18% OF ALL REAL ESTATE CONTRACTS CANCELLED IN AUGUST

Nationally, nearly one in five homes under contract was cancelled during August, with most of those cancellations resulting from low appraisals.

The National Association of Realtors reported this week that 18% of deals under contract were cancelled in August, up from 16% in July and up from just 9% in August of 2010.

We continue to live in a very fear-based economy, and it’s affecting appraisers, underwriters, buyers, sellers and agents. It is more difficult today to see a transaction through from start to finish than at any time in recent memory, which is why there continues to be a massive migration of agents heading out of the business while buyers and sellers spend more time seeking out the top agents in their markets.

In short, everyone has different fears, but they are all wrestling with something

APPRAISERS – are afraid of losing their standing with banks and lenders if they appraise properties which later go into foreclosure. Therefore, they appraise conservatively with a “better safe than sorry” philosophy on value and condition.

UNDERWRITERS – are afraid of losing their jobs if loans they approve go into default. Therefore, they ask for more documentation, underwrite more cautiously and decline files which would have sailed through in a better market.

BUYERS – are afraid of overpaying, plain and simple.

SELLERS – are afraid of moving up (and often do not have the equity or job security to do so), leading to less inventory on the market and fewer homes to choose from.

AGENTS – have a choice to make: either work harder, smarter and more efficiently… or get out of the business.

There’s not a lot of comfort for anyone in today’s market, but it’s the market we have and we must become comfortable navigating these uncomfortable waters.

We all have a choice - we can view this market as a burden, or we can view it as an opportunity.  We can choose to complain, or we can choose to elevate our game.  We can think about how things used to be, or we can focus on getting better each day so that we can compete and win in a market where so many others are simply quitting and leaving.

WHERE HAS THE INVENTORY GONE?

There is a fairly dramatic and ongoing trend in the Denver real estate market today, and it is a lack of inventory.

I’ve been talking about this with clients for the past few months, but it’s gone from an interesting observation to a dominant reality that will affect both prices and expectations for some buyers and sellers in the coming months.

As of September 10, the inventory of single family homes for sale in the Denver MLS is down a stunning 28% from one year ago. That is almost a seismic shift, but it’s even more dramatic than that at the entry level.

Let’s compare available inventory right now to one year ago, breaking it down by price point:

Price Point         Sept 2010          Sept 2011          Decline
$0-$250k               10,409               5,533               - 46.9%
$250k-$400k           7,250               4,795               - 33.9%
$400k-$600k           3,727               2,775               - 25.6%
$600k-$1M              2,428              1,870               - 23.0%
$1M and up             1,435              1,089               - 24.2%

Below $250,000, where most of today’s buyers are looking, inventory is down a remarkable 46.9%. For all homes below $400,000, there are 41.6% fewer homes on the market than 12 months ago.

Why the disappearance of homes for sale?

Historically, there are two main drivers in the housing market: first-time buyers, who traditionally make up 40% to 45% of the market, and move-up buyers, who traditionally make up about 40% (downsizing buyers make up the balance).

So here’s the deal: foreclosure are down 50% from the peak in Colorado, and the move-up market is dead because buyers simply don’t have the confidence to sell $250,000 homes to purchase $400,000 homes in today’s economy.

So when the supply of foreclosures dries up on first-time buyers, and existing owners (many of whom have little or no equity) in the $250k to $400k range don’t want to sell for economic reasons, you suddenly don’t have any homes for sale.

What we’re seeing right now is historic, and if the trend continues, it’s going to mean higher prices at the entry level.

I have several buyers right now who are quite frustrated by this total lack of supply. And, to be fair, many buyers are still under the increasingly untrue assumption that they hold all the cards in today’s market.

When inventory falls 46.9% at the entry-level, one of two things has to happen: buyers either start paying more, or they must be willing to accept a few more defects in a property because sellers are done cutting on price.

From an aerial perspective, the drop in inventory is actually an indicator of healing in our market, although I will say yet again that any improvement is going to be mostly concentrated below $400,000, because the move-up market simply isn’t generating enough buyers to absorb the higher end inventory.

But if you own a home under $200,000, you are looking at the first significant opportunity to see appreciation in at least five years. It’s going to take time – it always does – because buyers and sellers are almost always behind the market when it comes to perceptions.

Buyers still think that finding a great home for cheap is easy – it’s not. For a long time, sellers refused to acknowledge the reality of falling home prices, and as a result, the market was littered with overpriced, unsalable inventory for years.

Now, at last, it appears the pendulum is starting to swing.

With no new inventory coming online, interest rates at historic lows, rents rising rapidly and vacancy rates near zero, there are simply more buyers than sellers below $250,000.

Buying a home is still a sweet deal for most folks today, but it is hard and sometimes frustrating work.

And over time, buyers are going to have to adjust their expectations about what’s out there, how much it is worth and how quickly they will need to take action to secure a contract. It’s a totally different market than the one we knew 12 months ago, and it will be interesting to see how much lower inventory falls before more sellers start wratcheting up their expectations after several dry years with little or no appreciation.

CRUSHING IT IN THE THANK YOU ECONOMY

Meet Tony Eitzel.

Tony is a professional photographer based in Denver.  He has worked with John Fielder (the "dean" of Colorado nature photographers) and actually rents space in a Fielder gallery in the Santa Fe Arts District. 

We first met Tony a few weeks ago on a Friday afternoon art walk through the Arts District downtown.  We have been looking for a particular piece of artwork to go over our living room sofa for some time, and we have said "no" this summer to more pieces than I care to remember.

Then we met Tony.  While art will always be subjective and "in the eye of the beholder", we were drawn to the depth and character of Tony's pieces, whether cityscapes downtown or soaring mountain peaks.

We engaged Tony in a conversation about one particular piece - a grove of aspens near Independence Pass - and Tony stopped what he was doing, told us the complete backstory of how and when he found this particular grove, and asked us what we thought of it.

We liked it, we liked it a lot.  But the frame was wrong and the matting behind the picture wasn't quite perfect.  We were looking for blacks and greens, and the matting was sand and the frame was white.

"No problem," said Tony.  "I'll make it however you want it to be."

With that, we agreed to the sale and Tony asked for a few days to reframe the photograph.

A few days later, Tony called us again.  

"Do you mind if I bring the picture out to your house, so I can center and mount it myself?" he asked.

It was clear that Tony took as much pride in how the picture would hang in our living room as he did in taking the picture itself.

This morning, Tony came by with his ladder, his tape and his level.  Thirty minutes later, his gorgeous photograph was ours.  Perfectly framed, perfectly spaced, perfectly level.  

Why do I bring this up in a real estate blog?  Because Tony Eitzel gets it.  

Here is someone who loves his craft and wants total satisfaction for his clients.  Tony is not going to have to ask for referrals, he's going to attract them by the way he runs his business.

When you deliver value in excess of cost, you create fans.  Tony Eitzel knows what it takes to succeed in "The Thank You Economy".

THE THANK YOU ECONOMY

Social media isn't a platform, it's a culture.

So says Gary Vaynerchuk in "The Thank You Economy", which dives headfirst into the realm of social media and its game-changing effects on how businesses engage consumers in today's market.

In Vaynerchuk's view, everything old is becoming new again.

In the old days, word of mouth meant everything.  If you had a bad experience at the corner store, you told your friends and neighbors, and the impact of lost goodwill on the store was immediate.

Then, from about 1970 to 2000, corporations took over the world.  Businesses were gobbled up by larger competitors, communication became "one way" and the customer lost all power.  But since 2000, social media has changed the game again.

Today, the consumer is once again empowered through sites like Facebook, Twitter, Yelp and Trip Advisor.  Businesses have to care what people think, because the Internet is for consumers what the printing press was for writers - a platform for leveraging their thoughts and ideas into something far more powerful than had been the case when communication was merely a one-to-one proposition.

Social media is a brand-equity building machine, according to Vaynerchuk, while SEO is a fad.  Search Engine Optimization provides exposure, but it does not build relationships, and relationship selling is the power tool of the 21st Century.  Social media can be used to build an emotional bond between retailer and customer, between service provider and end-user. 

I have seen the power of social media firsthand over the past three years, and it has allowed me to leverage my thoughts and build my personal brand with over 300 "friends" on Facebook while connecting with hundreds of others on Twitter and YouTube. 

But the key is to remember that, as Vaynerchuk says, social media is not a platform - it's a culture.  It's not me with a bullhorn; rather, it's me looking to connect, create value, be an authority and most of all, remain available to the hundreds of clients I have worked with through the years.

I'll close this post with my favorite quote from the book:  "If you think everything in your business is fine, it means you have stopped caring."

My goal is to continue to grow not just my sales, but my value to others.  I am continually working on ways to do a better job, be more efficient, incorporate more technology, leverage my personal brand and help my clients get what they want. 

When you master those skills, you will master the market, no matter what that market looks like.  Because value is a quality that transcends markets, and if you can create it, the market will come to you.

ABOVE THE LINE

I taught a class this morning to a group of real estate agent entitled “Getting It to Appraise”. The subject, obviously, was strategies for getting your listings to appraise in a market where buyers, lenders and appraisers are often fear-based and/or predatory in their assessments of what a home is worth.

On this subject, there is one caveat that must be declared up-front: when making representations to an appraiser (or a buyer, or anyone else), all data must be factual. There is to be no cheating, no distorting of information and no known misrepresentations of fact.

As listing agents, it is our job to provide as much concrete, accurate and factually-supported data as possible which protects and defends the interests of our clients.

Having said that, here is a list of strategies one can use in supporting a home’s value in today’s market:

• Current comparable sales from the MLS

• Old comps from the MLS (can’t necessarily be used, but does support argument for historical value baselines)

• Comps from public records not appearing the MLS (FSBO’s and new builds)

• County assessor records

• List of upgrades and updates

• Previous appraisals (again, won’t necessarily be used, but does provide historical value baseline data)

• Neighboring appraisals (a “hidden gem” if you are willing to ask neighbors if they have refinanced or had their homes appraised in the past six months)

• Rental surveys (establishes rental value, which can influence market value)

I often refer to appraisal data as “above the line” or “below the line”. What that means is that some data supports value at or above the contract price you are looking to support. That is called “above the line” data.

Conversely, there is also data that can undermine your price – that is called “below the line” data.

The name of the game is to provide as much factual, honest, above the line data you can to support your price. That, in my opinion, is your job as a listing agent and a fiduciary to your seller.

The old “4P” approach to selling a home – Put a sign in the front yard, Put a lockbox on it, Put it in the the MLS, and Pray for a buyer – simply isn’t enough.

It’s hard work to list a home, hard work to negotiate a contract, hard work to support an appraisal and hard work to close the deal. That’s why one-quarter of all contracts fail to close, and why nearly one-third of the agents in Colorado have quit the business in the past three years.

There is, however, no point or purpose in complaining. Shut up and do your job. And do it well. That’s real estate in 2011.

CHANGES FORTHCOMING TO THE MORTGAGE INTEREST DEDUCTION

A few months ago, I received an urgent "Call to Action" from the National Association of Realtors.  The mortgage interest deduction, a key driver for home ownership and an indisputable benefit to homeowners, was under attack.

At the time, I felt there was no way the government would eliminate (or even reduce) the MID.  It simply plays too large a role in the overall value of housing, and with the GSE's (Government Sponsored Enterprises) Fannie Mae, Freddie Mac and FHA touching 90% of all mortgages being made today, I could not see the government putting a gun to its own head.

As more and more time passes, I'm starting to think I was wrong. 

Very connected industry insiders are saying there's now a "75% chance" the mortgage interest deduction is going to be scaled back by the end of 2011.  It will probably start with a cap on the deduction, limiting the deduction to the first $500,000 or $750,000 of one's mortgage, but the precedent will have been established.

The government isn't broke... it's $15 trillion in debt.  And the demand for new sources of revenue is simply too strong to think that housing is going to escape unscathed.  If the mortgage interest deduction is scaled back, I think it will be at least a few years before the issue is revisited, but the damage this will do to the high end of the market is undeniable.

As I have stated in post after post this year, we are living in a very segmented economy with a very segmented housing market.  The million dollar market in Denver, which already has 40 months of inventory, is going to get hit even harder.  The "trickle down" will roll all the way down to homes at or near the $500,000 range... I simply cannot see anything priced above this level holding value in the years to come.

If we are getting poorer as a nation, the demand for so-called "cheaper stuff" is going to increase.  And housing is part of this equation. 

There is already zero inventory below $250,000, and since it's no longer profitable to build, nothing new is coming online.  The population continues to increase by 3% to 4% per year, and people will always need places to live. 

Landlords are already feeling the "boom effect" of a poorer population.  Rents are rising because demand for affordable renting housing is hot.  It's only going to get hotter over the next few years, until rents become so high that the scales of affordability tip back toward homeownership as the more affordable alternative.

All this is to say that change is a constant, wealth is under attack, and you need to be able to read the tea leaves to figure out how to protect and provide for your family. 

High end housing is in big trouble, and the upcoming reduction of the mortgage interest deduction is going to make it worse.

JULY MARKET UPDATE

In July of 2008, there were over 26,000 homes for sale in the Denver metro market area.  Today, there are fewer than 18,000 homes on the market. 

Lack of inventory continues to be, in my mind, the big story in the Colorado real estate market today. 

Below $250,000, there are just 1.65 homes for sale to each one currently under contract.  And since that number includes short sales (of which there are many), the reality is that the market is even tighter than that. 

When half of the homes listed for sale in any price range are under contract, you have an inventory problem.

Above $1 million, the story is 180 degrees reversed.  In the luxury market, you have nearly 13 homes for sale to each one under contract, reflecting a continuing trend in which the high end of the market will continue to lose value for some time to come. 

Absorption rates help to tell this story.  The absorption rate, as we have explained before, is a mathematical calculation intended to show how many months of inventory exists on the market today.  Real estate economists will tell you that six months of inventory reflects a balanced market, favoring neither buyers nor sellers.  Below six months of inventory reflects a tight market, generally favoring sellers, while inventory above six months indicates that a buyers' market exists.

Check out these current absorption rates:

* Below $250,000... 4.03 months

* $250,000 - $400,000... 6.48 months

* $400,000 - $600,000... 8.00 months

* $600,000 - $1 million... 13.86 months

* Above $1 million... 40.25 months

That's about all you need to see to understand today's market.  The low end of the market has a shortage of inventory, but no shortage of buyers.  The middle of the market is okay, but hardly robust.  And the high end is a mess, and will continue to stay that way for quite some time to come.

I don't think that articles which discuss the overall market serve much purpose at all, because the $200,000 buyer has virtually nothing in common with the $1 million seller.  When The Denver Post and other news outlets report on overall trends, I think the information is often misleading and skewed.

Markets are about price point, condition and location.  And frankly, I am working with no shortage of buyers at the entry level who feel a disconnect from what they hear on the news when there is no inventory to look at and the nicest homes come off the market in days, not weeks or months. 

Successfully navigating this market requires specialized knowledge, and that's what competent brokers are supposed to provide.  The agents who are closing deals are the ones who understand the market.  Now more than ever, competence matters.

DAZED AND CONFUSED AT THE DENVER POST

Here is the opening paragraph from today's real estate article in the Denver Post:

"The metro Denver housing market continued its rally in June.  The number of homes put under contract last month increased 22.5% from a year ago - the second consecutive month that homes under contract showed large increases over 2010."

The article then goes on to quote a number of Realtors and other happy-talk professionals, painting a picture of recovery and momentum for everyone with four walls and a roof over their heads.

Not so fast.

There's one simple, obvious, huge omission from this article, and it's the fact that the two large and lucrative tax credits being offered to first-time buyers and move-up buyers came off the table April 30, 2010.  With the incentive to buy gone, sales crashed through the floor in May and June of last year.  Therefore, comparing this year to last year is a totally distorted comparison, and the Post real estate writer should know this.

Although I would love it if the facts matched the headline, there's only one sector of the market that is performing strongly, and it is the entry level.

At the mid-level and higher price points, fear is keeping buyers out of the market while sellers outnumber buyers by a large margin.

Lack of inventory is the dominant theme today, especially at the lower price points.  Overall, there are nearly 21% fewer listings on the market today and than a year ago.  But below $250,000, there are 37% fewer listings on the market today than one year ago.  There's simply nothing out there for buyers at the entry level. 

While inventory is also down (although not by nearly as much) at the higher price points, there are no buyers looking at luxury homes.  In fact, only 28 contracts were written on $1 million homes last month in the entire metro area. 

I suppose the happy headlines in the Denver Post will help buyer confidence, but when it comes to making huge financial decisions, I'd rather base them on facts instead of poor reporting.

INFLUENCE: THE PSYCHOLOGY OF PERSUASION

"Consistency is easier than thought."

So says Robert Cialdini in his excellent book Influence:  The Psychology of Persuasion. 

According to Cialdini, people often adjust their thoughts to match decisions they have already made.  Understanding that most decisions are made before a sales presentation even takes place can radically alter (and improve) the effectiveness of how sales presentations are made. 

Understanding how "social proof", "social jujitsu" and the "principle of association" affect persuasive psychology can also dramatically improve the impact and effectiveness of your sales presentations.

Under the theory of social proof, consumers can be heavily influenced by the actions of others.  That's why claims about being "the number one brand" or being recommended by "4 out of 5 dentists surveyed" are so effective.

Social jujitsu is a theory that states if a few people inside of a group can be herded in the right direction, the rest of the group will follow.  This is why, in many opera houses and even Broadway theaters, proprietors hire "professional clappers" to applaud and cheer loudly at pre-determined moments to bring the rest of the audience along.

Finally, under the "principle of association", persuaders attempt to connect themselves with positive or popular events.  That's why radio stations will repeat their call letters before every hit song, and it explains why every concert, sporting event and college bowl game has a presenting sponsor.  

How can the Psychology of Influence make you a more effective salesperson?  

For me, the goal has always been to provide value.  By understanding what motivates people, I am better able to give more effective presentations.  In essence, I can give people more of what they want, and less of what they don't.

Similarly, understanding influence is a valuable skill when it comes to marketing more effectively, especially with listings.  Popular neighborhoods, school performance or community awards can all be leveraged in positive ways to help the salability of a home.     

A career in real estate is about so much more than homes and land.  It is first and foremost a marketing job, starting with yourself. 

Influence:  The Psychology of Persuasion is a terrific and timely read that will sharpen the sword of any committed sales professional.

FIVE STARS, AGAIN

Found out this week I have been named a "Five Star Professional" by 5280 Magazine once again in 2011.  For the second consecutive year, I have been ranked in the top 7% of agents in the metro Denver area, based on surveys sent to over 10,000 recent homebuyers and over 250 Colorado mortgage and title companies.

Just like last year, survey respondents were asked to evaulate their real estate professionals based on customer service, integrity, market knowledge, communication and negotiation skills, closing preparation, marketing skills, and overall satisfaction.

In less than six years, I have established myself as a top tier agent in Denver and I am so grateful to everyone for their support. I have worked exceptionally hard for more than 100 local home buyers and sellers since relocating to Colorado in 2005 after 11 years as a licensed broker in California.

My clients know firsthand that nobody works harder to educate and inform them than I do, and that my relationship-based philosophy is all about creating customers (and a steady referral stream) for life.

If you work hard, study hard, negotiate hard, live with integrity and have passion for what you do, you'll never have to worry about finding your next client. I believe with all of my heart that success is found by attracting new business, not chasing it.  And you become an attractor of business when you deliver value, expertise and integrity over and over again, and when you take time to build relationships which last beyond your transactions.

Thank you for naming me a Five Star Professional.  It is my honor to serve you.

JUNE MARKET UPDATE

With the inventory of homes for sale in the Denver metro area now down 16.5% from one year ago and down nearly 35% from three years ago, we are living in strange and confusing times.

Because the Denver Post continues to fail to adaquately explain the realities of today's market (including a pathetic article this week discussing the state of the market in May), I continue to find home buyers and sellers who have no understanding of how different this market is from just one year ago.

Below $250,000, there is hardly anything for sale (just 2.08 homes for sale to each home currently under contract) and lots of buyers are on the hunt.  But here's the catch - what buyers want above all else is value, and they simply won't pay retail prices for junk.  So you have swarms of buyers pursuing one type of house... the well-priced piece of real estate in good condition which is priced for the market of 2011, not the market of 2008. 

If you can list this type of home, you'll sell it in a week.  But the moment you get unrealistic about price, or if the condition isn't up to par with the competition, buyers move right on down the road to the next house in pursuit of that price/condition combination,

There are two reasons I can see why inventory is down so dramatically.  First, banks aren't foreclosing on as many homes, and the ones they are foreclosing on are generally at higher price points.  And second, sellers have finally figured out that if your home is in good condition and in a good area, it's no fun to sell it at 2011 prices.

At higher prices, there is going to continue to be distress ("deleveraging" as I call it) for some time.  While the absorption rate below $250,000 is just 3.45 months, at $1 million there is an 18 month supply of homes.  There is no price support for the high end of the market, and as people continue to hunker down and think smaller about housing, help is not on the way.

In between $250,000 and $1 million, there are pockets of opportunity, but they still call for caution.  I regularly remind clients not to count on the market bailing them out if they make a questionable purchase, and to do all pieces of diligence up front.  If you're smart about what you're buying and where you're buying it, there are excellent opportunities.

Buyers need to be realistic about the market and the moment we are living in.  Prices have come down in many areas (and continue to fall at the higher price points) and interest rates are in the 4's.  There's no new construction coming online (it simply isn't profitable to build at these prices) and the population continues to grow.  If you're buying a home today and looking at the big picture (and you plan to stay in it for a few years), the combination of discounted prices and absurdly low rates simply shouldn't be passed up. 

But it's a professionals' market, which calls for expertise and understanding.  Now more than ever, assembling the best possible team to help you with your purchase or sale should be your highest priority.

THE WOB IN THE MOB

Having spent a lot of time around real estate investors (and being one myself), there's always chatter about the next "hot" area, or how Light Rail is going to affect values over the next decade as spurs shoot out from Union Station into Golden, Lakewood, Arvada and DIA.

Investors are always trying to think two steps ahead of the market, and that's a good practice.  But for safety and value, nothing beats the "WOB in the MOB".

Simply put, the WOB in the MOB is the worst house on the block at the median price or below.  The reason this type of home has so much upside is because while improvements your neighbors make can help your value, there's very little that can happen that will undercut it.  And because you're buying the worst house on the block (in theory), you have the most ability to improve it and bring it up to the standard of the area around you.

Good investors want control of their investments, and WOB/MOB fits this model.  Buy it right, fix it up, and ride the coattails of your more well-to-do neighbors.

Of course, the opposite of this corollary also holds true.  To buy the biggest home on the block (especially at the higher end of the market) becomes the riskiest, most speculative type of purchase out there because, to a large extent, you are at the mercy of your neighbors.  If a house gets foreclosed on and the bank sells it for cheap... the biggest loser is YOU.  If someone lets their yard go and the character of the neighborhood is affected, the biggest loser is YOU. 

Without a doubt, the "McMansion" buyers of ten years ago today live in a world of regret and blown equity.  To buy an overpriced, non-conforming home in an area of less expensive homes has almost universally been disastrous, and today there are simply few buyers for these types of homes (and especially not at retail prices).

The real estate market of 2011 is all about caution, with buyers ranking perceived value above all else. 

Real estate investors know the WOB in the MOB model fits this paradigm, and they are profiting handsomely from this new reality.