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.  

PRICE VS APPRECIATION

Let me begin this post with one, upfront statement:  I rarely recommend that someone buy a home strictly for potential appreciation.  Appreciation is a bonus, if all of the other numbers make sense.

Having said that, there is no doubt that the vast majority of homes in the Denver metro area under $500,000 are appreciating in value.  With an inventory shortage of near epic proportions (60% fewer homes on the market than two years ago with 15–25% more closed deals this year, depending on price point), bidding wars are the new norm.

Below $200,000, I know of almost no area that hasn’t seen at least 5% appreciation in the past year.  And for homes below $150,000 (which basically don’t exist anymore), 10% appreciation might be a conservative assessment of how strong the market has been in 2012.

With that as groundwork, let’s run a quick calculation that will illustrate once again why buyers are competing in multiple offer situations on a regular basis.

If you were to purchase a $200,000 home in today’s market, and you assume the value of that home will go up 5% over the next 12 months, that’s $10,000 of equity gain.  Divide that by 12 months, and you have $833.33 of appreciation per month.

Now, the other side of this amazing coin is interest rates.  Unless you have been out of the country or living under a rock, you probably know mortgage rates have trended all the way down into the low 3’s! 

If you purchase a $200,000 home today with FHA financing (which requires a down payment of just 3.5% of the purchase price, or $7,000 in this example) and take out a 30-year fixed rate loan at 3.5%, your monthly principal and interest payment is $866. 

Equity of $833 with a payment of $866 equals net monthly housing expense of $33.

Do you want me to repeat that?

Of course, in addition to the P & I payment you still have property taxes, homeowners insurance, potential HOA dues and maintenance costs.  But even with those amounts added in, the obvious value of ownership vs renting is impossible to miss.

Now, as I said at the beginning of this post, you don’t buy homes for appreciation.  You buy them because you need a place to live, you can afford the payment, and you enjoy pride of ownership.  You also get some excellent tax advantages, you accrue wealth by paying down your mortgage each month… and if fate is smiling on the Denver housing market (as it most definitely is right now), appreciation is the whipped cream. 

But heading into 2013, it’s all good.

I have always been candid with my clients about the state of things in housing.  I left California seven years ago in large part because I felt that market was unsustainable, and I didn’t want to see clients get hurt. 

I have always preached caution, and I still do.

But these numbers are so stinking obvious they simply cannot be ignored.

I have a hard time believing that home ownership will ever be more affordable than it is in this immediate moment. 

ZILLOW REVIEWS

A few days ago, I posted a treatise on “Transparency in Real Estate”.  Or, more specifically, the lack of transparency in real estate when it comes to what agents actually sell.

When I meet with buyers and sellers, I often carry several binders along with my tablet computer and presentation materials.  One is a book with over 60 laminated monthly market spreadsheets, dating back to 2007, which allows me to quickly show how our market has evolved over the past few years and allows for quick year-over-year market comparisons.

I also carry a book consisting of laminated MLS printouts of all the properties I've sold in the past 36 months.  This allows me to show and compare homes I’ve sold by price point, location, chronologically, etc. 

I’ve got a new book I'm carrying, however, and this one is growing almost daily.  It’s client reviews that have been posted to Zillow.com, and as of today, I have nearly 50 of them from buyers and sellers.  (I just did a quick search through Zillow’s agent review database, and it appears I currently have the fourth most Zillow reviews of any agent or team in the Denver metro area).

I have written about Zillow on this site before, and my feelings haven’t changed.  Although many of us in the industry hate “Zestimates” for many reasons, they are here to stay.  And the truth is, Zillow’s iPhone app beats just about anything else out there for historical property data (although its real time data feed for MLS listings is very often out of date). 

Zillow provides a treasure trove of information about neighborhoods and homes values, and I have decided to embrace it.  Thus, several weeks ago I began reaching out to past clients and asking them to review me on the site.  From that, I have nearly 50 unbiased reviews from real customers for the whole world to see.

Because I think transparency is a winning strategy, I actually purchased the domain name www.ZillowReviews.com, which redirects to my agent review landing page within the Zillow website.  From here, prospective clients can see and read everything that my clients have said about me, unabridged and without edits.  

Also, to be clear, I do not pay any money to Zillow for advertising or other services.  Although Zillow most certainly would like to make me a "Premier Agent" (i.e., sell me advertising rights on their site), I don't do it.  I want what people find about me online to be organic and unbiased.

I know for a fact that the 80/20 “Pareto Principle” is alive and well in real estate – 20% of the agents do sell 80% of the houses.  Consumers need to know who is in that 20% group, and they need to know whether agents in that group personally own their transactions, or if they are “farmed out” to lesser known team members whose sales are reported under the leader’s name.

As I said back in August, the recovery in our real estate market this time is going to be far more rational and sustainable than what we’ve seen during previous booms, because now, for the first time ever, the consumer has access to almost unlimited information about the market. 

Real estate property data is no longer hidden behind a veil, accessible only to dues-paying MLS members.  It’s out there in 100 different places online, and as the IQ of real estate consumers increases, their demand for a matching transparency from agents will only ring louder. 

I’m getting in front of this wave, because it’s a big one.  And I have a record to be proud of.  See what nearly 50 past clients have said online at www.ZillowReviews.com.

TRANSPARENCY IN REAL ESTATE

For many years, there has been an ongoing debate about the subject of transparency in real estate.  What do I mean by “transparency in real estate”?

If you are attempting to evaluate the worth of a Major League shortstop, there is publicly available data that will give you some indication of what kind of player you are looking at.

For example, if you compare the lifetime statistics for Derek Jeter and Troy Tulowitzki, you’ll see something like this:

PLAYER       Career Games Played     AVG     HR's     RBI

D. JETER                       2,585            .313       255     1,254

T. TULOWITZKI                 744             .292       130       470

From these numbers, you can have a legitimate discussion about which player has performed better during the course of his career, which player has more upside, and whether one would be a smarter pick than the other if you were starting up your own Major League Baseball franchise.

In real estate, there is no such tool for comparison.

In large part, this is because Realtors themselves do not want you to know how much (or how little) they sell, where it’s located, and what it cost.

I have argued against this line of thinking for years… of course, that’s because my production puts me in the top 10% of agents, which means 90% of the agent population is automatically not going to like my numbers (or theirs) being public.

Realtors pay a lot of money to belong to NAR (National Association of Realtors), and they also pay a lot of money to be part of a local Board of Realtors.  These boards exist to act upon the will of their membership, and if 70% of agents don’t want their numbers out there, then the numbers are not going to be out there.

But this is wrong.  It’s easy to argue that the decision about whom to hire to help you buy or sell your life’s most important investment is far, far more important than whether Derek Jeter or Troy Tulowitzki is the better shortstop… but the consumer will never know a fraction of what’s readily available about Major League shortstops when it comes to choosing a real estate practitioner.

One year ago, a company called Redfin made a bold play when they decided to independently mine regional MLS systems for agent production data and publish the results.  That data, posted on their website under the header “Redfin Agent Scouting Reports”, caused an immediate panic in the industry. Within three days, under intense pressure from its membership, most MLS systems either terminated access to Redfin altogether or promised to do so if the Agent Scorecard function wasn't shut down at once.

Threatened with an immediate loss of access to its most prized commodity - MLS property listings - Redfin backed down.  Agent Scorecard quickly vanished and individual agent sales data went back under cover of darkness once again.

So what can a consumer do to when it comes to finding a qualified, competent agent? 

Word-of-mouth referrals have always been a good, if unscientific, way to screen agents.  Advertising and neighborhood presence can also be used as benchmarks… but none of these really allow you to peek behind the curtain, to see what others have experienced.

Later this week I’ll let you know how I’m trying to address this issue, at least as far as my production data is concerned.  Check back Friday for that post.

AVERAGE VS MEDIAN PRICE

Each month, those of us who follow real estate see an avalanche of statistics and reports assessing what happened over the previous 30 days.  With coverage in the Denver Post, the Denver Business Journal and countless other blogs and publications, it’s relatively easy for consumers to be confused if they don’t understand the numbers.

One of the biggest points of confusion has to do with the “average” sales price versus the “median” sales price.

Take a look at these figures from the Denver MLS for September:

AVERAGE SALES PRICE

The average sales price for September of 2012 was $282,305.  All sales are added together and then divided by the number of sales to derive the average sales price.

MEDIAN SALES PRICE

The median sales price for September of 2012 was $255,000.  All sales are lined up in a list ordered from lowest to highest, with the sale exactly in the middle becoming the median sales price.  In other words, the median sales price tells you the number at which exactly half of the sales were higher, and half were lower.

WHICH METHOD IS MORE ACCURATE?

While it can be debated, many consider the median sales price to be a better indicator of the market.  This is because the average sales price tends to be skewed by outliers, usually multimillion dollar properties.  Look at this example below:

SALES:

• -          $112,000
• -          $132,000
• -          $140,000
• -          $146,000
• -          $178,000
• -          $275,000
• -          $1,000,000

In this example, the median price would be just $146,000 while the average sales price would be a whopping $283,285.

The median price does a better job of showing you what’s happening for most buyers, because it tracks which way the middle of the market is trending.  Therefore, I consider it to be more statistically accurate.

If the median home price for closed sales in September of 2012 was $255,000, can you guess what the median price was for Denver homes in September of 2011?  It was $229,804, meaning the median price for a home in our red-hot market has increased 9.9% in the past year.

Nothing “average” about that!