CALLING OUT THE SELLERS ON THE SIDELINES

Hindsight is always 20/20, and one day soon everyone will have this market figured out and it will be plainly obvious that we were supposed to be buying… I mean selling… I mean digging a bomb shelter in the backyard (hopefully wrong on that last one). 

No one really knows what tomorrow holds, but the one thing you can bank on is that no set of conditions lasts forever.

A few weeks ago, I wrote a very well-reasoned article entitled “Are Sellers Overplaying Their Hand?”.  Of course, since no one is selling right now, I’m guessing no one read it.

But I’ve been thinking about it a lot, because I’m highly frustrated with the number of sellers who do seem to be quite comfortable overplaying their hand, to the detriment of buyers but also quite possibly to themselves. 

As I share with my clients, while I can provide all the data, reports, insight and historical perspective of 19 years in real estate… ultimately, decisions are yours.  And no one wants to sell right now, because prices are going up.

"I’m getting rich by not selling,” people seem to be saying, “so why would I change course now?”

As I said, no one knows what tomorrow holds.  But here’s what I do know.  An awful lot of people with reasons to sell are not selling.  For example, I have a client whose mother died almost a year ago.  She lived in a little ranch home in Denver which she owned free and clear, and rather than rent it out (headache, in the mind of my client), they are just sitting on a vacant home and watching its value go up $2,000 per month or more. 

Easy money.  "Why sell?"

The concept of social proof is an important one to understand.  It’s pretty simple.  People take cues from those around them.  Robert Cialdini has written an amazing book that talks about this called “Influence: The Psychology of Persuasion”.  It’s one of the best books I have ever read and I strongly recommend it.

In real estate, it works like this.  When there are lots of buyers in the market, everyone wants to buy a home.  These new buyers are validated by all of the activity they see, so they follow the herd.

But it works the other way as well.

Right now, inventory remains near an all-time low and sellers are stubbornly refusing to put their homes on the market.  As I referenced earlier, there are people literally holding vacant homes off the market because they feel it’s more profitable to pay property taxes and holding costs on an empty home than it is to sell it in a hot market and potentially miss out on more appreciation.

One day, interest rates will rise.  In fact, last week, rates took their biggest one day jump in six months.  The Fed has announced that it is getting out of the mortgage bond-buying business by the end of the year.  The economy in many parts of the country is doing well, if not flat-out surging (like in Denver).

Wall Street is hanging on every word coming from the Fed, as more and more people think rate hikes have to be coming soon to slow down an economy that truly is performing at a much higher level than two or three years ago.

When rates go up, affordability falls further, and buyers will think longer and harder about whether they really want to pay 20%, 40% or even 50% more than the guy next door is paying for the same house just because the guy next door took action three years ago, when prices and rates were both crazy low.

At that point, whenever it may happen, the market will begin to tip.  And when people start to feel this shift taking place, every vacant house being held off the market will suddenly have a For Sale sign in the yard within about a week.  I have seen this phenomenon before (California, 2005) and it is predictable. 

When will this happen?  I don’t know.  But will it happen?  Yes.

Now I don’t see values crashing.  Not when all buyers have real down payments, real jobs and real credit scores.  But 10% appreciation is not sustainable.  There will be a slowdown, which is why it is so important for buyers to hunt for value, even if it means being extra patient.   

But sellers need to recognize that the wind is at their back, right now.  This is the easiest market to sell a home in since Denver was part of the Territory of Kansas 150 years ago (or something like that).  You want to sell when prices are up, buyers are plentiful, and (most importantly) when there is little or no competition.  

To those sellers sitting on the sidelines, I say… your window of opportunity to sell for top dollar is wide open.  But when it closes, I believe it will close faster than you think, and lots of sellers who have overplayed their hands will be stunned to learn that not every home sells in a week, with multiple offers, over list price.  

DELUSIONAL PRICING

Long, long ago, like a year ago, the Denver real estate market was still a relatively sane place. 

Yes, it was a hot market.  Buyers far outnumbered sellers.  Prices were clearly rising. 

But because Denver remains a place where very few agents actually KNOW the numbers, our market has often been moved more by myth and rumor than by factual data.  And there’s a lag time to people figuring out what is actually going on, because there is zero “reporting” in the local media, just the lazy regurgitation of press releases from real estate companies and interviews with the same pod of talking-head industry insiders and DU professors who may or may not have any idea what is actually happening at street level.

After three years of solid, consistent recovery, however, we moved into new territory this spring.  Overheat mode.  Basically, everything that wasn’t falling down suddenly had multiple offers.  Hideous homes that had no prayer of selling three years ago went under contract, often “as is”.  For good homes, multiple offers became an expected norm, appraisal clauses were waived and buyers agreed to anything short of auctioning off their children in order to land a desirable piece of real estate. 

Even though the market began its sharp turn three years ago – and you could see it, if you actually tracked and followed real numbers – because of this lag time between what I will call “street knowledge” and “mass audience knowledge”, buyers could still find value. 

Many sellers felt it was still a buyer’s market, even when it wasn’t.  Many agents had no idea that they could price listings $10k, $15k or $25k over the most recent comp and sometimes actually get it.

So value lingered, even after the market had clearly moved from a buyer’s market to a seller’s market.

But that advantage only lasts so long. 

The good news, in Denver, is that the lag time wasn’t a few days or a few weeks.  I would argue it was a year or more before word fully got out that the buyer’s market had ended and a brave new era of seller-domination had begun.

Today, I am sad to report, the seller’s market is no longer a secret.  Even the most reclusive, disengaged, off-the-grid sellers knows buyers are everywhere and nothing is for sale.  And that means we have entered an era where delusional pricing is an increasingly common reality.

What is delusional pricing?  In my mind, it’s any home listed more than 10% over the most recent comparable sale.  If the last sale in your neighborhood of a model match was $300,000 and you price yours at $315,000, that's defensible.  If you price it at $330,000, that’s delusional.

And delusional pricing is now everywhere.

It’s not helped by desperate agents who have no listings and are sick of working with buyers.  Agents who fall into this category will say anything – anything – to get a listing, even if it’s $25,000 or $50,000 overpriced. 

What these agents know is that either, a) maybe somebody is desperate enough to waive their appraisal clause and pay the big number, or b) although it may be uncomfortable and take a few months to beat the seller down on price, eventually the home will sell.

It’s hard to compete against these tactics, which is what they are. 

I always tell my sellers that advising is my job, but pricing is their job.  It is, after all, their home.  I will show them comps, give them suggestions on how to prepare it, help them stage it, professionally photograph it, digitally market it, proactively engage with agents and buyers, creatively and skillfully negotiate contracts, and fight like crazy to get the best possible outcome… but pricing it is their call.

Within reason.

I believe that in a hot market, time is too valuable to let crazy people take over your ship.  If a home is worth $400,000 and somebody wants to list it for $425,000, that can be done.  Leave room for the market to come to you, but don’t be crazy. 

But if the same seller wants $475,000, I’m not interested.  Somebody else can take the punishment.  There are enough other motivated people in the market that you don’t have to hit yourself in the head with a hammer for six months to close a sale, with a broken relationship and unkept promises as your transactional legacy. 

Now every listing is unique.  Just as in life, some people are reasonable and some people are not.  There are good agents and lousy agents.  There are ethical people and there are people who think taking advantage of others is part of the game.  This is why it's really important to assemble a team of people you trust to help navigate these waters.

As a buyer, if you find a home that’s priced reasonably and you have faith in the market, then by all means get in there and swing hard.  Being on the sidelines is costing you money.  The median home value in Denver increased by $74 per day last year, with similar numbers likely this year as well.  Every day you continue to rent, you are paying someone else’s mortgage while your future mortgage becomes more expensive.

For you, time is money.

But if the pricing is crazy, you don’t have to play along.  Put a red line through it.  Wait for something else.  Be proactive and knock on some doors.  Try another neighborhood.

The problem with delusional pricing is that it feeds upon itself.  When Neighbor Smith sees that Neighbor Jones listed his $250,000 home for $325,000, Neighbor Smith now believes his home is worth $325,000. 

That’s wrong.  Your home is worth what a ready, willing and able buyer will pay for it.

Delusional pricing is like a cancer that gets into the market, spreading false perceptions of reality and emboldening others to become delusional.  That’s one of the maddening themes of 2014, especially over the past few months. 

A list price is not a sold price, and wishing won’t make it so.  

A MARKET THAT DOESN'T EXIST ANYMORE

Let me put one thing out there, right off the bat.  In 2014, my average closed sales price is $331,000.  I’ve closed a half-dozen sales of $500,000 or higher, and I’ve sold nearly $8 million in real estate so far this year.  I’m very happy with my mix of clients, and I successfully help people at all different price points.

Having said that, I don’t make decisions about who to work with based solely on price.  Because my business is 90% referral-based, relationships are the true currency of my business.  And so I make decisions about who to work with based not just on commission potential, but also on my assessment of the person I’m talking to and whether or not I can actually help them.

Yesterday, I spent nearly two hours in dialog with a referred prospect who wants to buy a home on the west side of town.  All good, except he wants to keep his principle and interest payment under $1,000 per month. 

The problem with that, when you run the numbers, is that the payment he’s looking for equates to a purchase price of about $200,000.  And that, unfortunately, is a market that doesn’t exist anymore.

Here are the facts.  Denver is as hot a real estate market as there is in the country, and it has been for two-plus years.  Active inventory – currently about 8,700 homes in the metro area – is down a whopping 17% from a year ago, down 48% from three years ago and down 72% from 2007, when there were more than 31,000 homes listed for sale in the Denver MLS.

Transactions are up.  A lot.  Over the first eight monthly reporting cycles of the year, there have 47,516 homes to go under contract in the Denver MLS.  During the corresponding period one year ago, there were 41,383.  That’s an increase of 13%.

If you go back to 2011 and measure contracts in the same period (26,155 vs 47,516), the number of contracts in the first eight months of the year is up 81%.  That's frenzied.  

Here’s what it means.  When inventory isn’t there, and buyers are everywhere, prices go up.  We’ve had no inventory, by the standard of historical norms, for two solid years.  And with inventory nosediving once again in August, down 17% YOY, market conditions appear to only be getting tighter. 

So there’s less for sale, prices are already up significantly, and guess what… buyers are still kicking down the gates trying to get into the market.  What’s happening here is not, and has not been, a small deal.  It’s huge, so huge and ongoing that Denver is rapidly becoming a “high cost” market.

As I wrote a few weeks ago, a major factor in this is the Fed’s intervention into the bond market since 2009, which has created artificially low rates that have made refinancing an obvious choice for anyone (especially in 2012-13) with equity and a job.  The net result of that intervention, a policy the Fed will terminate by the end of this year, is that we have a generation of recently-refinanced homeowners who are addicted to low payments, which is what you get when your monthly payments are based on a 3% or 3.25% or 3.50% mortgage for the next 30 years. 

For these people, selling and moving up makes little sense now, because they will be hit twice… once with a higher interest rate, but also with home values that have gone up 20% or more.  For many of them, adding an extra bedroom or picking up a larger yard would recast their existing payments upward by 45% to 60%, and that’s just not worth it.

“We’re not going to list, but do you know the name of a good contractor?  We want to finish the basement.”

So these people simply aren’t selling, and that’s making our price escalation even more dramatic.

The gentleman I dialoged with yesterday is a nice guy.  Thoughtful, intelligent, trying to do the right thing.  But the bottom line is I don’t have the ability to go back in time.  Try as I may, I cannot find a magic wand.

The search I ran for him yesterday… 3/2 single family detached homes, under $200k, in Littleton, Lakewood, Wheat Ridge, Morrison, Golden, Arvada, Broomfield or Westminster… turned up eight homes.  Eight.  How awful must those eight be to linger on the market when five years ago, there would have been 200 or more sub-$200k homes for sale at any point in time?

You can say you want to buy a fixer, you can say you are willing to do some work, I hear it all the time.  Until you walk in and there’s standing water in the basement, holes punched in the drywall, pet urine in every square inch of carpet, mold growing in the closets and foundation cracks in three of the four walls. 

Then, suddenly, most people reconsider this romanticized vision of "buying a fixer".

I went back and ran some amazing numbers to demonstrate for this prospective buyer how dramatically things had changed.

Between 2008 and 2012, over a five year period, I personally helped 64 buyers purchase homes in the Denver metro area for less than $200,000.  That's more than 12 per year, on average.  Then in 2013, the number fell to four.  This year, I’ve had one buyer successfully purchase a home for less than $200,000.  One.

I’ve had several others who thought they were in the market to buy, only to chase after fleeting inventory for weeks or months, constantly beaten out by investors or cash buyers (or those armed with the resources of The Bank of Mom and Dad), before eventually capitulating and signing another lease or moving back in to their parents’ basement.  For them, game over.

The era of sub-$200,000 house in Denver is a thing of the past.  It lasted for a hundred years, but in 2013, the clock finally ran out.  Today, $250,000 is the new $200,000.  If you can’t write that check, then you may want to start looking for a roommate.

The next big booms are coming in the outlying areas… the Firestones, Daconos, Brightons and Strausburgs.  Places where, if you’re willing to drive and take on projects, you might still have a chance for less than $200k.

But the game has changed, and if you didn’t get in when you had the chance, the window isn't  just closing, it's almost nailed shut. 

This isn’t the Denver you grew up in or knew even 10 years ago.  It’s a bigger, more sophisticated, wealthier, increasingly metropolitan place.  It’s drawing people from everywhere, but especially from California, where high taxes, crummy schools and ridiculous home prices are driving people toward saner places. 

Places where the sun shines bright and there’s lots to do.  Places where there are good jobs and plenty of opportunity for anyone who is willing to work.  Places where it’s possible to enjoy an amazing sunrise or a remarkable sunset almost every day of the year.  Places like Denver.

Places like that are really awesome places to live.  They just don’t have homes for less than $200,000 anymore.