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.