HOUSING NIRVANA

There are many blogs and news sources I follow on a daily basis for real estate news and commentary.  Some of these include Bubble Info, Inman News, The Big Picture, RIS Media, Housing Wire and DS News.

Bill McBride, author of respected finance and economics blog Calculated Risk, was one of the first major industry observers to predict mayhem back in 2006.  Today, McBride is calling this market “housing nirvana”, with low rates, affordable prices and demographics all pointing squarely at a major run in home prices over the next few years.

McBride argues that new home construction could essentially double from today’s levels and we would not come close to matching the existing and coming demand for new homes.  With less than 500,000 homes built in the entire country in 2012, new home construction is now at the same level as it was in 1991.  New home construction would have to triple to hit levels seen during the boom, which is simply unlikely to happen given the ongoing tightness of financing in both construction and residential lending.

Additionally, McBride points at the impact the Baby Boomers are about to have on the housing market as a key driver in future appreciation.  In the decade from 1994 – 2003, the number of 55 and older Americans no longer in the workforce increased by 4.3 million.  From 2004 – 2013, however, the number of older Americans no longer in the workforce increased by 8.1 million, an 88% jump in the number of Boomers hitting retirement age.

As these Boomers retire, they will want the same thing… smaller, ranch-style homes with less maintenance and less square footage.  Because builders simply cannot build “affordable” entry-level homes any more (due to increased material costs, labor costs, and land acquisition costs), the homes these booms vacate will be in exceptionally high demand in a thin-inventory market. 

McBride argues that unless material costs, labor costs and land acquisition costs drop significantly, higher prices are essentially a foregone conclusion going forward.

REBOUND, NOT BUBBLE, SAYS LEAD ECONOMIST FOR TRULIA

Lead Trulia economist Jed Kolko issued a report this week saying that home prices nationally are in rebound mode, not bubble mode, despite impressive gains in many parts of the country (including Denver).

Prices today are still 7% undervalued, according to Kolko, based on fundamentals such as supply, demand, new construction capacity, demographics, interest rates, incomes and rents.  At the beginning of 2006, according to Trulia’s formula, US homes prices were overvalued by 39%.

Because mortgage credit remains very tight, the market is still dominated by well-qualified buyers.  Even in a downturn, well-qualified buyers who make real down payments are far more likely to stick things out that the “no down payment” crowd who dominated the buyer pool during the final stages of the last run on housing.

New construction activity is still far, far below history norms, and this year new construction will only amount to about 35% of the number of homes built during 2006.  This cap on supply after years of no building at all figures to protect values for at least the next few years. 

Will there ever be another bubble?  According to Trulia (and me), the answer is yes.  The history of US real estate is dotted with booms and busts.  The question is always, when will it happen and what will it look like? 

As long as mortgage rates remain relatively low, new construction remains muted compared to previous levels, and mortgage finance remains responsible with buyers expected to make real down payments… the market will continue to grow and prices will continue to rise. As long as job growth (even slow growth) continues, as long as demographic trends hold up, and as long as prices remain affordable compared to rents… the upward march in prices figures to go on.

When rates rise, the quality of new buyers falls, builders overbuild, and the economy falters… the tone of this conversation will change sharply.

But for now, housing is clearly the healthiest component of the US economy.

QUALITY MATTERS

In a hot market, who you work with matters.

This past weekend, I listed a highly updated, well-kept home in Arvada priced in the low $200s.  Thirty-six hours later, the home generated 29 showings and four offers - all at or above list price, including two with "escalator clauses", with the buyer pledging to outbid any bonafide competing offer up to a certain limit.

Pure craziness.  

So, if you're the agent, what do you do here?  Simply look at the numbers and choose the highest one?  Or delve a little further into the details?

While I won't reveal which offer my seller ultimately chose, I will let you know that one of the first things I did was to go straight to the MLS, and using a technique not many agents know, I pulled up recorded sales history for each of the agents involved.  

This production history is important, because the numbers in a purchase offer are irrelevant if the deal never closes.  

Using a little-known search function in the Denver MLS, I can pull up to five years of closed sales data for any licensed agent, which shows me how many listings they have sold, how many buyers they have successfully closed, what those homes sold for and where those homes were located.

Would that be valuable information for you to have in determining the relative quality of an offer?  Of course.

In a hot market overflowing with emotion, would you rather accept an offer from an agent with a proven and consistent track record of closing homes?  Or from a newly licensed agent with three lifetime sales?

Here's what my "buyer side" sales production looks like in the MLS.  It shows 68 closed buyer sides in the past five years, although that number does not include a handful of "non-MLS" transactions, such as "For Sale by Owner" or new construction deals (the actual number of buyer sides is closer to 80).

I am firmly convinced that in a market where multiple offers are the new normal, the reputation agents have is going to be a deciding factor more and more when determining which offer gets chosen.

This is a stressed out, transitioning market and a lot of people simply can't deal with it.  When selecting an offer, it's not just the bottom line number (although that obviously is important).  It's figuring out who the buyer is, who the agent is, who the lender is... and then determining (when challenges arise, which they always do) if these people are going to make things happen, or if they are going to make excuses.  

Quality matters.  Reputation matters.  Production matters.  Your team matters.  Results matter.

In an environment like this, everything matters.  So choose wisely, because your success or failure is going to increasingly depend on who you allow into your boat as you push off from the shore.

THE OVERPRICED LISTING SPECIALIST

There's a new breed of agent coming to town, sure to be appearing in your neighborhood soon.

She's the "Overpriced Listing Specialist", and she always comes to town when the real estate market gets hot.

She understands that prices are going up and sellers are getting greedy.  She doesn't really care about marketing, ensuring a home is salable or even getting the best price for a home.  She only knows how to get listings.

"I'm sure you've heard the market is pretty hot right now, Mr. Seller", she says.  "What price do you want for you home?"  

"Wow," says Mr. Seller.  "All the other agents we talked to came in here with comps, historical information, market data, and they even talked about - what's the name of that guy who comes in with a clipboard and measures your rooms - ah yes, the appraiser.  You mean I can just pick my price?"

"You sure can, Mr. Seller.  Sign here."

The Overpriced Listing Specialist is getting traction in this market.  She always does. 

When homes listed for 15% more than they're worth don't sell, she blames the market.  She tells Mr. Seller to be patient.  Or sometimes she simply doesn't answer her phone at all.  

After all, she has a signed listing contract.

In Colorado, we don't have enough homes to sell.  Inventory is incredibly low and, yes, prices are most definitely rising.  

But none of it matters if you are priced so delusionally high that when the first wave of buyers comes storming through, they thumb their nose at your home and move on... "That price is ridiculous."

The problem Mr. Seller will soon encounter is that, after the first 15 to 21 days, the showings are going to start to dry up.  The parade of motivated, "want-it-now" buyers is over.  And suddenly, your home is getting a little bit stale.  

You may still get a good price, but you may not.  You may sit on the market for months, driven out of your home for showing after showing after showing until you dread the sound of your own phone ringing.  

The time of maximum leverage for sellers is during the first 10 to 15 days on the market.  During this time, the showings are coming fast and furious, the buyers are motivated and they are ready to write strong, "pre-emptive" offers to try and lock up your home before the weekend traffic comes pouring through.

Those are good conditions to sell into.

I would look closely at the sales history of the Overpriced Listing Specialist.  "How many days on market does it take your listings to sell?"  

Then ask for MLS printouts to prove it.

I have always said there are certain formulas in real estate that will yield the best results.  That includes strategies tailored for buyers, and approaches that work best for sellers.

If your goal is to sell your home in a reasonable period of time for the best price possible, you will probably pursue a formula that involves lots of cleaning, lots of decluttering, some tactical improvements like paint and carpet, and you'll look for ways to stage the home in ways that draw attention to its best features.

If your goal is to impress yourself by listing your home higher than anyone else in your ZIP code, then no worries... the Overpriced Listing Specialist is coming to your neighborhood soon.

EPIC, HISTORIC, BREATHTAKING JANUARY FOR DENVER REAL ESTATE MARKET

Amazing.  Incredible.  Astonishing.  

Those are just a few of the words that come to mind when describing what happened in the Denver real estate market during January.  The surge in activity - the overall absorption rate fell from 3.32 months to 1.81 months in just 30 days - rivals anything I have seen in 19 years as a real estate broker. 

Some of the ratios are just absurd.  In a "normal" market, with six months of inventory, you would see about twice as many homes on the market as you have under contract at any point in time.  As of today, below $250,000, there are currently 3,475 homes under contract.  That means, under "normal" market conditions, you would have 6,950 homes for sale.  The actual number - 1,843.  

Want more numbers?

In February of 2011, there were 18,000 homes on the market and 4,400 under contract.

In February of 2012, there were 10,000 homes on the market and 6,000 under contract.

Today, there are 7,000 homes on the market and 7,200 under contract.

In numerous conversations and Facebook posts over the past few months, I have shared my view that half of the so-called "buyers" in the market today will never buy a home.  I equate it to 2007, when (literally) 50% of the sellers who listed homes for sale never sold them, because they could not come to grips with a changing market (i.e. a declining market) and they could not let go of their overpriced appraisals from 2005.

Today, countless "buyers", often taking counsel from out-of-state relatives while obsessing on three-year old sales data appearing on the Zillow app, look at me with confused eyes and stubbornly proclaim they "simply will not pay these prices" for homes.

Ok, see ya later.

Those who work with me know I am an educator first, and a salesperson second.  They also know I take the ethics of this business very seriously, that I own my fiduciary responsibility to take care of my clients, and that I am fully committed to a long and enduring "happily ever after".

Having said that, this is a Denver real estate market that is surging like none other in the past 20 years.  

Construction vaporized for four years in this state, the population grew by 400,000 during that time, every unqualified homeowner (and neighbor) was uprooted and forced out by foreclosure, and default rates in Colorado are now 40% to 50% below where they have historically been in normal markets because underwriting has become so obsessively tight.

And, in a highly under-reported development, some percentage of the 70,000 Denver metro area households foreclosed on in 2006, 2007 and 2008 will be re-entering the housing market in the next two years.  What do you think that will do to demand?

What we have today are neighborhoods full of qualified buyers who made real down payments with loans offering obscenely low payments who are better educated than their predecessors and who understand the value (and responsibilities) of home ownership.  

Does that sound like a crash waiting to happen?

I don't think it does.  I think we're on the front end of what will be an extended run for property values in Colorado. At least until the builders catch up with demand and, perhaps, overbuild once again.  But that's at least a few years off.

Nothing lasts forever.  Conditions will change.  Eventually.

But for the foreseeable future, home prices in the Denver metro area are going nowhere but up.

PRICE AGGRESSION

Having spent much of this past weekend showing homes to first-time buyers in Aurora,  I am marveling at how fast list prices seem to be rising in many of the hottest entry-level neighborhoods.

In fact, I saw several homes on Saturday that were listed at prices $25,000 to $40,000 over what homes in these neighborhoods were selling for just two to three years ago.  We’re not talking about high end homes here…we’re talking about $130,000 homes three years ago that are being offered at $165,000 today.

The shift is so startling, I have a term for it – price aggression.

Price appreciation happens when prices are lifted by improved market conditions and values increase in an orderly, logical way.

Price aggression – my new term - happens when sellers and agents list homes at numbers that are so high that 75% of buyers will turn and walk away… leaving this inventory to those who either don’t understand historical values or who have agents willing to let them write seriously inflated offers.

If you have followed the posts in this blog for any period of time, you know that we live in a very segmented housing market.  The reality below $250,000 - 2 months of inventory and more homes under contract than on the market - is radically different than the $1 million market, where there is 19 months of inventory (pathetic) and about 7.5 homes on the market for each one that has a contract.

Price aggression, for now, exists in the lower rungs of the market only... but that's where the majority of buyers today are looking.  And when you consider that a decent percentage of the 50,000 households that were foreclosed on in the Denver metro area in 2006 and 2007 alone are now coming back into the market, demand won't be easing up in this price bracket any time soon.

It will be interesting to see how appraisers handle neighborhoods where prices appear to be going up 1% a month or more. 

For the record, I don’t like price aggression, and I don’t like the fact that half of the buyers in the market today are never going to buy a house, either because they don't understand the market or they simply are addicted to past market conditions that no longer exist.  To be successful in today’s market as a buyer, you most definitely must understand that prices are rising, but you need to be disciplined enough to wait for the right deal.

That means fewer transactions for good agents, at least on the buyer side, which means that many of the better agents are going to stop working with buyers because there are simply too many fish in the pond right now.

Price aggression among sellers is the flip side of buyers who lowball.  For five-plus years, lowballing was a legitimate strategy in many situations.  Now, unfortunately for buyers, price aggression has become a legitimate strategy for many sellers in a market when the inventory of homes for sale is down 77% compared to 2007. 

Right now, price aggression seems mostly limited to homes under $200k, where the most severe supply-demand imbalance exists.  It will be interesting to see buyers react to these suddenly higher prices over the next few months.  

A HISTORY LESSON FOR TODAY’S BUYERS

There is a lot of angst in our market right now.  Call them "birthing pains".  They are the birthing pains of higher prices.  And many buyers are feeling them.

We’ve had 1,900 homes come on to our inventory-starved market since the first of January.  We had 1,500 homes (nothing) listed in all of December.  Buyers have been lined up for months, waiting for something worth buying to come along. 

Now here it is… but wait.  That little home in the older part of town which was worth $215,000 last summer… it’s listed at $229,000!  That one on the ridge, by the park.  Sales in that neighborhood were in the high $200s last year.  $324,000??

The tension that exists in our market is the inverse of the tension that existed in our market in 2007.  The difference is, this time prices are going up, last time prices were coming down.

In 2007, there were 31,000 homes for sale in the Denver metro area, and maybe 8,000 buyers looking to purchase in a shaky, uncertain market.  Today, there are 8,000 homes for sale and it feels like there are 31,000 buyers, all looking to nail something down with a rate in the 3’s.  That equals rising prices.

In 2007, seller’s clutched their overvalued appraisals from 2005 and lamented as to why penny-pinching buyers were being so unreasonable. 

But in 2013, it’s buyers who are racing to Zillow, finding archived sales information from two years ago and lamenting why suddenly greedy sellers are being so unreasonable. 

And so you have come full circle. 

Zillow history from two years ago is just as irrelevant to buyers today as overpriced appraisals from 2005 were to sellers in 2007. 

Just as sellers in 2007 waved their appraisals and cursed the buyers, today the buyers are waving their iPhones (open to the Zillow app) and cursing sellers.

It’s called tension, and it happens when things change.

I talked with my home inspector yesterday, and he’s feeling it too.  He says more and more, he’s seeing the same buyers turn up at inspection after inspection.  They theorize that they have the power, just as they did in 2007, 2008, 2009, 2010 and most of 2011.  They theorize that if they offer a higher price, they can get it all back by beating down the seller during inspections.

Many sellers are folding their arms, backup offers in hand, and saying “Fine, walk away.”

There’s tension in the market because things are changing.  There’s tension in the market because inventory is at a 20 year low and demand is intense, especially below $300,000.  There’s tension because sellers have been beaten down for five years and the market has finally flipped in their direction.

Over half of the listings taken in the Denver MLS in 2007 never sold.  And I’m starting to feel that about half of the buyers in the market today are never going to buy a house. 

It’s because the rules have changed, and if you are clinging to data that’s not relevant in today’s market, it means you’re not likely to be successful.  

NO DECEMBER SLOWDOWN

In normal years, the Colorado real estate market often falls into a deep sleep from mid-November through the first week of January.

This, however, is not a normal year!

The number of homes under contract in the Denver MLS increased by 15% during November compared to last year, while listing inventory plummeted 36%.  A total of 2,710 homes went under contract over the past 30 days, compared to 2,342 during the same period last year.  The overall listing inventory in the Denver MLS as of November 30 stands at 8,847 homes, down from 12,634 at the end of November in 2011 (and down from 19,881 in November of 2010).

Those are incredible, market-shaking changes.

As I have written about over and over on this blog throughout 2012, the ingredients in our market’s amazing turnaround are as follows:

No more foreclosures.  In 2007, the Denver metro area had more than 27,000 foreclosures.  This year, that number will probably fall right near 7,000, which is completely normal for a metropolitan area this size.  Everyone who was going to lose a home due to subprime financing or Great Recession job loss has already lost it, save for a few stragglers and those whose foreclosures have been delayed for months or years due to the foreclosure moratorium fiasco.

Hardly any new construction.  Three-quarters of the builders in Colorado in 2006 were gone by the end of 2009, wiped out by the recession and the collapse of the commercial lending industry.  We stopped building homes for nearly four years as the population continued to grow by close to 2% (100,000 new residents) per year.

First-time buyers.  With rates in the 3’s and rents rising at an historic pace, first-time buyers are out in droves, prompted by their parents to “buy now” while affordability is so ridiculously high.

A lousy economy.  How does a lousy economy contribute to a surging housing market?  Because many people who have seen their wages drop or whom have lost jobs simply aren’t moving.  Not moving = no inventory.

The return of “first generation” foreclosure buyers.  In 2006 and 2007 alone, over 50,000 metro area households lost homes to foreclosures.  Today, after five years of credit restoration, a good percentage of these former owners are coming back into the market… smarter, wiser, and probably at a lower price point than during the boom.

What it means is that prices are now rising faster (especially in the lower price brackets) than they have at any time in the past eight to 10 years.  Case-Shiller has reported year-over-year price appreciation of 6.7% for the Denver metro area; CoreLogic reported 9.3% price growth; and just this week, Zillow blasted the appreciation conversation into a whole new stratosphere, reporting 10.8% year-over-year price gains for Denver.

Now hold on.  Take a deep breath.  Some of this chatter is out of control.  Zillow’s numbers, for example, are being heavily slanted by repeat sales involving foreclosures that were purchased at steep discounts in 2008 or 2009 and then resold in 2012.  Trashed foreclosures that were selling for $130,000 two years ago are being flipped in the $200s today, but that doesn't mean prices have appreciated 50%.  It means a lot of former junk is being reintroduced to the market in pristine condition, with much of the value gain coming from improvements. 

But the overall upward trend is undeniable.  And if you have been working with buyers (many of whom are finding that it is darn near impossible to get a nice home under contract under $400,000 without immediate competition), you know that 2012 is nothing like the markets of 2007, 2008, 2009, 2010 or 2011. 

What does it mean for 2013?  If interest rates remain low, and if the fiscal cliff negotiations are resolved in a fairly efficient manner, it likely means that higher prices and lower inventory are here to stay.  Buyers are going to have to be willing to pay more, or get less, because the demand for entry-level homes isn’t going to let up any time soon.

Although it’s frustrating for some, it’s good for many more.  Homeowners in Denver are seeing their equity grow after years of tepid or non-existent appreciation.

Heading into 2013, that’s something to be thankful for. 

COLORADO HAS NATION'S THIRD LOWEST AVERAGE FOR REAL ESTATE CLOSING COSTS

Closing costs on a real estate transaction can take many forms and can vary widely.  Lender fees, title company closing costs, and transfer fees are just a few of the ingredients that can push up closing costs.

Bankrate.com’s 2012 annual survey of closing costs shows that Colorado has the third lowest closing costs, on average, of any of the 50 states.  The Bankrate survey showed average closing costs of $3,199 for Colorado, leaving only Missouri ($3,006) and Kansas ($3,193) with lower average closing costs.

At $5,435, New York has the highest average closing costs of any state.

Different states use different processes and procedures for settling real estate transactions. 

New York is a state where buyers and sellers usually hire attorneys to prepare closing documents and attend closing.  That, obviously, is why New York ranks #1 on the list of most expensive states.

California and Nevada are “escrow states”, where buyers and sellers hire a third party entity called an escrow company to prepare documents, ensure adherence to contract terms and receive and disburse settlement funds.

In Colorado, we are a “title state”, meaning that title companies (which also issue the title insurance policy for the transaction) officiate the closing process, which is highly streamlined compared to other states. 

Because closing costs are often prorated to the sales price and/or loan amount, states with higher real estate prices tend to have higher closing costs.

The bottom line is that, even though it may seem like buying or selling a home in Colorado is expensive, we are the third cheapest state in the country for closing costs. 

Which means more of your money stays in your pocket.

ANOTHER BUBBLE?

Inventory down 40% in one year.  Contracts up 10% - 30%, depending on price point.  Case-Shiller reporting that Denver home prices have increased an eye-catching 6.7% over the past 12 months.  Interest rates in the 3's. Multiple offers, bidding wars and cash buyers in abundance.

When you look at the totality of the frenzied Denver housing market, it's hard to resist raising a skeptical hand and harkening back to the bubble and crash that effectively sank the US economy just four short years ago.

But conditions today are very different from the conditions we saw during the bubble years of 1998 - 2005.

Specifically...

1) First, and foremost, the world of mortgage finance is 180 degrees removed from where it was during the bubble years.  Back then, subprime lending, no-doc qualifying, option ARMs and negative amortizing loans flooded the market.  By 2006, anyone with decent credit and a ballpoint pen could borrow $1 million or more with a signature.  Today, buyers must qualify under painfully tight guidelines, regardless of down payment size, and virtually every buyer is locking in a fixed rate loan.

2) The rise of Zillow, Trulia and an ocean of freely available Internet-based real estate data.  Remember that Zillow launched in 2005, at the tail end of the housing boom.  Until then, most real estate data was hard to find and sometimes impossible for the public to access, meaning that consumers were making decisions based on emotion rather than hard data. Today, there are no secrets, and buyers have access to an overwhelming amount of information that helps them to make far better judgments about the value of a piece of real estate.

3) In 2005, most of the country didn't know what a foreclosure was, much less a short sale.  People were buying out of pure speculation in anticipation of pocketing huge real estate profits.  Greed was like a disease running through the market, and the upward price spiral was simply unsustainable.  Today's buyers know that losing money is possible in real estate, and they are proceeding much more carefully.

4) In Colorado, 50,000 homeowners lost property to foreclosure in 2006 and 2007 alone.  Today, having done their time, many of these former owners are re-emerging from "credit purgatory" and coming back into the market... older, wiser, and much more cautiously.  They are not buying "over their heads" this time.  And they are making real down payments, which gives them far greater incentive to stick around.

5) For the most part, the foreclosure crisis in Colorado is over.  For seven years, less qualified buyers have been systematically rooted out and replaced with buyers who have real jobs, documentable income, strong credit and actual down payments.  In 2007, over 27,000 Denver metro homeowners lost their homes to foreclosure.  This year, there will be fewer than 8,000 foreclosures in the metro area, a 71% decline from the peak.  

In January of 2011, 45% of the listing inventory in the Denver MLS was foreclosures and short sales.  Today, just 8% of active listings are distressed.  We have essentially run out of distressed inventory, or "houses on sale", which means the number one anchor on prices is out of the picture.

We now have massive numbers of first-time buyers competing with thousands of "second generation" buyers (those who lost homes at the onset of the foreclosure crisis) plus we've added nearly 100,000 people per year to the state's population since the economic crash of 2008. 

Couple that with the fact that three-quarters of the builders in Colorado in 2006 have either closed shop, declared bankruptcy or left the state... then factor in rapidly rising rents coupled with mortgage rates in the 3's... and the frenzy you see today falls into pretty clear focus.

The only slowdown scenarios I can see in the short term would be a sudden spike in interest rates (which would have a catastrophic impact on the national debt, which is financed, thus crippling the overall US economy) or an extended plunge off the so-called "fiscal cliff", if lawmakers fail to do their job and cannot come to agreement on raising the US debt ceiling in a timely manner before the end of the year.

These are things that could happen, and they deserve to be monitored closely.  And I do believe in cycles.  There will come a day in the future when it's time to consider getting out of an overheated market, just as many (including myself) checked out of an unsustainable bubble last time around.

But if Congress and the President do their job and interest rates remain low, the heat under the Denver area housing market today will only burn hotter as we enter 2013.

CASE-SHILLER: DENVER HOME PRICES UP 6.7%

The good news for homeowners in Denver just keeps on coming.

Case-Shiller reported yesterday that home prices in the Denver Metro area increased 6.7% year over year in September, reaching the highest levels we have seen since 2007.

Case-Shiller uses a scoring matrix (instead of an average or median price) which gave the Denver area a rating of 134.01, meaning that prices at the end of September were up 34.01% over prices in 2000, which Case-Shiller uses as a baseline year.

Prices nationally rose 3.6% over the past 12 months, so value increases here in Denver nearly doubled the national figure.

So what does this mean?

Let's say that 12 months ago, you purchased a $200,000 home with a 3.5% FHA down payment and you had your closing costs paid by the seller.  Your total up front investment in the home is $7,000.

Now, assuming your home's value increase matched the Case-Shiller report and went up 6.7%, its new real-time value is $213,400.  Under this scenario, you have $13,400 of equity appreciation.

If your initial investment was $7,000 and your first year return is $13,400, your one-year "cash on cash" return is 191%!

(Please call you financial advisor immediately and ask if he or she can provide these kinds of returns!)

These incredible yields don't even take into account the fact your mortgage payment is likely lower than comparable rent, that your taxes and mortgage interest are likely tax deductible, and that you might actually like the home you are now living in.

I have always taken a cautious approach to this business, in good times and bad.  I am not saying you should speculatively buy a home in hopes of massive appreciation, but in this market, facts are facts.

While the market remains sluggish above $600k and there's only modest gains above $400k, everything else is in full recovery mode.  At the lower end of the market in particular, prices are rising quickly and virtually all of the key indicators point toward continued growth.

What are those key indicators?

1) Three-quarters of the builders in Colorado filed bankruptcy or left the state between 2006 and 2009, meaning new construction has essentially vaporized compared to historical levels;
2) Colorado's population has consistently increased by 100,000 or more each of the past five years (one of the top 10 growth rates in the country), meaning upwards of 500,000 new residents have moved to our state since the economic downturn began;
3)  Over 50,000 Colorado households were foreclosed on in 2006 and 2007 -  with many of those households now coming back into the housing market (and competing with first-time buyers) as their credit is restored;
4)  Foreclosures and short sales, which were providing 45% of our inventory two years ago, now make up just 8% of active MLS listings;

When you look at those kinds of dynamics, you see the framework for an incredible supply crunch, which is what we are experiencing right now. 

Couple this with the fact interest rates remain in the 3's (still completely absurd) and you can lock in an artificially low payment for however many years you choose to live in your home... and the value in this market is so obvious almost everyone can see it.

This is why we have transitioned into a market where multiple offers are common, days on market have plummeted and absorption rates are near all time lows.

I mentioned to one of my networking groups yesterday that the only people getting homes under contract in this market are those buyers who are fully committed to going on offense.  The mindset of this market is a complete reversal from 2008, 2009, and 2010, when buyers thought defensively, negotiated aggressively and deliberated endlessly.

Those who are finding success in this market are properly educated, fully pre-qualified and ready to take action immediately.  All others are likely to remain on the outside, looking in, while the most motivated buyers are taking advantage of low rates and riding the front end of what figures to be a significant wave of appreciation for the foreseeable future.

MORTGAGE FIRST, HOUSE SECOND

I am quite convinced that many buyers today are purchasing mortgages first, and houses second. 

What do I mean? 

What I mean is that the educated buyer, the one who understands how mind-numbingly low and historically aberrational today’s fixed interest rates are… that person is taking decisive action and shopping with great urgency because of rates.

To this person, who understands the long-term upside of home ownership… who understands how much personal wealth can be accrued through a 15-year mortgage… and who understands that once he or she buys a home, the principal and interest payment can never go up (while rents continue to rise)… this person wants a house and is willing to spend a little more to get it.

Meantime, buyers who don’t understand this market, or buyers who want to grind on price, or buyers who think their experience will be just like the experience of a friend who may have purchased during the dark days of 2009 or 2010… very few of those buyers are actually having success in a highly competitive market.

Now, I never advocate overpaying.  Read this sampling of posts from the past few years and you’ll see, I shoot straight on the subject of value:

* Round One Impacted the Entry Level; Round Two to Hit Upper Middle Class (Oct 18, 2009)

* Why It's Not the Same This Time (Oct 3, 2008)

* August Wrap: Buyers Have Upper Hand (Sept 20, 2010)
* Stark Differences Between Condos and Single Family Resale Market (Jan 26, 2010)

But here’s what it boils down to today:

If you offer $5,000 more for a median priced home, that decision will cost you about $22 extra per month, based on a 30-year loan at 3.5%.  Over the course of a year, that’s $264 dollars in higher payments.

If you don’t feel the urgency, if you sign another lease and let this market pass, and rates go up just 1%, you could be looking at an extra $2,500 per year in interest payments on a 30-year fixed rate loan.  Plus, prices are rising in almost every area below $500,000. 

So take action now, write a winning offer, and spend an extra $264 per year.  Or wait 12 months, pay more for a lesser house, and pay 10 times more than the $264 per year a $5,000 increase in your offer price would cost today.

The buyers who want into this market are not fooling around.  And there are lots of them.  They’re writing serious offers fast and closing on their new homes.

The buyers who don’t see the big picture are working off rules that simply don’t apply anymore. 

This is a market for the swift and the determined.