston Texans.

Many of you know that at the end of 2015, my youngest daughter Elizabeth spent a total of 17 days at Rocky Mountain Hospital for Children, going through a series of three major surgeries that resulted in the loss of about half of her left lung due to a congenital birth defect. 

What was supposed to be a four-day bump in the road for a 15-year old high school freshman ended up turning into nearly three weeks of high stress drama, with numerous setbacks and complications that led to two additional surgeries and quite a bit of uncertainty about whether this chain of events would morph into a long-term hospitalization with potential lifelong repercussions. 

Her first surgery was on December 18^th, which was also her 15^th birthday. 

That day had started with great promise – Elizabeth went to the Jefferson County DMV at 8 a.m. to get her driver’s permit.  It ended late that night with her in grueling post-op pain, about one-third of her diseased left lung having been plucked, pulled and otherwise chiseled from her rib cage during a complex surgical procedure that took more than three hours to complete. 

The original proposition had been to either do this surgery on her birthday, with the promise of being home for Christmas.  Or celebrate her birthday at home but spend Christmas in the hospital.

As it turned out, Elizabeth spent her birthday, Christmas, and New Year’s Day hooked up to tubes, wires and breathing machines while being carted in and out of surgeries in a holiday season we will surely never forget.

So what was a dark time for everyone changed suddenly about 10 a.m. on Christmas morning when there was a tap on the door of room 4403.  A face ducked in, a face belonging to Brock Osweiler, quarterback of the Denver Broncos.  He was a wearing a #17 jersey and a blue and orange Santa hat, which almost brushed the top of the door frame as he made his way into our room.

“Is this Lizzie?” he asked. 

And with that, the room suddenly came to life. 

“I’m Brock,” he said.  “Does anybody here like the Broncos?”

His wife, Erin, walked in with a large bag full of gifts.  Good stuff… headphones, an iPod Touch, board games, blankets, socks, stocking caps, Broncos gear. 

Elizabeth smiled, and Victoria and Sherry looked at me in disbelief.

Soon, we were talking about the NFL, about whether Arizona State would be a good college choice for Victoria, about how he and Erin first met, about Lizzie and her prognosis for recovery, and what it felt like to have 300 pound linemen intentionally falling on your legs.

The Osweilers gave us about 10 minutes of their time, but it wasn't rushed, it wasn't choreographed and there were no PR people pushing them out of the room to make the next photo op.  I was struck by how legit it felt.

The girls took selfies with their suddenly new best friend, and Erin talked with Sherry about the pain of watching a young girl go through hard times in the middle of the Christmas season.

Finally, we took a group photo and Brock and Erin departed, moving on to the next room to share some holiday cheer with another family in distress.  

It almost felt like a dream, and as we processed what had just happened, both Sherry and I felt  gratitude and amazement at how we had been blessed in such an unexpected way at such an unexpected time.. 

It was Christmas morning, after all, and don’t players have families too?

Later on, one of the charge nurses told me it was at least the fourth time during the season that the quarterback had shown up, unannounced.  No camera crews, no media people. 

Just Brock and Erin, with an intern from the Broncos helping to hand out gifts that for us turned out to be nearly $500 worth of merchandise.

The nurse said that many of the athletes who show up at the Children’s hospital are doing community service, working off DUI’s or doing penance for fights at the strip club.  Not Brock Osweiler.

Three days later, Osweiler played the biggest game of his career, a high stakes Monday night matchup against the Cincinnati Bengals.  It was still unthinkable to me that on Christmas Day, 72 hours before a football game that would not only determine the Broncos’ playoff fate but make or break his long-term contract chances, Brock Osweiler was spending his off day at the hospital, lifting the spirits of sick kids and their families.

Elizabeth has never been much of a football fan, but on that frosty Monday night in our cold hospital room, she was glued to the television. 

It looked bad early on, with the Broncos falling behind by two touchdowns.  As the team struggled, the pain in her chest seemed to intensify.  Her spirit was again deflating. 

But in the second half, magic happened.  And the Broncos rallied back, with Brock leading a spirited comeback and then engineering an overtime drive to win it.

There were late night whoops and hollers all up and down the pediatric floor at RMHC.

The girl who never cared about football suddenly couldn’t stop talking about it.  We high-fived in the dark hospital room and when we finally dozed off to sleep, Elizabeth in her hospital bed and me at her side on a cold vinyl sleeper couch, we were both feeling better than we had been in many, many days.. 

Some other amazing things happened over the next few weeks.  Elizabeth finally got out of the hospital during the second half of the fateful Broncos – Chargers game on the last Sunday of the season, leaving the hospital in a wheelchair right about the time Brock was being pulled in favor of Peyton Manning.  

Two weeks later, through the extreme generosity of a long-time business associate, Elizabeth attended her first football game by sitting in the front row of the lower level for the Broncos divisional round playoff game, directly behind the Pittsburgh Steelers bench.  These were legacy seats which had been passed down from generation to generation for 50 years, and they were offered to Lizzie free of charge in a tear-jerking display of kindness.  I got to share that remarkable day with her, one of the most memorable experiences in my 16 years of being a dad. 

We took pictures of both Brock and Peyton during warm ups and cheered like crazy for the Broncos throughout the game.  Elizabeth couldn’t believe the noise from the crowd or the way the stadium shook in the fourth quarter.  She left the stadium transcendently happy. 

You can question whether Brock Osweiler’s on-the-field resume is worth $72 million, but you can’t question the integrity of his resume off it. 

Osweiler’s autographed picture has been taped to Elizabeth’s bathroom mirror for the past nine weeks.

His sudden departure has turned into a tough life lesson, that sometimes people move on even when staying seems to make all the sense in the world.  

WAVES OF NEW BUYERS, A TRICKLE OF HOMES FOR SALE

The Denver housing market is not getting any easier to navigate for buyers.

Last week, the Denver Post reported that month-end inventory in February fell to an all-time low of 3,963 active listings, the lowest number ever recorded since the Denver MLS was formed in 1985.

Fact check: in 1985, the population in the Denver metro area was 1.6 million.  In 2015, the population in the Denver metro area topped 3 million for the first time.

There are so many ways to parse the numbers, nearly all of them painful if you are a prospective buyer, and especially so if you are trying to buy a home below $400,000.

With 3,000,000 people in the metro area and 3,963 homes for sale, that’s one home on the market for every 757 people. 

But with fewer than 1,400 homes for sale below $400,000, that works out to one active listing below $400k for every 2,142 people.  Let me restate that… for every 2,142 people living in the metro area, there is one home below $400k on the market.

Can you see why prices are soaring?

Colorado experienced record population growth last year with a net gain of 101,000 new residents.  That works out to 270 people per day, every day, with half of those ending up within 40 minutes of Denver. 

While 101,000 people moved here last year, fewer than 10,000 new homes were constructed in the metro area.  If half of the people who moved here end up within 40 minutes of Denver and each new household has 2.5 residents, on average, that means the pool of people renting homes or apartments in the metro area increased by more than 25,000.  

And with unemployment in the metro area at 3.3%, surging rents and skyrocketing home prices, it's safe to say most of those apartment dwellers aren't looking to rent for the rest of their lives.  They will essentially make up the next wave of buyers.

No matter how you look at the numbers, they all tell the same story.  Denver is going through a painful gentrification process which is not only driving out those who used to be our entry-level buyers, it's now taking aim at what has historically made up our middle class as well. 

THE SOMETHING, ANYTHING MARKET

Roll up to any new listing in the Denver metro area under $400k on a Saturday afternoon right now and you’ll see the logjam down the street.  SUV’s, Priuses, bicycles, foot traffic.  It’s almost comical to watch what’s going on as buyers fight over scant inventory, once again, just as happened in 2013… 2014… 2015… and now to start the year in 2016.

I closed a transaction last week with an offer $16,000 over list price, and I’ve routinely been writing offers $10,000 to $20,000 over list price for attractive listings since mid-December. 

The inventory today is down 43% from September, and the overall absorption rate marketwide is just 1.07 months.  For homes below $400,000, the absorption rate is 0.48 months.  A balanced market has five months of inventory.

While homeowners are getting rich, there’s desperation for everyone else. 

Without any exaggeration, the value of a median-priced home in Denver has been going up $60 - $70 per day, every day, for four solid years.  Nearly $20 million per day in new equity is being created in the city of Denver alone… but every penny of it is reserved for the ownership class.

If you are renting, the hole you are in gets deeper every day. 

This is that rare time when values and rents are moving in tandem, two locomotives leaving the station together.  Those living in rentals are getting clobbered on rent and seeing their ability to buy shrink almost by the hour. It's not a question of too many renters or too many buyers.  It's a systemic lack of inventory, period.  

There’s so much cash in Denver, so much equity being converted into liquid funds through HELOC loans, so much marijuana money that nobody really can quantify… that serious buyers are showing up with massive down payments or full cash offers that just blow smaller down payment buyers out the door.

The marijuana question is an interesting one. 

I recently listed an entry-level property which predictably drew multiple offers.  One of the offers was all cash, and as it turned out, some title research revealed that this buyer had purchased over 150 homes with cash in the metro area in just the past three years.  Total value of that real estate – between $40 and $45 million.

Want to guess where that money was coming from?

We’ve got businesses moving here from all over the country.  In a very interesting twist, Zillow (which currently has no data-sharing agreement with the Denver MLS) has moved 330 employees to a location directly adjacent to the Centennial airport (so high ranking executives can easily fly in and out, and perhaps play a round of golf at Inverness) with plans to hire another 150 more in 2016. 

Why would Zillow make Denver its second largest hub in the US, when it is currently in a nasty stalemate with the leadership of the Denver MLS over its abuses of past data sharing agreements and its refusal to accept responsibility for the accuracy of its own data?

It’s pretty simple.  While the dispute with the Denver MLS is temporary, the demographic that is migrating here and changing the face of Colorado is not.  Zillow is recognized as a leading technology company with aspirations of dominating the real estate information market… so making a huge bet on Denver makes perfect sense.

As I wrote about last month, the gentrification of Denver is underway, but at a scope and level few people truly understand.  It’s not just the poor neighborhoods of Denver that are being cleaned out… soon, it may well be what formerly constituted Denver’s middle class. 

I spent 38 years in the most populated areas of California, and what eventually came to be was a world where 90% of the people who bought their homes a decade ago couldn’t possibly afford them today. 

Is that happening in Denver today?  Increasingly, it appears so.

Eventually, you end up with constrained inventory because no one can afford to sell and move up.  So people stay.  Inventory dwindles.  Prices go up further because there’s nothing for sale. 

Like it or not, Denver is becoming a very big city.  With very expensive housing. 

For those in the market today, finding a “dream home” may already be just a dream. 

If you plan to stay here, the best advice I can offer is to find something, anything, and get it into your name as fast as you can. 

The buyer pool is so deep, and inventory is already so constrained, that the script for further price appreciation in 2016 has already been written.

We are not the Denver you grew up with, or the Denver of even a decade ago.

STRAIGHT FIRE

Through much of my correspondence over the past few weeks, I’ve said one thing over and over… pay attention to the first 90 days of 2016, because it will set the tone for what kind of year we are going to have in the Denver housing market.

Thirty four days into the year, the verdict is already in… it’s going to be another year of straight fire in red hot Denver.

January blew up, both anecdotally and by the numbers, with buyers rushing into the market and virtually anything worth even considering going under contract with multiple offers, usually well over list price.

I have spent much of the past month standing in line, often two and three parties deep, waiting to get into new listings the first day they hit the market.  I have watched new listings hit my phone in real time, only to get another text message hours later showing that same home under contract.

In these types of situations, the numbers should be your guide.   So here’s some evidence:

As of this morning, there are 4,932 homes on the market in the Denver MLS.  That’s down 9% from December (I thought more listings were supposed to show up in January), down 24% from November, and 37% lower than the 7,823 homes that were for sale in October.

While there are 4,932 homes for sale, there are 6,475 under contract… a ridiculous active-to-under contract ratio of 0.76.  To provide some context, a “normal” market has about twice as many homes for sale as you would see under contract.  In that “normal” environment, it would take 45 to 60 days to sell your home and values would be going up 2-3% per year. 

For things to be “normal”, you would need nearly 13,000 homes on the market… and there are 4,932.  That means inventory could increase by 250%, without one additional buyer coming into the market, and you would still see values moving higher.

At this point, you can’t really worry about 2013, 2014 or 2015.  Great years for values, historic times in terms of equity growth for Denver housing.  But the numbers that matter today are the numbers in front of us. 

We currently have an absorption rate of 1.07 months, meaning at the current pace of sales, every home in the Denver MLS would be sold in 1.07 months if no new inventory was to come online.  The numbers are even crazier at the lower price points.

If you look at all inventory below $400,000, the absorption rate is 0.48 months, or roughly two weeks.  Economists consider five months of inventory to be a balanced market.  Put another way, a balanced market has about 150 days of inventory.  In Denver, below $400,000… we have 14 days of inventory.

What this means is prices are going up, period. 

In Littleton, if you look at all homes between $300,000 and $400,000, you see this morning that 121 out of 136 total listings are under contract. That is 89% of the inventory, regardless of price, condition or location!

I spent much of last year scanning the horizon for black clouds that never formed.  Yes, we are in our fifth year of a sustained run on housing, and rarely do these runs last more than about seven years.  But the numbers must be your guide, and what the numbers say is that this market still has upside, still has fuel, and is struggling mightily to accommodate the 270 people who are moving to Colorado each day. 

If you’re looking to buy into this frenzy, know that you’re going to have to be fearless.  You’re going to have to swing hard and likely pay more than you planned.  You’re going to have to climb over the top of a bunch of other people all chasing after the same thing. 

But the sooner you get it done, the sooner you accrue the benefits. 

This is the hottest housing market in America, period.  If you’re not up for the fight, don’t bother stepping into the ring.  

THE TEN YEAR WINDOW

So far, 2016 is looking a lot like 2015.

Three weeks into the year and we are back into frenzy mode, with multiple offers the norm for almost everything in the Denver metro area below $500k that isn’t falling down. 

The market is overflowing with frustrated buyers chasing limited inventory, just as it was in 2013, 2014 and 2015.  While I do think election-year fear mongering and a deflating stock market will cause some slowing in the second half of the year, slowing isn’t the same thing as stopping.

The bottom line is that it will take something pretty catastrophic for us not to have another solid year of appreciation, meaning that whatever you’re chasing for $400k today is going to cost you a lot more if you wait until next year.

How much, you ask? 

Well, if you assume just 5% appreciation on a $400k purchase price over the next 12 months, that’s $20,000.  Divided by 366 days (it’s a leap year), that works out to $54.64 per day for each day you wait. 

No luck today?  That’s $54.64.  Nothing tomorrow?  That’s $109.28.  Wait a week?  That’ll be $382.51. 

In fact, if you really want to make this hurt… consider what your mortgage costs would be on a $400,000 home if you closed on one this afternoon. 

Assuming a 20% down payment, that’s a $320,000 mortgage at 4% (rates are actually better than that right now, but I want the illustration to be conservative).  That payment works out to $1,528 per month.  Throw in $300 per month for taxes and another $150 per month for insurance, and your total payment is $1,978. 

Multiply that by 12 months and you get total annual payments of $23,736.  Divide that by 366 days (leap year) and you get $64.85 per day. 

So if you buy today and home prices go up 5% - a conservative estimate by almost every projection – your actual cost of home ownership for 2016 is about $10.21 per day, plus utilities.  All of a sudden, the numbers make a little more sense, don't they?

If you're renting a comparably-sized house, your rent is likely $80 per day or more, and you're getting none of the tax deductions reserved for home owners.  

I only share this to frame the potential opportunity cost of waiting for the return of a market that has long since moved on. 

Facts are facts, and the fact is that buying a home in the Denver metro area is not necessarily a pleasant experience anymore.  It’s stressful when you find yourself sometimes waiting in lines two or three parties deep just to get in to see a house.

It’s frustrating to finally find “the one”, only to learn that seven other buyers have already written offers. 

But the people who are having success in this market – the ones who are going under contract and going to closing – those people are looking forward, not backward. 

If competing scares you, or if you are worried that there’s a trap door under the market that somebody standing behind a curtain is just waiting to pull the lever on… then just back away right now.  Go sign another lease.  Or move to a more affordable locale. 

Because in Denver, big money is showing up and it’s ready to buy, now. 

Truth is, there has never been a 10-year window where home values have gone down in Denver, ever,  We all want the deal our friend got in 2012, but it’s not going to happen.  Record low inventory.  Unemployment rate of 3.3%.  Nearly 100 people a day moving here from California alone.  CU Leeds projecting population growth of 95,000 in 2016 with more than 8,000 new jobs being created every month. 

Where are all these people going to live?

If those numbers are real, then so is the value in this market, even at 2016 prices. 

If you want to cross that bridge from renting to owning, you’re going to have to come to terms with it.  Or you’re simply going to spend another year going in circles, making someone else’s mortgage payment instead of your own while prices go up even further.  

THE GENTRIFICATION OF DENVER

Over the past few years, gentrification has swept over Denver like a rising tide.  It started with the Highlands, then Berkeley, then Sloan’s Lake.  It was followed by neighborhoods like Five Points, Whittier and Cole.  Then Baker, Cap Hill and Cheeseman Park.  Now it’s the RiNo district, Globeville and Elyria-Swansea where investors, flippers and speculators are buying up everything in sight.

All over town, thousands of lower-income residents are being driven from homes and neighborhoods they can no longer afford.  Kids and families are being displaced, school and community demographics are changing, and high-end remodels and so-called "luxury apartments" are going up in record numbers.

From the outside, it’s all looked great.  Urban renewal.  Capital investment.  Jobs. 

Problem is, from the inside, it looks a lot different.  Financial and family stress.  Disruption.  Homelessness. 

You can find some well-written and insightful articles on gentrification and its impact on communities in publications like 5280 and Westword, and online by following sites like DenverUrbanism.

But as we enter into 2016 facing our fifth consecutive year of surging home prices and massive migration, a new thought is emerging.  Maybe gentrification and the impact of soaring home prices isn’t just a lower socio-economic class issue.  Maybe it’s bubbling all the way up to what has historically been Denver’s middle class. 

What if, in the not too distant future, homes priced in the $200s disappear the way homes priced in the $100s have vanished since 2011?  With a median home price in the mid $300s and bidding wars ongoing for everything that isn’t falling down, how much longer before an 1,100 square foot ranch built in the 1960s sets you back $400k? 

Gentrification has always been an emotional issue, but it’s a lot more emotional when the waters reach your shore. 

In 2011, I sold 14 homes priced below $200,000 in the Denver metro area.  Last year, I sold one.

In 2011, there were a total of 11,847 sales of homes in the Denver MLS priced below $200,000.  Today, if you draw a box from Boulder to Highlands Ranch to Parker to Brighton… there are a total of 48 homes on the market priced below $200,000.

Simply put, sub-$200k homes don’t exist in Denver anymore.

In fact, if you look at the distribution of closed single-family detached sales in 2011 and 2015, bracketing by different price ranges, you’ll see what a completely different market Denver is today versus just five years ago.

$0-$200k:  In 2011, there were 11,847 closed sales.  In 2015, 1,698.  A decline of 85%.

$200k-$300k:  In 2011, there were 6,371 closed sales.  In 2015, 11,062.  An increase of 73%.

$300k-$400k:  In 2011, there were 3,118 closed sales.  In 2015, 9,170.  An increase of 294%.

$400k-$500k:  In 2011, there were 1,479 closed sales.  In 2015, 4,608.  An increase of 311%.

As I have written about previously, since the beginning of 2012 home values in the city of Denver have gone up by nearly $18 million per day, every day, now accounting for nearly $30 billion in equity gains.  Clearly, Denver has become an affluent place to live.  Or, as a friend of mine who runs a tech business describes it, "Denver is now the fastest growing suburb of San Francisco."

And with 270 people per day moving to Colorado last year and similar numbers projected for 2016, somehow the thought of having a total of 48 homes for sale under $200k makes further price increases seem like a virtual inevitability.

THE SPRING MARKET IN JANUARY

I’ve always said the best time to list a home for sale is early in the year, and the logic is pretty simple. 

While most sellers are more established and more beholden to the school calendar, first-time buyers and those trapped paying sky high lease rates are not.  And every year, it seems that thousands of people make the decision during the holidays to buy a new home after the first of the year. 

January hits and all of these freshly motivated, fired up buyers come out swinging… and there’s virtually nothing on the market. 

I’ve been quite active with buyers over the first two weeks of the year and I can tell you that this pattern is repeating itself yet again.  In the southwest metro area (Lakewood and Littleton), for example, there are 89 total listings under $400k.  A staggering 70 of them are under contract!

That’s roughly 79% of the inventory, which is pure insanity.  Remember that a “normal” market has about twice as many homes for sale as there are under contract at any point in time. 

Run the numbers forward, and with 70 homes under contract there should be about 140 on the market.  There are 19.

Run the numbers backward, and with 19 homes on the market, there should be about 10 under contract.  There are 70.

Looking at new listings after 4 p.m. on weekdays, it’s not uncommon to be stacked up two and three parties deep in the driveway waiting to get in.  On the weekends, you simply need to budget an extra 15 to 20 minutes per listing to account for your wait time. 

I’ve spent much of the last year looking for signs of change inside our market.  I've poured over numbers looking for breaks in the pattern.  For a brief spell at the end of summer into early fall, things did slow down.  The number of showings and offers dwindled and, for a moment, it felt like our market was shifting.

But based on the first 14 days of 2016, it appears that was just an operational pause, not a shift.

To start the year, buyers are coming out swinging… and if you want to buy a house, you had better be prepared to compete, especially below $400k.

With a net population gain of 101,000 last year, about 270 people a day moved to Colorado in 2015.  And they all need a place to live.  

POKER GAME

Strategy evolves and changes over time, and smart agents make changes in their approach to reflect the market.

 

For most of 2015, I have used a pretty simple formula to market my listings and get great results:

- Clean, declutter and stage;

- Photograph professionally;

- Price it appropriately at a number that will appraise;

- Aggressively "pre-market" to prospective buyers and agents;

- Encourage sellers to clear out for a long weekend of uninterrupted showings;

- Stream as many buyers and agents as possible through the property in a short period of time;

- Facilitate a bidding war;

- Vet and present offers;

- Determine what the top of the market will bear, write a "reverse offer" reflecting those terms, and present those terms to our hand-selected buyer/agent for ratification.

I don’t want to oversimplify this.  Every one of these steps is vitally important, and costly errors can be made if any stage is handled without proper care and precision. 

But this formula has allowed me to sell 27 listings this year, 23 of which sold inside of 10 days, with the longest market time being just 19 days.  Twenty sold at or above list price. 

(I also had the discipline to turn listings away when they were going to be conspicuously overpriced or if the sellers had totally unrealistic expectations.  While many agents are programmed to take any listing agreement, fully understanding that they will need to “wait out” the sellers and eventually beat on them for necessary price adjustments, I question the integrity of such strategy.  In a hot market, get it ready, price it right, and let the market determine value.)

It’s been interesting to watch how buyers and buyers’ agents have responded to this type of marketing. 

Early in the year, if we determined that a property would be on the market for 96 hours, ending at 5 p.m. Sunday night… agents didn’t seem to give it much thought.  

If they saw it Thursday, and liked it, they wrote an offer.  If they saw it Friday, and liked it, same thing.  In fact, early in the year I often ended up with 10 or more competing offers, in large part because agents (especially new ones) were undisciplined about submitting offers and didn’t really think through the strategy.

At the peak of the spring market, one of my listings drew a total of 32 offers, each leveraged on top of the other to generate a final sales price $33,000 above the original list price. 

Over the second half of the year, though, it seems more agents have caught on.  Now, there are fewer offers, and they arrive later in the game.  The best agents wait the process out, staying in communication throughout the process to monitor and gauge what their clients are up against. 

Strategically, the worst move you can make is to be the first agent to submit an offer during an open bidding period. 

And why is that?  Because the truth is, it’s very likely the listing agent (with the seller’s blessing) is going to attempt to use that initial offer to leverage higher and better offers from other agents and buyers. 

And if you can manage to generate three… four… five… or more offers… the more likely it is you can leverage the intense competition to not only raise the price, but gain other concessions such as shorter inspection periods, a modified (or waived) appraisal provision or an earlier loan objection deadline.

Here’s the truth:  if you’re in one of these bidding wars, the longer you wait to submit your offer, the more likely it is to be chosen.  Because if you really want the house, and you can wait out the process, chances are you can figure out what it’s going to take to win. 

And then you either write that offer, or you don’t. 

That’s always been the game, but with so many new agents flooding the market, especially at the lower-end, a lot of homes have been selling to poorly represented buyers at inflated prices.

Now that the buyer pool is finally starting to thin, if only just a bit, you could argue that buyers are better positioned to find value.  You don’t want to compete with people who don’t know what they are doing. 

Even with overall values higher today than they were in the summer, you’ll get a better deal competing with two or three logic-based buyers in a more stable market than competing against a dozen or more emotional ones in the midst of a frenzy.  

CHECKING OUT OF CALIFORNIA

The CU Leeds School of Business released its 2016 Economic Forecast for Colorado last week, and the report has a predictably upbeat tone to it.  Record low unemployment, record high population growth, record high home prices and record high per-capita income are all in the forecast for next year, continuing Colorado’s emergence as one of the country’s elite regional economies.

There is a lot to sift through in a 133 page report, but when talking economics my focus is always drawn to employment, income and migration.  

Employment looks great – according to Leeds, we have 2.46 million jobs in the state, and that number is expected to increase by another 100,000 in 2016.  Per capita personal income is also at a record level, $48,869.  The state picked up over 101,000 new residents in 2015 and we are expected to grow by more than 95,000 in 2016.  That’s crazy growth, and it fuels unbelievable expansion and opportunity.

California has now supplanted Texas as our top importer of new residents.  In 2014, more than 24,000 Californians moved to Colorado.  Nearly 30,000 more came this year, and next year the number may top 30,000 for the first time. 

That’s nearly 90,000 Californians in three years, a number equivalent to the population of Boulder or nearly three times the population of Wheat Ridge.  Californians now account for 30% of our population growth. 

Because of my own California roots, this trend is one I’ve been paying close attention to for many years.  We left because it was my belief that the value proposition of living in California at inflated bubble-era prices simply wasn’t worth it anymore.  Housing was too expensive, the public schools in most areas were a wreck, traffic was a never-ending irritation and too much of life was spent fighting to support a lifestyle that simply didn’t deliver enough value.

Ironically, the collapse of the housing bubble actually created a brief era of renewed-affordability (if you still had a job), but by 2011, home prices began surging and the same issues began to surface again. 

Today, with California home prices back to their bubble-era peak, the middle class must once again decide if marginal schools, ridiculous traffic, and endless urban sprawl are worth a $4,000 per month mortgage payment and an occasional trip to the beach.

Since leaving 10 years ago, I’ve maintained that California is a great place to visit.  It's a fine place to live if you’re super rich or super poor.  But if you’re in the middle, the battle is real and the returns are diminishing.  

It’s Millennials and the middle class that are fleeing California in the largest numbers.

Face it, if you’re 25 years old, fresh out of college with $80,000 of student loans and looking to stay in Southern California or the Bay Area, your options are extremely limited.  Pay $2,500 - $3,000 per month to rent an apartment, live with your parents, or find a partner and buy a tiny little two bedroom ramschackle condo backing to the interstate. 

For the same money, your housing options in Colorado seem like utopia.  Your job prospects are unbelievably bright here as well.  And while rush hour traffic on I-25 has definitely worsened, it can’t hold a candle to twelve lanes of gridlock at 5 o’clock on the 101. 

I was recently talking with a client about the impact of the California exodus on the Denver housing market, and I put it this way.  The problem California has is that people can stay there and people can leave there… but it’s darn near impossible for anyone to go there.  California’s top two export items are the iPhone and the middle class. 

While I still have many friends who remain behind, my desire to go back is zero. 

Each morning, when the sun rises up over the eastern plains and brilliant Colorado sunshine comes pouring into our home, I give thanks for the decision we made a decade ago.  And with each spectacular sunset over the Rocky Mountains, my gratitude flares again.  

What's happening here is not surprising to me.  I'm just surprised it took so long for everyone else to figure it out.