THE SOMETHING, ANYTHING MARKET

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

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

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

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

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

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

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

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

The marijuana question is an interesting one. 

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

Want to guess where that money was coming from?

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

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

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

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

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

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

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

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

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

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

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

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

STRAIGHT FIRE

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

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

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

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

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

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

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

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

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

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

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

What this means is prices are going up, period. 

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

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

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

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

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

THE TEN YEAR WINDOW

So far, 2016 is looking a lot like 2015.

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

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

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

How much, you ask? 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Where are all these people going to live?

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

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

THE GENTRIFICATION OF DENVER

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

THE SPRING MARKET IN JANUARY

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

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

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

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

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

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

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

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

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

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

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

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

POKER GAME

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

 

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

- Clean, declutter and stage;

- Photograph professionally;

- Price it appropriately at a number that will appraise;

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

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

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

- Facilitate a bidding war;

- Vet and present offers;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CHECKING OUT OF CALIFORNIA

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

INTO THE WOODS

Many consumers believe the MLS is nothing more than a handy nickname for the database where agents post their listings for sale.  “I saw it in the MLS”, a client will often say when a new listing hits the market. 

Truth is, though, unless you’re a licensed subscriber in good standing, you did not see it in the MLS.  You saw it on Realtor.com, or Zillow, or Home Scouting Report, or some other third-party site that may pay money to access data from the MLS, but you did not see it in the MLS unless you are an authorized, dues-paying member.

That’s an important distinction, because listing a home for sale in the MLS does more than just post your property on a digital billboard seen by a massive online audience.  It also binds you (and your brokerage) to rules and regulations which are designed to ensure ethics, transparency and fairness to all parties. 

One common theme in a hot market is a rise in the number of FSBO (For Sale By Owner) listings.  When the market is rolling, FSBO sellers bank on the market (and not a broker) to sell the house.

Seems like a great way to save some money, and it makes sense if you believe that the final sales price for your home is simply pre-ordained in the heavens, and not at least partly attributable to the exposure, marketing, strategy and negotiation skills of a good broker.

To think that agents don't influence the final terms of a deal is naive.

I've said it before and I'll say it until I'm gone... a good broker creates value beyond cost.  A good broker mitigates risk and maximizes returns. A good broker spots potential problems early and intervenes quickly.  A good broker crafts thorough solutions that make it easy for the other side to say "yes".  And a good broker keeps emotions out of the deal and stays focused on the end result.  

But there are other perils of going off-MLS, and they relate back to those MLS rules and regulations which exist to ensure ethics, transparency and fairness to all parties.

I recently had an investor-client contact me about an income property he saw posted for sale on Craig’s List.  It was a $500k home in Denver with an approved ADU (accessory dwelling unit) built in the backyard, which rented for $1,100 per month.  In the main house, there were two renters - a “main floor renter” paying $1,250 per month, and an “upstairs renter” who had access to a modified and enclosed loft space (accessible through a private side entrance) for $850 per month. 

Add it up, and the three leases were generating $3,200 per month in rent.  On a $500k home with a 20% down payment and a 30-year loan at 4%, a new investor would be looking at about $900 per month in positive cash flow, which would make it a very strong investment. 

But as is so often the case (especially on Craig’s List), the reality turned out to be something far different.  Turns out, thanks to my own investigation, that the property was zoned as a duplex, not a triplex.  Hence, the third living space (and upstairs lease) was illegal, and the city could step in at any time and evict one of the tenants for violating the occupancy code, as well as imposing penalties on the owner.

Take away that extra $850 in income, and it shaves $50k off the value of the property.

When I asked to see copies of the leases, the seller initially refused, saying she didn’t know where they were.  (In reality, she didn’t want to turn them over because they could be turned over to the city, thus busting up her illegal three-unit operation)

Despite my concerns, my client remained interested in the property and its potential, even as a two-unit rental.  When I went back to the seller and expressed continued interest, she eventually agreed to let us view the leases – but only two of them.  

The bottom line is that this seller was looking for value based off of three leases, but legally only two were enforceable.  When I talked to her about the challenges this would create for the lender and the appraiser (who would value the property based on the leases), she came back with a solution… she would lump the two tenants in the main house together and have the upstairs tenant sublease from the main floor tenant.

Still illegal, and still loan fraud.

By this time, it was clear to me that this Craig's List seller knew exactly what was going on.  It was a cat and mouse game predicated on finding someone who would pay an inflated price by accepting the imaginary value created by her illegal third lease.  

I advised my client to walk away from the negotiation.  

In the MLS, marketing this property as a triplex could expose you to a lawsuit, result in loss of your MLS membership and could even lead to suspension or revocation of your real estate license.  But in the “off MLS” world of Craig’s List, it was a clever way for the seller to try and pocket an extra $50k through some creative lease structuring, otherwise known as loan fraud.  

This is an extreme case, but I’ve run into countless headaches through the years when clients have wanted to venture “off MLS”.  Whether it’s an attempt to navigate around illegal leases, undisclosed defects, zoning issues or just the well-intentioned efforts of an honest person who doesn’t want to pay a commission, when you leave the rules and regulations of the MLS, you really do venture into the woods. 

It’s far less regulated, it can be far less ethical, and it’s a good way for perfectly well-intentioned people to end up assuming unknown risks or being sucked into outright fraud.    

STILL WAITING ON SENSIBLE CONSTRUCTION DEFECTS REFORM

Denver has an affordable housing shortage, and it’s extreme. 

We’ve talked before about how Colorado’s so-called “Construction Defects Law” has shut down the condo market.  In short, the 2005 law essentially creates “uncapped” liability for associations to sue builders with a simple board majority vote if there is a construction defect.   

As a result, everything you see going up downtown is an apartment building, not a condominium complex.  And with construction costs at all-time highs (with the highest-ever land, labor and material costs), rents have soared like never before.

In 2007, 25% of all new construction in the state was condos.  Today, condos make up just 3% of all new construction.

It’s one of the things that has kept our housing market strong.  Limited inventory plus ridiculous rents plus low mortgage rates makes owning a home – even at prices 30% - 50% higher than they were three years ago – more attractive than paying sky high rents.

Eventually, there will be a bill passed by the legislature that will soften this law, and shortly thereafter you will see thousands of apartments converted to condos in relatively short order.  In fact, if and when this law passes, you will probably see prices fall in the short term due to the sudden glut of more affordable housing options. 

If you own a condo today and you’re thinking about selling, this should be part of your thought process.  Right now, demand is high and supply is low.  That creates an obvious selling opportunity.

Next year, or in 2017, or whenever the legislature finally takes some of the teeth out of this law, condo inventory will surge.  Because of the reduced inventory of rentals, rents will probably stay high.  But buyers will suddenly have lots of choice, instead of none, and the predictable result will be a softening of prices. 

It will also be harder to sell an older condo, because developers will be forced to price more aggressively to compete with thousands of new units coming online.  Old units will look, well, old.

Our market is already starting to shift, and I am expecting that to continue into 2016.  Appreciation of 12 – 15% per year for three straight years just isn’t sustainable.  Five percent appreciation would be a great year, in my opinion, given the massive run-up in prices since 2012.

Will the market collapse?  Not as long as lenders remain militant about ensuring buyers have real jobs, real down payments and real credit.  The market crashed in 2008 because thousands of buyers had no skin in the game and no reason to stick around when things got tough.  That’s not the case today.

But too many people have short memories, and I believe too many people are buying homes (or attempting to move up) first and foremost because they want to make money.  Don’t fall for that trap.  You should be able to afford what you buy, like where you live and stick to a budget.  The ones who get burned when the market cools down will be those who let greed drive their decision-making.

The Denver housing market today is a lot more complicated than it was three years ago.  To make smart investments, you have to think more critically because the margin for error is much slimmer.  You can’t rely on past performance to dictate future results.  That’s naive thinking, and you can’t be lazy right now.  You’ve got to think critically, look beyond the headlines, and make a decision for yourself as to what you think the Denver housing landscape will look like in 2016 and beyond.

If you currently own a condo, you need to know that there is future volatility around that investment.  What it ultimately looks like will be determined by what the legislature does with Construction Defects Reform.  But if you’re thinking about selling, you know what the landscape looks like today.  Tomorrow is anyone’s guess.

COOLING DOWN

The Denver market is transitioning.  You can see it in the numbers.

For only the second time in the past 68 months, inventory actually increased on a year-over-year basis over the past 30 days.  Yes, you read that right… for 66 of the prior 68 months, year-over-year inventory has fallen.  So this is a noteworthy development, for sure.  

As I have said before, interpreting these numbers requires some context.  Denver is still the #3 ranked housing market in the country, according to Zillow, and second according to Case-Shiller.  We are healthier than 90% of the markets in the US, and with an unemployment rate of less than 4% in Denver, the Rocky Mountain region remains an economic powerhouse. 

We have become the “go to” market for Millennials (thank you California) and companies have come flocking to Colorado for its comparative low-cost, low-regulation business environment.

Home values in Denver have appreciated by a mind-blowing $18 million per day since the beginning of 2012, with the average home going up in value by $76,000. 

The news has been so good for the so long that many people have come to accept these conditions as the “new normal”.  Except that would be flawed thinking.

A closer look shows that our magical four-year run in housing is starting to wind down.  Just take a look at the numbers:

The current inventory of homes for sale – 8,747 – has essentially doubled since the January low of 4,420.  Last year, by comparison, inventory rose only 37% between January and October.

For homes priced below $250,000, the absorption rate has doubled since June… from 0.33 months of inventory (unprecedented demand) to 0.69 months (still very healthy, but not the same). 

Absorption rates have also doubled in the $250k - $400k range, from 0.48 months in May to 1.01 months today.  In fact, absorption rates are up at least 70% in all price points since the spring, meaning it is taking about twice as long to sell a home now as it did in our epic, crazy, frenzied spring market. 

Because the headlines always trail what’s happening on the street by several weeks, most people are not aware of how conditions have changed in the last 60 to 90 days.  But changing they are.

I have seen it with my own listings… fewer showings, fewer offers and (generally speaking) less qualified buyers.  The buyer pool is thinning, and what drove double digit appreciation was demand.  As that demand calms down, so will prices.

For the first time in two years, I recently accepted an offer with FHA financing, down payment assistance and the seller contributing money toward closing costs.  That doesn’t happen in a red-hot market. 

For the most part, the days of selling your home in a weekend with multiple offers are over.  The days of giving buyers 96 hours to submit offers – “highest and best due by 5 p.m. Tuesday” – are over. 

We’re headed back to traditional real estate, where (gasp!) it might actually take a few weeks to sell your home, and where (double gasp!) you might actually have to negotiate with your buyer to close the deal.

Agents who can’t articulate this information to their sellers are going to continue to overprice their listings, and buyers will continue to look but not swing.  Listings will sit longer, grow stale, and languish on the market.  2016 is shaping up to be a solid year for alcohol sales in the real estate industry.

There are still buyers out there, and there are still reasons to buy.  Rates remain a gift from the Fed.  Owning is still cheaper than renting in most parts of town.  But the days of double-digit offers, buyers waiving appraisal clauses and taking homes “as is” are mostly over.

At these prices, buyers want quality and value. 

If you are selling, you need to get in front of this.  The market has been one-sided for so long, we’ve forgotten what normal looks like.  For too long, it’s been too easy. 

Next year, not every seller is going to get their home sold.  And many of the newbie agents who have come racing into the real estate world are going to get their first cold, hard taste of the “real” real estate business, the one where education, communication and negotiation replace raw emotion as the primary drivers in our real estate market.  

HESITATION

First, some perspective. 

The Denver housing market is still terrific, as strong as any in the nation.  In fact, on a scale of 1 to 10, we have been in the 9 to 10 range for overall strength and fundamentals for nearly three years.

Denver and San Francisco have been running neck and neck during 2015 as the top-performing housing markets in the country.  And what do we have in common?  Young, educated, highly employable workers and jobs for anybody who wants to work.

None of that has changed.

But there has been a change in the past 60-90 days, and it’s time to start exercising just a bit of caution. 

I often tell people that the last place you want to go for real estate news is the Denver Post, because there is no real reporting there.  The Post is good for reporting headlines from press releases put together by Zillow and Trulia.  The Post is good at talking to the same five high profile Cherry Creek / Wash Park / Highlands-based agents who talk about their million dollar clients and the hottest new restaurants in town. 

But the heartbeat of the market is found in much grittier places, on the street and closer to where most people live.  The best way to gauge a market is to list a working class neighborhood home for sale and then watch what happens.

And what’s happening now is different than what happened in April or May.  While the showings are still coming, the offers are not… at least not in the same numbers. 

For example, I recently listed an estate sale home priced $10,000 to $50,000 below other recent sales in the neighborhood due to its overall dated condition.  While it wasn’t being given away, it wasn’t priced near the top shelf, either. 

Showings?  No problem.  Thirty five of them in four days, consistent with all the craziness we have come to expect in 2015.  But the offers?  Not so much.

Ultimately, we ended up with just three offers… a cash buyer, more than $30k below list, and two conventionally-financed buyers with smaller down payments. 

But no over-the-moon offers, no escalators, and no one willing to waive the appraisal or let a portion of earnest money go hard upon acceptance. 

I guess we have gotten so used to crazy that when normal comes along, we barely recognize it. 

It is my belief that the frenzy we saw in the spring would have generated six to 10 offers on this home, but the late summer reality turned out to be something less.

I had a similar experience with a condo I listed downtown last month.  Priced right, turnkey condition, an easy sale.  And in one weekend, 14 showings… and just two offers. 

I do think you can use this anecdotal information to judge a change in the climate. 

Prices are high, the highest they have ever been.  Sellers are squeezing this market for all it’s worth, so value is very hard to find.  There is a lot of arrogance and greed driving things, and that type of market rarely sustains for long. 

As we move into fall, buyers are becoming a bit more selective, a bit more patient, and a bit more willing to say no to properties that don’t check all the boxes.

It’s very possible that a slowdown is taking shape, and you have to start being a little bit more careful… whether you are buying or selling.

The fundamentals of the market are still strong – watch the unemployment rate, because that will tell you the overall health of the market – but it’s not like it was three to six months ago.  And with the holidays coming, it’s likely to cool off further as the year winds to a close.

Homes are still selling, and buyers are still out there.  But you’re going to have to look at things differently in 2016, because we are moving back toward a market where selling a home actually requires work and buying a home will once again be contingent on comps and actual value, not simply emotion and greed.     

COST VS VALUE

Life is too short to be cheap.

Now I’m not in favor of mindlessly blowing money, far from it.  But I think a fundamental skill for anyone to develop is discerning the different between cost and value.

Cost is what you pay.  Value is what you get.

But for many people, the conversation begins and ends with cost.  Determining value requires higher level thinking, and some just can’t get there.

I recently went on a listing consultation and after the appointment, as I was walking to my car, an elderly lady called out to me from her front porch across the street.  “Sir, are you a real estate broker?”

We sat down and chatted, and as it turned out, she had been recently widowed.  She now wanted to sell her small starter home and move back to Nebraska to be closer to her kids.

I’ll skip the details, but over the next few days we had several conversations about what she needed to do to get the home ready, what the strategy would be for pricing and marketing it, and how we would approach things if we received multiple offers, which was likely at this entry-level price point.

Finally, the conversation turned to commissions.  “What do you charge?”, she said.

“Six percent”, I replied, “which is split between my brokerage and the brokerage that brings things the buyer.  I pay for staging and photography, plus I’ll handle all aspects of marketing, negotiations, and follow up.  I’ll get the word out to as many people as possible before we list, I’ll follow-up with everybody while we’re on the market, and I’ll do everything in my power to leverage the offers we get to help you end up with the most money possible when it’s all said and done.  It’s my job to make this simple, keep stress off of you and manage the entire process.”

She paused. 

“Six percent?”, she said.  “I know I can find someone who will list it for less.”   

And she can.  Absolutely.  And I can find a bottle of wine for $3.99, a hamburger for a dollar and we can pick some old French fries out of the trash can.  A well rounded meal for under $5.

In life, most of the time, you get what you pay for.

And when you focus on cost, you miss half of the equation. 

What if you pay $20,000 for a car that breaks down after 100,000 miles?  But what if you could pay $25,000 for a car that runs well for 200,000 miles?  Which actually costs more?

If you have 45 showings and seven offers on your house, can you screw that up? 

Those who focus on cost will simply go with the highest offer.  Those who focus on value will look at it differently.  Of these seven buyers, who is actually likely to close on the deal?  Who is qualified and who is not?  Who is motivated and who is not?  Who has a problem-solving agent and who has a hot-tempered screamer representing them?

Who will take the time to vet each offer?  To call the lender?  To Google search the buyers.  To profile the agent?  To talk about potential challenges up front, so we can address future sticking points before signatures have locked us into a binding agreement?

I am a huge believer that most of what exists in our lives is stuff we attracted.  Want to be cheap?  Get ready to hang out with cheap people.  Want to be greedy?  Welcome to a lifetime of tug of war.  Want to be dishonest?  Get ready to be lied to.

People who focus on value know that the true measure of value isn’t the size of the seed, but rather the size of the tree that comes from it. 

Can two agents list the same home, but one agent gets $290k while another can get $300k?  Absolutely.  It’s called marketing, strategy and negotiation. 

Who’s smarter?  Seller A, who pays a 5% commission and gets $290k?  Or Seller B, who pays a 6% commission and gets $300k.  One focused on cost, the other on value.

In my worldview, cost is secondary to value.  I strive to surround myself with problem-solving people who spend their time building relationships and networks.  I spend time with people who are honest, reliable, hard-working and committed.  I look for people who invest in other people and who are willing to do the right thing, whose ethics are unwavering and non-situational.  I look for connectors, not takers.

If you find and build a network of people like that, you’re going to win. 

In the end, it doesn’t matter if you pay 5%, 6% or 10% to someone to sell your home.  The only thing that matters is what you walk away with at the end of the day.  And how you feel about the process.

This lesson goes so far beyond real estate, because it’s also how life works.  Be careful about what (and who) you invite into your life, because chances are whatever you make room for will eventually fill that space.

Whether it’s good or bad.