Tuesday, July 26, 2011


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

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

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

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

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

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

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

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

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

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

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

Tuesday, July 12, 2011


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

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

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

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

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

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

Check out these current absorption rates:

* Below $250,000... 4.03 months
* $250,000 - $400,000... 6.48 months
* $400,000 - $600,000... 8.00 months
* $600,000 - $1 million... 13.86 months
* Above $1 million... 40.25 months

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

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

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

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

Saturday, July 9, 2011


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

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

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

Not so fast.

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

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

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

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

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

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