HIGHER PRICES IN 2015? THERE CAN BE NO OTHER INTERPRETATION

We're 29 days into the new year and the verdict for 2015 is already in... higher prices, again.

The Denver market has started off 2015 every bit as hot as it was at any time during 2014.  That in itself is amazing, because prices have already risen 20% or more in most parts of town and buyers have been engaged in savage bidding wars since the spring of 2012.

While all segments of the market shy of $1 million are doing well, the fact remains that the entry-level is at a level of frenzy we’ve never really seen before.  Check out these current absorption rates at different price points in the metro area:

0-$250k:  0.53 months of inventory

$250k-$400k:  1.13 months of inventory

$400k-$600k:  3.36 months of inventory

$600k-$1M:  5.39 months of inventory

$1M and up:  15.30 months of inventory

Five months of inventory is considered the benchmark for a balanced market.  Less than this, you have a seller’s market.  Above this point, buyers have the upper hand. 

You can see how tiered our market is, with intense completion below $400k, solid demand up to $600k, and then steady deterioration going up from there.

Because of this, over the past several months consultations with first-time buyers have become more and more of a challenge.  Yesterday, for example, I met with a terrific young couple looking to buy a starter home in Littleton for less than $300,000.  They’re well-qualified, realistic, motivated… everything you want in a buyer.

But what about the market?  That’s where the water gets deep, and depressing, quickly.

Right now, in Littleton, there are 73 detached homes in the MLS under $300,000.  Great.  Problem is, 68 of the 73 are under contract!  That’s 93% of the listed inventory!

I’ve been doing this for 20 years, and I’ve seen all kinds of markets in both Colorado and California.  Good and bad, hot and cold.  But never anything like this.

So I stretched out the search and decided to look at detached homes in some other cities under $300k:

Arvada – 7 homes on the market under $300k, 86 under contract (92%)

Golden – 3 homes on the market under $300k, 6 under contract (67%)

Wheat Ridge – 3 homes on the market under $300k, 12 under contract (80%)

Westminster – 17 homes on the market under $300k, 77 under contract (82%)

Broomfield – 5 homes on the market under $300k, 26 under contract (84%)

Highlands Ranch – 4 homes on the market, 12 under contract (75%)

Adding Littleton into the mix, that’s a total of 44 homes on the market under $300k and 287 under contract!  87% percent!

Let me parse that for you… in a “normal” market (and this is so far from a “normal” market I’m not sure we’ll ever see “normal” again), you’ll generally see about twice as many homes for sale as you have under contract. 

A 2 to 1 ratio of homes on the market versus homes under contract usually equates to five months of inventory, 60-90 days to sell a reasonably priced property and 3-4% annual appreciation. 

Okay, let’s run the current numbers both ways:

If there are 44 homes on the market, in a “normal” market 22 would be under contract… we have 287!

If 287 homes are under contract, in a “normal” market there would be 574 homes for sale… we have 44!

Do you see how insane this is?

Per the “old” rules, 33% of our inventory should be under contract.  But for these cities I’ve just listed below $300,000, it’s 87% of the inventory. 

Here’s what this means… if you are selling a home at a lower price point, lucky you!  You will never see a market this strong or easy to navigate again.  Buyers are lined up, down the street, waiting to see your home and write an amazing offer.

Prepare for appraisal challenges, lots of emotion and possible attempts by the buyer to re-negotiate down during the contract period.  This is what happens when you have multiple offers and a market where emotion supplants logic, and where contract prices often cannot be justified by past sales.

If you are buyer, however… buckle up.  There are going to be huge challenges here, especially if you have a smaller down payment. 

Getting something under contract is challenging enough… but getting that house to appraise is almost as difficult.  So do you have the means to deal with a low appraisal?  Are you financially strong enough to waive your appraisal contingency altogether?   

Do you have the ability to take a home “as is”, with no repairs?  Do you have the ability to let some of your earnest money go “hard” upon acceptance?  What else can you do to make your offer stand out in a supercharged and hyper-competitive environment?

These are serious and hard subjects, but the fact is, in a crowded marketplace, courage is mandatory. 

If you aren’t ready to deal with this type of competition, then maybe buying an entry-level home just isn’t in the cards for you in 2015. 

Whether you buy, sell, or sit on the sidelines, one thing is crystal clear as the first month of 2015 comes to a close… prices are going up, again.  The numbers allow for no other interpretation.

THE FRENZY CONTINUES

As I stated in a recent post, the two numbers I plan to watch closely in 2015 are the unemployment rate and the inventory of homes for sale.

Unemployment is crazy low – currently just 3.6% in Denver.  And inventory is crazy low – as of this morning, there are just 4,535 homes for sale in the Denver MLS, another all-time low dating back to the creation of the Denver MLS in 1985. 

Hopefully, unemployment remains low.  If it remains below 4%, this is going to be another lid-lifting year for housing in Denver.  Even if it rises to 5%, we’ll still have a highly functional market.  Lower is better, but our employment market is so strong right now that we are a long way from any serious concern.

With inventory, the picture is a little different.  Inventory is going to rise this spring – it has to.  But how much must it rise to make a difference?

The magic formula, as I have described before, is lining up the number of homes under contract at any point in time and comparing that to the active inventory.  A 2 to 1 active to under contract ratio is normal, which means 60 to 90 days to sell your home, 3-4% appreciation and a nice, calm orderly life for real estate professionals.

This market (nor the life of full-time real estate professionals) hasn’t resembled normal in over three years!

As of this morning, there 5,681 homes under contract in the Denver MLS, compared to the active inventory mentioned above of 4,535.  Under the 2 to 1 theory, we would need 11,362 homes on the market to hit equilibrium.  We are at 39% of that number. 

Which means inventory could DOUBLE and it would still be a seller’s market!

Having said that, I still think the numbers will tell the story of where we are headed in 2015.

My working theory about this market is that when it calms down – and it has to calm down at some point – many people will be caught off guard.  That’s because there are thousands and thousands of sellers on the sidelines who are just sitting tight, biding their time and enjoying their accumulating piles of equity.

When things start to slow down – or more accurately, when the media starts to report a slowdown (which, in fact, will be several weeks or even months after insiders see the changes occurring) – inventory will shoot up quickly as everyone tries to get out at the top of the market. 

That’s exactly what happened in California at the end of 2005, as I was on my way out the door, and it will happen here.  Sellers will wait too long, market conditions will change, and suddenly the whole universe of "market timers" will all list at once.  

Will that cause values to fall?  I seriously doubt it.  You simply have too many high quality employed buyers with real down payments and solid credit scores.   They’re not going to bail out at the first sign of change the way subprime buyers did almost a decade ago.

But the insanity of multiple offers, bidding wars, over-list price offers and contingency waiving will eventually go away... sellers will have to work, wait and negotiate to get their homes sold.  Just like in the old days (which means, pre-2013).  

Selling a home is not supposed to be this easy, and one day down the road, it won’t be.  But for now, sellers are experiencing the greatest market conditions in at least 30 years.  Enjoy them while they last, because one day, you won't have the unbelievable leverage that you do today.

AIR TRAFFIC CONTROL

I listed a townhome in Lakewood today for $168,000.  Twelve hours later, I have had 22 showings, six offers in hand, several others on the way and a bidding war is in progress as I write this at 8:45 in the evening.

Will it ever end?  The shortage of entry-level housing product in the metro area is amazing to behold.  Five years ago this week, there were 6,774 homes for sale in the Denver MLS under $250,000.  Today, there are 558.

To drill deeper, try this on for size.  As I just mentioned, right now there are 558 homes on the market priced below $250,000.  There are 660 homes in the Denver MLS priced over $1 million.  So there is more million dollar inventory in the Denver MLS than entry-level inventory. 

That is simply unprecedented. 

Now let’s flip it over and look at homes currently under contract.  Below $250,000, there are 1,948 homes currently under contract.  Above $1 million, there are just 118. 

So while the number of homes for sale below $250k and above $1 million are basically the same, there are almost 17 times as many homes under contract below $250,000 as there are above $1 million.

If you aren’t tracking on this, let me make it simple.  There is nothing for sale under $250,000 and there are literally thousands and thousands and thousands of prospective buyers racing around town trying to find something, anything, in this price range.

I listed a home in November for $244,000 in a good part of Wheat Ridge that drew a dozen offers in four days.  I listed another sub-$200k home in October that had 34 showings and a top offer $27,000 over list price.  In fact, when I list anything below $250,000 these days, I pretty much block out two solid days on my calendar because all I’m going to do is take calls from buyers, answer questions from agents and do my level best to skillfully manage the bidding wars that are almost certain to break out.

Is it all about top dollar?  Sometimes, but not always.  It's important to know who is in your transactions.  That means I want to know who the buyer is, why they have an interest in this neighborhood, how they met their agent, and of course, how much commitment their offer shows.

I want to know about the agent.  Does the agent sell homes, or is he or she a part-timer?  Can they demonstrate a track record of solving problems?  How did they meet the buyer?  How well are they educated?  Have they written offers on other homes?  Are they prepared to waive appraisal contingencies, jack up the earnest money, take the home “as is”, or come up with other ways to make their offer stand out?

Who is the lender?  Local?  Or some obscure Internet company?  You can offer $1 million for my $168,000 listing and it doesn’t matter if it never closes.  Show me proven results.

There is nothing about this enjoyable for buyers, or agents.  Including the listing agent.  About the only ones having fun are the sellers, who are cashing out with big profits and feeling pretty good about the whole thing.

As an agent, managing a feeding frenzy / barroom brawl is hard to do, especially if you are legitimately trying to give everyone a fair chance while doing what it takes to fulfill your obligations to your seller.  Namely, to get the best offer from the strongest buyer, ethically, while mitigating risk and protecting your seller’s interests.   

Tomorrow, we’re going to sift through a pile of offers and have a series of conversations with agents who are just as tired of showing houses as their entry-level buyers are of chasing after them.  Ultimately, there will be one winner and a disgruntled group of frustrated also-ran’s who once again gave it their best shot, only to get nothing. 

For prospective sellers, I want to caution you.  It will not always be this way.

In fact, at some point a market transition is going to happen.  And when it does, I suspect we’re going to see a whole lot of inventory show up very quickly, because when people sense we’re near a top, everyone wants out.  I’ve seen it before, and I know it will eventually play out this way again.

If you choose to wait a while longer, you may pick up a few more dollars.  But if you overplay your hand, if you want until the market tops and then tips the other way, you will miss the best seller’s market in the history of Denver. 

The best time to buy is when no one is buying.  And the best time to sell is when no one is selling.  End of story.

BREAKAGE

In a hot market, it always happens.  As interest in real estate surges, so do the number of agents.  In a hot market, everyone feels like a winner, everyone is a genius.  Optimism abounds.

That is, until you head out into the trenches.  

Every year, NAR puts out statistics which only vary slightly from year to year.  Fifty percent of all new agents will quit the business inside of 12 months.  Three out of four newbees will never renew at the end of their first licensing cycle.  Truth is, real estate is the ultimate revolving door business, with thousands of freshly-minted optimists coming in and thousands of downtrodden skeptics going out every single year.

I'm not here to wish for the demise of new agents, or to live in fear that someone else is going to come along and "steal" my clients.  I believe there is plenty of business to be had, if you (and here's the big IF) know how to create value for people that others do not.

For 20 years, I have built what I call an "others-based" practice.  By making your clients' goals your own, and by looking after every transaction as if it were your own, you create value.  By making the time and energy investment to attend high-level training classes and learn negotiation strategies others don't take the time or won't spend the money to learn, you become more valuable.  By occasionally sticking our neck out, by leveraging your own resources or reputation to get a deal done for someone you truly care about, you earn long-lasting relational equity, which is the lifeblood of this business.

But in the grown-up world of real estate, where stress, drama, and yes, fallible humans reside... sometimes bad things happen.  One of the reasons so many people go out of this business by their heels is that they cannot handle the emotional fallout of rejection, failure and even betrayal.

Rejection happens... it's a sign of life.

Failure is an opportunity to learn, correct and improve... let it teach you.

But betrayal is the most difficult to process, because it cuts to the core.  You just have to let it go.

We've all got stories of being hung out to dry.  Sometimes it's being undercut when another broker sweeps in at the eleventh hour and offers to list a home for a lower commission.  Sometimes it's when one of your clients wanders into a builder's office on a whim and is charmed into signing a contract for new construction without representation.  And sometimes it's showing someone houses for month after month after month, only to have them give up without ever taking the bat off their shoulder.

Real estate (and sales in general) is a world full of paper cuts.  Things happen that hurt.  But whether you let them take you down or use them to become stronger is totally up to you.

The bottom line is I live in a world where I take responsibility for everything that happens, because that's the only way you can grow and mature.

Failure, at any level, can make you bitter or make you better.  My coping mechanism involves processing bad outcomes quickly, grieving them fast, looking for the lesson, correcting where necessary, and then moving on... quickly... to other productive things I can be doing for others starting right now.

Whatever you give your mind over to grows and gets stronger.  Think failure, and failure becomes your dominant thought.  Think fear, and your fears take root.  But think solutions, and your brain will work to solve problems.

There is plenty of business in the world, if you can master the art of creating value and survive the bumps that are inevitable in any sales environment.  You don't need to let one person derail your momentum, or undermine your commitment to faithfully being the best version of yourself you can possibly be.  

Pick yourself up, dust yourself off, and get on with it.

PRICE AND PAYMENT

Markets are interesting, but even more interesting is the way different people respond to them.

Denver’s real estate market is so strong these days, with total median price appreciation averaging 17-20 percent just in the last two years, that buyers have one of two reactions.

Either…

I can’t believe how much prices have gone up.  My friends got better deals than me.  I’m not sure if I can afford to buy a home.  What if the market crashes? 

Or…

Our economy is strong and I have a great job.  Show me a house I like and I’ll buy it.  I’ll beat out anyone who thinks they want this more than me.  Rates are so low that I’ll happily take this payment for the next 15 or 30 years, regardless of what prices do. 

Guess whose offers are getting accepted?

This is a very difficult market to navigate as a buyer’s agent, especially a cautious one with a deep addiction to logic and a strong desire to see everyone do well.

Fact is, buyers did better two or three years ago.  But it's also a fact you can't go back in time, and today's decisions need to be based on today's market, which remains incredibly robust and healthy.

I want the numbers to make sense.  I’m sympathetic to the angst many buyers are feeling in today’s record-low inventory, high-demand market. But that same logical streak that whispers to be cautious also tells me that the fundamentals of this market are so strong that boldly going forward remains the wiser choice.

As I posted a few days ago, there are two numbers I plan to watch in 2015.  One is the inventory of homes for sale, the other is the unemployment rate in Denver.  Because these two numbers will tell you the overall health of our market.

If inventory is low and everyone is working, then pricing is built on a very firm foundation. 

Jobs, not affordability, drive housing markets.  If the unemployment rate remains below 5.0% (currently 3.6% in Denver and 4.1% statewide), this market will be driven by confidence and optimism.  If the inventory stays low, it means sellers are not seeing enough value in selling, which means prices aren’t high enough yet to change prevailing behaviors.

And with fewer than 6,000 homes on the market, an all-time low for the Denver MLS (which dates to 1985), we are incredibly thin on inventory.  In fact, to reach balance in our market, we would need to see somewhere between 13,000 and 14,000 homes for sale, which means we could double the current inventory and still have a seller's market.  

Is there a day down the road when we reach a tipping point, when confidence finally dries up and the market levels off?  Yes, of course.  The question is whether that day is six months out, 24 months out or 60 months out… and what is the opportunity cost of sitting on the sidelines waiting for conditions to change?

Fact is, there’s an opportunity cost to waiting.  It’s called rent.  Unless you are a cash buyer or living in your parents’ basement, you’ll either pay rent or pay a mortgage.  It’s your call to make.

I showed a home last night listed at $449,000 to a young couple expecting a first child.  They really like the home, it checks most of the boxes on their wish list.  But the comps for the neighborhood are mostly in the $410k - $435k range. 

“Do you think it’s worth $449,000?” I was asked. 

“If you base it on past sales, the answer is no,” I said.  “But this market isn’t about past sales.  It’s about present demand, and present demand says they’re going to get this number, whether it appraises or not.”

The home came on the market yesterday and mine was the seventh business card on the counter.  That’s a ton of showings for a $449,000 home in one day.  Four years ago, seven showings was a good month for a home at this price point.

While we agreed the home may be $10,000 to $15,000 overpriced, based on past sales, there was another factor that I felt my buyers were neglecting to adequately consider.  And that is interest rates, which have currently dropped back down to the 4% range.

With a $360,000 loan at 5% over 30 years, the principal and interest payment is $1,933 per month.  At 4% over 30 years, the monthly payment is $1,719.  That’s $214 per month of savings, which multiplied over 12 months comes to $2,568 per year in lower payments, simply because of prevailing interest rate conditions. 

Funnel that money back into your mortgage with added payments to principal, and you’ll pay off your 30 year loan in less than 15 years, and you’ll cut your interest costs in half.  So now, rather than talking about paying $10,000 more than past comps support… we should also be giving consideration to an interest rate environment that will allow for more than $100,000 in interest savings over the life of the loan, and owning this home in 12 to 15 years instead of 30.

Price and payment.  They’re both important, but too many buyers who fail to recognize the value of low rates are making decisions based solely on price.