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.