PRICED OUT FOREVER?

In 1971, my parents bought the three bedroom house I grew up in in Southern California for $42,000.  Thirty years later, after my dad passed away, my mom sold if for $400,000.  

Was there a time when you could buy a great home in Orange County for $40,000?  Absolutely.

A few years later, it took $100,000 to buy a great home.  Then a few years after that, it was $200,000.  By the mid 1990s, it took $300,000.  By the late 1990s, it took $400,000.  Today, even after the Great Recession, the median price for a home in Orange County is $560,000.

While Denver and Southern California are not parallel markets, there's a lesson here nonetheless.  Eventually, housing prices in any landlocked, desirable metropolitan area rise and people get priced out of the market.

Watching what's happening in Denver right now, it's hard to not see the same trends taking shape.

Over the past eight years, I have had dozens of clients buy homes for under $200,000.  Within just a few years, many of those clients are now sitting on anywhere from $25,000 to $75,000 of equity.    

Today, like every other agent in Colorado, I have lots and lots of people talking to me about trying to buy a home for $200,000. The problem is, those types of houses/deals just don't exist anymore.  Time and market forces have changed the game.

If you talk to transplants from the Bay Area of California, as I often do, you'll repeatedly hear stories of families being totally priced out of the market.  In many areas of San Francisco and to the south in Silicon Valley, prices for average three bed, two bath homes now routinely top $1 million.

So what do the people who work in the Bay Area do when they can no longer afford to buy a home?  They drive.

They drive, from cities like Walnut Creek, Pleasanton, or even Central Valley towns like Modesto, Merced or Manteca.  Fifty, seventy, ninety miles.  Each way.  Five days a week.  It sucks.  (And by the way, many of these fed up people are now moving to Colorado and fueling our state's ongoing population surge)

In terms of housing prices, I worry that the same thing that happened in California is now happening in Denver.  I hate to say it, but if I was open to speculating a bit, I'd be very interested in markets like Firestone, Dacono and even Strasburg.  Markets 20 to 40 minutes from downtown where prices are 25% to 50% cheaper.

I have no shortage of clients looking for homes under $200,000.  And more and more often, I simply can't help them.  The market has changed, and they have been left behind.

This past Friday, I met with yet another prospective first-time buyer.  To prepare for that appointment, I pulled all single family homes in Broomfield, Westminster and Arvada priced below $200k.  

The final tally?  Eighty total homes listed, 76 of which are under contract.  Let that sink in for a moment.

When 95% of the inventory on the market is under contract, regardless of price, condition or location, change is no longer open to discussion.  It's here.

To say "Buy now, or be priced out forever"... sounds like the ultimate sleazy salesman's cliche.  But that's where we are.  

The era of sub $200k housing in the Denver metro area is coming to an end.  Get ready to start driving.

THE FRUSTRATED BUYERS CLUB

Search #1.  Wheat Ridge, Arvada.  Three or more beds, under $300k.  Fifteen homes on the market, 86 under contract.

Search #2.  Lakewood, Littleton.  Three or more beds, under $300k.  Twenty eight homes on the market, 95 under contract.

Are you kidding me?

Since buyers currently outnumber sellers by a ridiculous margin in the Denver market, many agents are enrolling an increasing number of their clients in what we affectionately call “The Frustrated Buyers Club.”

The FBC is a clearinghouse for all those innocent, well-meaning souls who thought it would be fun to buy a home in 2014, only to find that the experience quickly becomes a frustrating, time-consumptive, soul-crushing endeavor that leaves aspiring buyers in the throes of despair and agents on the verge of considering a Thelma and Louise style departure from the real estate business.

Consider the following… as of March 10, in the Denver metro area there are currently 1,225 homes for sale below $250,000… and 3,621 under contract.  That means 74.7% of entry-level homes listed for sale, regardless of price, condition or location, are under contract. 

Between $250,000 and $400,000… there are 1,568 homes for sale and 2,465 under contract.  That’s "only" 61% of the listed homes under contract, which would be fine, except that in a "normal" market that ratio would be more like 33%.

A "normal" market means five months of inventory with 2-3% appreciation. What we have right now has absolutely no connection to a "normal" market.  This is an overheating, inventory-starved market where Foreclosure 1.0 buyers, investors, relocating white-collar professionals, first-time buyers, oil and gas workers, marijuana growers and fed-up renters are storming the gates looking for inventory that simply isn't there.

Inventory remains within a few hundred homes of an all-time low, and by all-time low, I’m talking about records dating to 1985… when the population in Denver was about one-third of what it is today.

Since the end of December, absorption rates have plunged to unheard of lows as buyers have flooded the market, only to find absolutely no one wanting to sell.  In fact, about the only sources of inventory are builders, flippers and estates. 

Check out this transition at different price points in terms of absorption rates since the beginning of the year, keeping in mind that a “normal” market would have about five months of inventory:

0-$250k:  Absorption rate has fallen from 1.35 months to 0.61 months;

$250-$400k:  Absorption rate has fallen from 2.40 months to 1.01 months;

$400-$600k:  Absorption rate has fallen from 4.04 months to 2.45 months;

$600k-$1 million:  Absorption rate has fallen from 7.47 months to 4.27 months;

Above $1 million:  Absorption rate has fallen from 20.89 months to 7.62 months.

A falling absorption rate means more buyers than sellers entering the market, plain and simple.

If you are a buyer, here’s what you need to know if you plan to buy a home below $400,000 in 2014. 

* You need to do it now.  Waiting is costing you money as values continue to rise.

* You need to let go of your obsession about price.  With this imbalance between buyers and sellers, sellers control the market.  

* You need to do it before rates up further.  Again, higher rates are costing you money and will continue to cost you money on a monthly basis for the life of your loan.

Remember, the Frustrated Buyers Club is not a place you want to be.  It’s a place you end up.  And the only way to get out of it is to suck it up, get serious and commit to winning when you find a home that suits your needs.

HUD HOMES - YOU'VE BEEN WARNED

HUD Homes are the root canals of real estate.

Thank goodness they are on the decline.  I have probably sold 20 HUDs during the downturn, and I have one under contract now that is reminding me why I need to quickly make a U-turn and head the other way anytime I see a HUD sign planted in front of a vacant property.

A HUD home is a property owned by the Department of Housing and Urban Development.  This is the government agency that insures FHA loans, meaning that if banks will underwrite loans to guidelines established by FHA, the government will step in and make the lender “whole” if the buyer goes into foreclosure.

This means minimal risk to the banks, which meant that a whole bunch of FHA loans were done during the downturn that never would have been approved if there wasn’t the government’s “guarantee” of buyer performance.

So when a bank forecloses on an FHA buyer and submits and insurance claim to HUD, the government pays off the bank and takes the house in trade. 

This is where the fun begins.

I know my candor in this post will be upsetting to some people, but the first thing you need to know is that HUD does not hire based on merit. 

So when HUD sends in an “Asset Preservation Company” to drain the plumbing lines and secure the property, there’s no guarantee that this is being done correctly.  (And yes, just yesterday, I did an inspection on a HUD home where the contractor brought in to winterize the property failed to do so properly, resulting in a series of frozen pipes that caused a series of mini-floods throughout the house when the water was turned on… ah, but that’s a story for another day).

Once the property is “winterized”, HUD then puts it on the market. 

Here’s an overview of the rules:

- Home is placed on the market for 10 days;

- “Bids” are submitted online on behalf of owner-occupant buyers, but they must be working with a “HUD-certified” broker (which, fortunately or unfortunately, I am);

- Investors are not allowed to bid during this initial first-look period;

- Homes are sold strictly “AS IS”, with no repairs made by HUD, ever.

- High bidder wins, regardless of qualifications

If you’re lucky enough to win a HUD bid, now things get really exciting.

If you’re the broker, you have 48 hours to get a fully-executed contract package to HUD’s field office in Texas.  If the package doesn’t show up in 48 hours, delivered by overnight mail, your bid is tossed aside and they go to the next highest bidder.

What’s in that contract package?  Page after page of eight-point font legalese, which must be filled out in BLUE ink (no exceptions), with each and every signature and initial space fully executed (or see paragraph above).

HUD also views its transactions as so important that they require the signature of the owner of the real estate broker’s company.  So yes, the owner of my company is expected to sign a document (in BLUE ink) verifying that he knows this transaction is happening and that he personally vouches for the fact my client is an owner-occupant (although of course he has no idea who my owner-occupant buyer is).

It’s up to me to track down the owner of my company and get his signature (no matter where on the planet he may be), after I have presented the 49 pages of contract paperwork and addenda (signed in BLUE ink) to my buyer and picked up his cashier’s check for $1,000 (HUD’s standard earnest money deposit).

I then need to rush this package overnight (at my expense) to Texas, where it generally sits on someone’s desk for two or three days until it is opened and reviewed.  Eventually I get an email including a copy package of the contract, signed by an authorized desk jockey at HUD.

At this point, you have 15 days to get an inspection done.  If flaws are discovered with the home that were not disclosed by HUD (which is a pretty sure bet), you can cancel.  But your 15 day time limit is fixed and there are no extensions granted for any reason.

So the first thing you’ll want to do for your inspections is to get the water and utilities turned on. 

But… not so fast.  HUD wants a $150 cashiers’ check before they will fill out and sign a “Utility Activation Form”, which most water districts and utility companies require before temporarily restoring service to the house.

Once you have purchased this form (by sending another overnight package at the broker’s expense), you can call the water company and the gas/electric company.

Most water companies will not leave the water on for more than 72 hours, and they require that someone be at the property when the water is turned on at the street (to ensure the house doesn’t flood when the water is turned on).  Of course, they give you a nice four hour window with no advance notice, so plan on spending half a day at the house waiting for the water guy.

Working with the utility company can be even more fun.  Xcel will give you a day’s notice when they are coming to turn the gas on, but that’s it.  If you’re not there, no heat for you. 

So plan on spending up to a full day waiting for the gas service to be restored.

Once you’ve got water and power turned on, now you have a small window of time to get your inspection done.  This will be another $350 to $400, and as much as $500 if your client wants to test for radon. 

If your buyer is financing the property, chances are the appraiser will need to be squeezed in during this tight little window as well so he or she can verify that you have hot and cold running water.  Plan on writing another check for $400 for the appraisal. 

Let’s say, however, that the appraiser doesn’t show up during your 72 hour window of time with the utilities on. 

No problem, we just get another cashier’s check for $150 to HUD, get another Utility Activation Form, and we start the process over.  

Spend a half day waiting on the water.  Spend a full day waiting for the utilities.  And then hope that the appraiser shows up during your window of water/power time.

Let’s backtrack to yesterday for a moment.  Say, hypothetically, the Asset Preservation Company (Lowest Bidder Asset Preservation Company, LLC) botched the winterization and your plumbing is damaged. 

Let’s say your buyer spends $400 on inspections to learn that the plumbing is broken. 

That’s okay, you still might have 24 hours to get a plumber out (hypothetically), fix the plumbing (at the buyer’s expense) and get the home inspector back out to finish the inspection (with an additional trip charge). 

Even if that happens, though, we’ve run out of time for the appraiser before the utilities are turned off again.

Ok, freeze.  Go get another cashier’s check.  Send it to HUD.  Wait four days.  Get another Utility Activation Form.  Call for water and power.  Sit in the house for a day.  Get the appraiser out.  Hopefully no one has broken in and stolen the appliances or the copper pipes during this time.  Finally the appraiser signs off.

Now the lender can underwrite the file and (hopefully) approve the loan. 

If all of that happens, you’re almost there. 

Except now HUD requires that all closing figures and documents be sent to the title company eight full business days before closing.  No, I am not making that up. 

So your lender busts his or her tail, gets everything to the title company, and you wait.  And wait.  And wait. 

Finally, HUD looks at the paperwork and signs off.  You’re set to close!

You bring your funds to closing.  You sign you paperwork.  You finally own a HUD house!

You ask for the keys.  Um, you ask for the keys.  Keys? 

Oh yeah, HUD doesn’t allow me to give you the keys.  Per HUD’s policies and procedures, since the same key opens all 4,000 HUD homes in Colorado (that is some brilliance, right there), I am not allowed to give it to you. 

Instead, I am supposed to drive you to the house, open the front door, and wish you the best.  Then I am supposed to mail the key back to the listing agent.  Again, I am not making this up.

By this point, I think you can see the thread of insanity that runs through this process. 

It is my belief that at least half of the brokers in Colorado won’t even mess with HUD homes because of the absurdity of the process.  But, because HUD generally gives homes away for cheap (after all, the taxpayer foots the bill for losses), buyers go after them. 

The thing I want to do with this post is to use this as an educational tool for future buyers.  You need to know what this looks like up front, because by the time you figure out you’re in the middle of a three ring bureaucratic circus, you’ve already invested significant time, money and emotional energy.

I’m fine with HUD homes.  They are what they are.  They are often sold well below market value.  But if you find the process stressful, confusing and fraught with upfront costs and mind-numbing sideshows, don’t blame me.  You’ve been warned.

FULL SPEED AHEAD

Two months into 2014, and it's starting to feel a lot like 2013 all over again.

Record low inventory, multiple offer shootouts, an overall market absorption rate of 1.45 months.. yeah, this is the same song that just led to 10% appreciation in 2013.

The inventory of homes for sale in the metro area fell to 6,026 homes at the end of January, a new all-time low that was nearly 10% under last March's previous bottom.  From December 31 to January 31, a time when you might think more listings would come on the market, the active inventory actually plunged by 800 homes. 

Why did this happen?  In short, the number of buyers in January (about 4,200 homes went under contract) swamped the number of new sellers (about 3,400), which led to a net loss of 800 listings. 

If you're a buyer looking to "steal one", this is a little bit demoralizing. 

We've talked repeatedly here about why the inventory is low - no more foreclosures, large numbers of "boomerang buyers", no new construction under $325k, record in-state migration, an improving Denver economy, low rates, high rents.  Add it all up and the market remains just smoking hot.

We actually had an increase of more than 8% in the number of homes that went under contract in January of 2014 versus January of 2013, despite the fact that prices are up to 10% higher and rates are up a full percent over the past 12 months.

In Denver, higher prices and higher rates are not deterring anyone from buying a house.

With the Fed now backing off of Quantitative Easing (which has artificially held rates down since 2009), the near certainty of higher rates a year from today seems to be driving buyers to act while affordability is still reasonable. 

A year ago, however, affordability was unbelievable. 

I do believe that this year's market is going to be even more "tiered" than in past years, meaning that demand for homes under $300k is going to continue to sizzle while higher end homes are more vulnerable to value stagnation, especially as rates rise later in the year.

For 2014, the psychology on the street is that owning is better than renting, rates in the 4's today are better than rates in the 5's tomorrow, and migration and a dramatically improved economy have essentially driven all fear out of the market. 

If you aren't ready to get in, don't bother showing up.  The market in Denver below $300k remains swamped with buyers, and the only way to create balance between supply and demand is for prices to continue going up until buyers back off, which hasn't happened yet.