By now, everyone knows
that the housing market had an amazing year in 2013. In Denver, price increase estimates range
from 10.1% (most recent Case-Shiller) to an amazing 13.9% year-over-year
increase (Zillow).
But in the
field, it’s not that simple.
As I’ve
advanced for years, there is not “one” single housing market in Denver, but at
least three. Those markets are
essentially the entry-level market, the move-up market and the luxury
market. They are all different, and they
all perform differently.
In simplest
terms, the largest gains have been posted this year at the lowest price
points. In some areas of town under
$200,000, homeowners have seen price gains as high as 15-20%. At $1 million, however, any gains have been
negligible.
The biggest
reason for this disproportionate gain at the lower price points has to do with
the basic concept of “replacement cost”.
In most areas of Denver, the break-even point for builders starts at
about $325,000, meaning they can’t build single family homes for less than this
with any kind of profit.
So they don’t.
Which brings
us to the subject of condos.
For the past
five years, condos have been the “red-headed step child” of the Denver housing
market. (For a detailed discussion about
this, see my post from May 21, 2012, linked here, or my post from January 26, 2010, linked here).
With lenders
unwilling to lend, homeowners walking away and HOA’s swimming in red ink since
2009, the Denver condo market has been a basket case. Many associations have been unable to keep up
with basic maintenance demands, newer associations have been awash in
litigation and falling prices have sunk thousands of homeowners into negative
equity positions.
In other
words, it’s been a season of great opportunity for those who know what they’re
doing.
It has been
my contention that, because of these problems, the condo market has been
lagging the housing market recovery in Denver by 6 to 12 months. Now, with prices on single family homes
soaring and the overall feel of the housing market completely different than it
was 24 or 48 months ago, the condo market is next up for a major advance.
With price
rising and defaults sinking, lenders are showing a new willingness to finance in the condo market.
Earlier this
month I sold a condo listing to a buyer who came in with just a 5% down payment
– a rarity since most lenders have required a 10% to 20%
down payment on condos since the market tanked (or was blown up by FHA) in 2009.
With FHA
taking itself out of the picture, lenders responded by essentially eliminating
low down payment options. Without FHA to
finance first-time buyers, investors took over the market. And since most investors simply will not pay
retail, selling a condo became nearly impossible for most private owners –
unless they were willing to sell at a big loss.
Foreclosures
flooded the market, investors bought them for cheap, and the remaining “retail”
owners were left with the difficult decision whether to sell short, walk away,
or wait it out.
While FHA
has yet to get back into the condo market, I believe that day is coming soon.
As Fannie and Freddie begin to relax guidelines (as illustrated by my 5% down payment buyer) and
single family prices continue to move out of reach for many first-time buyers, the
condo market is becoming much more viable.
And should FHA begin lending into more condominium communities again, the surge in buyer demand will be both sudden and dramatic.
One last
note - because HOA’s play such a large role in condo life, it’s important to
emphasize that you MUST look carefully at the financials of each HOA before making any buying
decisions. Some are so deep in red ink
their recovery may lag for years, but for others, who have navigated the
downturn with prudence, forethought and fiscal discipline, better times are coming soon.
