THE NUMBERS ALWAYS TELL A STORY

Many of you are familiar with this large, bulky, slightly weathered binder that I often break out during listing appointments and buyer consultations.

It is a binder full of laminated spreadsheets, over 90 of them, dating back to 2006.  Each spreadsheet provides a “snapshot” of what our market has looked like on a on a month-by-month basis, with data personally extrapolated from the Denver MLS on the 10th of each month.

In 19 years as a real estate broker, one core conviction that I have developed is that the numbers always tell a story.  And if you’re paying attention, you can see the story being written.

From 2005 to 2010, our market here in Denver went through some dark times.  Colorado actually led the nation in “foreclosures per capita” in 2005 and 2006, driven in large part due to the fact that until 2007, Colorado was one of only two states in the county (Alaska being the other) that had no kind of licensing or registration program of any kind for mortgage lenders.

Lose your license in Miami?  "Come check out the Rocky Mountains!" Busted for fraud in Vegas?  "Hey, they are hiring in Denver!"

That nonsense finally ended in 2007, when Colorado got serious about regulating its mortgage finance industry, but not until terrible damage had already been done. 

Between 2005 and 2008, over 83,000 homes were lost to foreclosure in the seven county Denver metro area.  Banks dumped homes on the market, literally piling them on top of one another, until we had more than 31,000 homes for sale in the Denver MLS by the middle of 2007. 

In 2008, over half of the homes listed for sale in the Denver MLS never sold.  Buyers were fearful, spooked, afraid.  The economy tanked.  Interest rates plunged.  The foreclosures continued, and continued, and continued.  With prices falling and few buyers to be found, new construction vaporized.  Builders abandoned communities in mid-development.  Contractors and construction workers were fired en masse.  The stock market plunged. 

In 2009 and 2010, the government got involved, offering tax credits and rebates to home buyers.  Many stepped forward, taking advantage of low rates and temporary government subsidies.  But still the foreclosures continued. 

By the end of 2010, most people had internalized a new set of beliefs about real estate.  Housing was bad.  Houses make you poor.  Smart people rent.  Only fools buy real estate.  And over one-third of the real estate licensees in Colorado quit the business (because it was really, really hard!).

And then, like a passing summer storm, it ended.

If you were paying attention, by early 2011, you could see it.  Small patches of blue sky behind the dark clouds.  Inventory began to thin, absorption rates began to drop.  Foreclosures started to dry up.  Rents began to increase.  Cash buyers suddenly materialized and became very, very active. 

At the start of 2011, there were 18,000 homes on the market.  By the end of 2011, there were 10,000 homes on the market.  Foreclosures and short sales went from 45% of our market to less than 20% of the active inventory.  Change was happening, and it was tangible.

By early 2012, the numbers were in a full reversal.  Between January of 2012 and May of 2012, the overall absorption rate for homes in the Denver MLS plunged from 5.88 months to 2.22 months – a staggering shift and a complete flip of the supply / demand ratios we had seen during the downturn.

Buyers began finding themselves in multiple offer situations.  Days on market plunged.  Urgency replaced passivity.  Prices began to rise.

Now, halfway through 2013, in most parts of town, it has turned into a shootout.  Over 40% of all homes sold in the Denver MLS so far this year were on the market less than 7 days.  I have seen properties with 7, 15, 25 competing offers.  I have sold listings before they went in the MLS, with motivated buyers pouncing on nothing more than a “Coming Soon” sign in the front yard. 

Zillow says home prices have increased 13.4% in Denver in the past year.  Case-Shiller reports a 9.8% increase.  Core Logic’s estimate is 10.5%. 

The newspapers and television stations now bemoan our “terrible inventory shortage”.  We hear new terms like “price aggression”, which is what happens when sellers list homes 10% over the most recent closed sale.  (It’s the exact opposite, by the way, of “lowballing”, which buyers practiced without fear or remorse when the market was declining)

And just this morning, I saw online that Wells Fargo and B of A are now once again offering “piggyback” loans, second mortgages which are piled on to an 80% first mortgage to lower down payment requirements. 

Interesting how everything old suddenly feels new again.

Now, there are notable differences between this market and the one that crashed seven years ago.  For one, today’s buyers must have excellent credit and real down payments.  New construction essentially ceased to exist for five years while the population in Colorado increased by 2% per year.  And even with 30-year fixed rates on the rise, the affordability of this market is just crazy compared to what we saw when prices peaked in 2006, when rates were in the high 6s and occasionally over 7%. 

That’s the power of tracking numbers.  They always tell a story.  And if you pay attention to them, it’s much easier to anticipate what the next chapters will look like before we actually turn the pages. 

Will this current run on housing last forever?  Of course not.  But before it changes, the numbers will begin to whisper.  And if you’re paying attention to them, you’ll know what to do.

THE 20/20 RULE

In a hot market, sellers have more leverage than they have had in years.  Rapidly rising prices and a slight uptick in mortgage rates and causing buyers to move quickly on new listings. 

But not all buyers are the same.  Nor are all buyer’s agents.

As I have mentioned in previous posts, when I work with sellers I am legitimately concerned about who the other parties are in our transactions.  Is this buyer really qualified to buy a home?  Does he have a reputable lender?  Does he understand the market?  Is he really motivated?  And does the agent he is working with have a track record of closing sales?

When you list a home and it goes under contract, the last thing you want to have happen is for that transaction to be derailed by some avoidable concern. 

And the truth is, there are agents who know how to solve problems, and there are agents who know how to cause them.

In a market where multiple offers are increasingly common, I’ve implemented a principle I call the “20/20 Rule”.  In short, it means that we are looking for a buyer with a 20% down payment working with an agent who closes 20 or more deals a year.  (That doesn’t mean we always find a buyer who fits the 20/20 Rule, but the principle is still relevant)

If you can find these two dynamics, I put your odds of closing successfully somewhere around 95%.

Another way to phrase this is that serious sellers should be looking for serious buyers with serious agents.

A full-price offer is rather meaningless if the buyer is working with a brand new agent, borrowing his down payment and using a promissory note for the earnest money. 

As a seller, you are damaged when your home goes under contract and then reappears as an active listing a week or two down the road.  Because that history is traceable in the MLS, buyers and agents often assume “there must be a problem with the home”, when in reality, often there was a problem with the buyer or the buyer’s agent.

So choose whom you contract with wisely, because it takes both cooperation and competence to successfully close a deal.  

NEW CONSTRUCTION PRICES SOARING AS LABOR SHORTAGE INTENSIFIES

An article in this morning's Denver Post highlights something I have been discussing with buyers for months. Pent-up demand and higher land acquisition costs aren't the only reasons new construction costs are soaring; the cost of attracting and keeping skilled construction workers is literally going through the roof.

This past week, I talked to a Richmond Homes sales manager who told me that many builders are paying five-figure signing bonuses to electricians, framers, drywallers, tile setters... virtually everyone involved in the construction trades.

This scarcity of labor stems from the fact that, during the downturn, many construction workers got out of the business altogether after seeing their wages cut, their hours shortened, and eventually, most of their employers shutting down completely.  Having lived through this "boom and bust" cycle, large numbers of these workers swore off construction and found other ways to support themselves during the recession.

This morning's article also talks about the reluctance of builders to hire because of the new health care law, as well as the reduced pool of skilled immigrant labor that helped drive housing during the last cycle.  

As a result, many new home sites are becoming a literal carousel of workers, as builders "steal" contractors (and sometimes entire crews) from one another in mid-project.  And these higher labor costs are another reason that price gains in new construction are outpacing even the red-hot resale market.  

FRANKENSTEIN OFFERS

Lately, it’s not uncommon to see multiple offers, especially on homes listed below $250,000.  In fact, over half of the homes I’ve listed this year had multiple offers within three days.

It’s important to remind readers that when I work for a buyer, I work for a buyer.  And that means we focus on finding value, making sure we know everything we can about a home and a neighborhood, and making the most logical decision we can based on the data.

When I work for a seller, however, I work for a seller.  And that means my job is to get my seller the very best offer possible from the best qualified buyer. 

So the methodologies are different, very different, when working with buyers and sellers. 

With buyers, the goal is to stay out of multiple offer shootouts.  With sellers, oftentimes the goal is to encourage multiple offer outcomes.

Having said that, one of the strategies I have employed successfully in this sellers’ market is what I call “Frankenstein offers”. 

This simply means that when I am representing a seller and we have multiple offers, often we will take the best components (price, closing date, earnest money, contingency dates, etc) of several offers and create one master “reverse” offer, which gives the seller everything he is asking for in one shot.

We then rank the quality of buyers, based on strength of down payment, qualifications, and yes, who their agent is (with a strong preference for agents in the top 20% of our market). 

The resulting “Frankenstein offer” is then presented to our preferred buyer, with a relatively short deadline for acceptance.  If the first buyer fails to perform, we move to buyer number two, and so on.

Now of course there are some strong caveats around this.

First, you cannot overplay your hand.  You must be reasonable in what you present to a buyer, or your arrogance will blow the deal entirely.  You must be respectful and committed to making sure the buyer still feels value in the proposed terms that you lay out. 

You also have to have a saleable piece of real estate. 

My “Frankenstein offers” this year have all resulted from properties that were turnkey ready and priced to sell in today’s market.  If you list a $250,000 home for $290,000, this post is not for you.

What we’re talking about are well-maintained or renovated homes in turnkey condition with a reasonable starting price.  That kind of home will most often have a shelf life measured in hours or days, not weeks or months… and that’s what you need in order to succcesfully “Frankenstein” an offer.

In a hot market, selling a home is much easier than it has been in past years. 

But let’s be clear… if you’re a seller, merely selling your home should not be your ultimate goal.  Your primary objective should be to market and negotiate your way into the highest possible net dollars after closing.  That's what matters most, and that's why quality agents are never at a loss for new business. 

MULTIPLE OFFER MAYHEM

These days, every agent with a pulse has stories about losing homes in multiple offer situations.  With inventory at a 28-year low and buyers flooding the market, this isn’t news.  Over the past five years, we have progressed from a dead market… to a cautious market… to a logical market… to an emotional market.  Most buyers are no longer shopping for homes, they are fighting for them.

Having said that, buyers need to know that there really are no set rules for multiple offer situations.  While Realtors subscribe to NAR’s code of ethics (which promote fairness and integrity in all dealings), many others are simply in combat mode, looking to lock down the best offer regardless of whose feelings get hurt along the way.

Most buyers would like to believe there is an orderly, systematic protocol for dealing with multiple offers.  There isn’t one.  In many cases, the listing agent makes it up.

Submitting a reasonable offer in hopes of eventually negotiating a fair deal is so 2011. 

Today, I advise my buyers to fire their best shot immediately, eliminating as many contingencies as they comfortably can eliminate, with the highest down payment and strongest lender letter possible.  Sometimes we let earnest money go “hard” and become non-refundable early on in the process, so sellers know we are dead serious.

It’s those types of offers… the ones that show serious motivation, creative presentation and thoughtful negotiation… that are getting accepted. 

As an agent, I have been told many times when I’ve submitted an offer that the listing agent will get back to me if other offers materialize before we’ve come to agreement.  Sometimes they do, sometimes they don’t.

I have been told before that the seller will set a future deadline (noon on Wednesday, for example) for reviewing offers, only to find that by Tuesday night, the home is under contract.  Sorry, you lose.

I’ve had agents tell me verbally this year that my offer was being accepted… only to wait hours for a signed contract that never comes back. 

There is also the growing issue of so-called “pocket listings”, where agents take listings but don’t immediately put the property in the MLS in hopes of finding the buyer on their own (which allows them to “double-end” the sale and collect both sides of the commission).

The bottom line is that this marketplace is a battlefield, and if your agent isn't advising you on how to compete, chances are you are going to lose. 

With home prices in many areas of town rising 1% per month, time is money.  The recent increase in interest rates, coupled with prices that continue to rise, means that buyers who continue to shop for months and months are ending up with less house and higher payments.

This is not an orderly market.  Urgency is in.  Strategy matters.  If you're a buyer, sooner is most definitely better than later when it comes to buying a house.  Prepare to compete. 

HIERARCHY OF BUYERS

As more and more buyers gain awareness (and first-hand experience) of our red hot sellers' market, the question is coming more and more often:  “Are we headed for another bubble?”

It’s a great question, and one that deserves some discussion.

First of all, I know there are things we can never know.  We can never know what global events lie around the corner.  We can never know what the stock market is going to do.  We can never know if some major employer will pack up and leave town. 

All we can do, as we have always done, is make the best decisions we can with the information we have.

I have outlined repeatedly in this blog over the past several months the factors that are driving our market:  1) no more foreclosures; 2) little new construction, especially below $300k; 3) low interest rates; 4) the return of some percentage of 83,000 Denver area households that lost homes in foreclosure between 2005 – 2008; 4) significant in-state migration, especially Millennials who will be aggressively pursing entry-level housing; 6) and first-time buyers who are being implored to buy homes by their Baby Boomer parents who see the obvious value in today’s market.

So how do we know when the water is getting too deep, when values are rising too fast?

Because I lived through a bubble market (and, in fact, left California because of it in 2005), I have a benchmark I call the “Hierarchy of Buyers”. 

It’s a little complicated, but what it boils down to is this.  I will know when this market is at its apex based on the quality of the buyers sitting in my car.

In other words, as long as most buyers have 20% down, stable employment, 780 credit scores and money in the bank… we are nowhere near a top.

When those buyers have little or no money down (often borrowed money), with minimal reserves and credit scores in the low 600s… time to get out.

I often talk with my sellers about the “Hierarchy of Buyers”, about how a 100% cash offer always beats a financed offer (no appraisal, no loan objection deadline, etc); how a 20% down buyer beats a 10% down buyer (no mortgage insurance, no secondary underwriting by the PMI company, etc); how a 10% down buyer beats an FHA buyer (FHA can be a crapshoot for all sorts of reasons), etc.

What it boils down to is this.  Generally speaking, cash buyers were cherry-picking homes in 2010, 2011 and the beginning of 2012 with aggressive offers at really low prices.  They were often beating out financed buyers to get these homes.  Most cash buyers have already pocketed a lot of equity in 2-3 short years.

There are not as many cash buyers anymore, because with prices up 10% to 15%, the value is not as great.  So now here come the 20% down buyers, making sizable down payments and locking in interest rates in the 3’s that will set them up beautifully for the next decade or more.

These 20% down buyers are often beating out lower down payment buyers, who continue having to fight harder and be more creative in getting their offers accepted. 

Once the 20% down buyers clear out, the market opens up for 10% down buyers… then 5% down buyers… until finally, when there’s nothing left by FHA or low down payment buyers, the cycle ends.

It’s just a theory, and there certainly are countless individual exceptions to it.  But it’s the benchmark I use in gauging where the market is as we work through this dramatic season of change.

If the buyers have money and credit, we’re good.

When the buyers have no money and no credit, it’s time to think about your options.

Based on what I see with my eyes, we are a long, long way from having to worry about a hitting a top any time soon.  

You should not fear this market.  The much greater fear is missing out on it.  

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.