ANGST, DISCOMFORT AND GRIEF

This is a rough season for buyers.  In addition to scarce inventory and highly motivated, hard-hitting competition, the rent situation isn’t getting any better.

Zillow reported this week that Denver rent gains averaged 10.2% in January, versus a national average increase of 3.3%.  Only San Francisco (which is already exporting tons of people to Denver) and San Jose (ditto) had larger increases.

For first-time buyers, in particular, the bloom is off the rose.  You can watch all the HGTV you want, but in real life, buying a home under $300k in the metro area has become a giant fistfight.  In Littleton and Lakewood, for example, 153 of 170 homes listed under $300k this week were under contract.  That works out to exactly 90% of the inventory. 

It’s just as brutal in other parts of town.  In Aurora, usually a common landing spot for first-time buyers, 332 of 376 (88%) of homes listed under $300k are under contract.  In Arvada, it’s 103 of 116 (89%).

This is simply unprecedented. 

I met with a well-qualified first-time buyer this week who wants to purchase a condo downtown for under $250k.  43 of 49 such units are under contract.

I met with another first-time buyer last weekend who wants to buy in Thornton for under $300k.  It’s 114 out of 130. 

What’s even more amazing is not just that between 85% and 90% of these entry-level listings are under contract, it’s that they are under contract at retail prices regardless of condition or location! 

It almost pains me to meet with first-time buyers these days, because they simply have no idea how ridiculously competitive this market is.  I’m very blunt about it – there’s no sense wasting time if your prospective client isn’t ready to climb into the gladiator’s ring and fight.  I absolutely am not offended if someone chooses to give up and sign another lease, or move into a friend’s basement.  Unless you are willing to swing hard and throw haymakers, this market is simply not for you.

My last five listings have drawn a total of more than 30 offers, selling for an average of $6,400 over list price.  Appraisal issues are now a huge part of this landscape, and as a listing agent, one of the topics of discussion around any offer is "what happens if it doesn't appraise?"  

Buyers who have the courage and the resources to waive appraisal contingencies win.  Those who don't are losing to those who do.  That's the hierarchy of buyers.  

    

I was having yet another depressed buyer-therapy conversation Thursday afternoon when I told my client, “You simply have to accept that discomfort is now part of this process.”  And I think that has become true.  For first-time buyers in particular, housing is becoming quite painful, whether you are looking to buy (massive completion, no inventory) or rent (massive increases, no inventory).

How long can this go on?  I don’t know. 

I keep reminding clients that the numbers should be your guide.  In a normal market, 33% of the listings are under contract.  In many parts of town under $300k, it’s pushing 90%.  That is so overwhelmingly out of whack and unlike anything I have seen in 20 years that I start fumbling for words trying to describe it.

So what does it mean for now? 

It means prices are going up, rents are going up, and housing is going to a painful subject for people who don’t already own one, or two, or (hopefully) more. 

If you bought in 2011 or 2012 or 2013, thank your lucky stars (or your real estate agent).  If you’re still on the outside looking in, it’s going to hurt. 

Denver is going someplace it has never gone before, and lots of people are in the process of being left behind.

A HIGH COST METROPOLIS

Over the past nine years and 484 posts on this blog, I have tried to do one thing… accurately represent what is happening inside the Denver real estate market.

Four hundred and eighty four posts are not to be taken lightly.  That’s close to 1,000 hours of writing, which equates to six solid months of 40 hour workweeks at a keyboard.  Plus hundreds of more hours thinking, researching, formulating theories and running the numbers.

My goal through all of this has been to create clarity, first for my readers, but also for myself.  Being challenged to study the numbers, investigate the rumors, research the claims of others… all of it has helped me to evolve to a place where I have strong confidence about everything I write, and a firm conviction that internalizing what you read here puts you months ahead of what most people will eventually figure out about the Denver real estate market.

I have been documenting for the past year how the market we have in Denver today is unlike any I have seen in 20 years.  I stand by that statement 100 percent.

Here are a few facts:

- The current inventory of homes for sale - 4,420 - is the lowest number ever recorded since the Denver MLS was created in 1985;

- For the first time in history, the overall absorption rate for all inventory is less than one month;

- The active-to-under contract ratio stands at 0.67, meaning that there are 50% more homes under contract (6,640) than on the market (4,420) right now.

Let’s talk about what these number mean in more detail.

First, the current inventory.

At 4,420 homes for sale, we are 15% below where we were 12 months ago (which happened to be a record low at the time).  The historical blended average of homes on the market for the Denver MLS over the past 10 years is 16,000.  Four years ago, there were 18,000 homes on the market.  Five years ago there were 23,000 homes for sale.  And in 2007, in the middle of the crash, we peaked at more than 31,000 homes for sale in the Denver MLS.

Regarding absorption rate… real estate economists consider five months of inventory to be a “balanced” market.  The absorption rate is a hypothetical calculation which computes, at the current pace of sales, how long it would take to deplete all inventory on the market if there were no new listings.

With five months of inventory, you can expect it to take 60 – 90 days to sell a reasonably priced home, with annualized appreciation of 3-4%.  Has such a market ever existed in Denver?  Of course.

As recently as January of 2012, the overall absorption rate in the Denver MLS was 5.88 months.  At the beginning of 2011, it was a shaky, stammering 11.21 months.  Today, it is 0.95 months!

That, my friends, is how you become the fastest appreciating real estate market in the United States.

The active-to-under contract ratio shows sellers how much competition they are up against when listing their homes for sale.  In a “normal” market, the ratio is about 2 to 1, meaning you have twice as many homes for sale as you have under contract.

Today, there are 6,640 homes under contract and 4,420 on the market… a ratio of 0.67. 

But that’s if you’re looking at the entire market.  If you are looking for a home under $250,000, the ratio is 0.24!  Between $250k and $400k, it’s 0.37.  In fact, at all prices points below $600k, there are more homes under contract than on the market.  Those ratios are simply unprecedented.

Applying the 2 to 1 theory to our current market, with 6,640 homes under contract, you could literally triple the amount of active inventory (4,420 x 3 = 13,260) without one new buyer showing up and have a stable market.

What does that mean?  It means for the foreseeable future, prices are undeniably, indisputably going to continue their upward trajectory.

Based on historical norms, a “balanced” market in Denver would have 16,000 homes for sale, five months of inventory and a 2 to 1 active-to-under contract ratio.

Those numbers are currently 4,420 / 0.95 / 0.67.

At the start of 2011, by contrast, they were 19,135 / 11.21 / 4.51.

While I have written extensively about why these conditions exist, they are still difficult to comprehend, largely because I have never seen them before.

It is hard to believe that we will ever see another real estate market do what the Denver market is doing, and has done, over the past 48 months.

It’s total transformation, the evolution from mid-price market to high-cost metropolis.

COLORADO IS NATION’S FASTEST APPRECIATING REAL ESTATE MARKET

It is official – Colorado is now the nation’s top performing real estate market.

CoreLogic released its year-end numbers last month and Colorado was ranked number one in the country with home prices up 8.4% in 2014.  Texas was number two, with appreciation of 7.6%.

There are several firms that track home valuations, including Zillow, Trulia, Case-Shiller and the Federal Housing Finance Authority (FHFA).  All rank Colorado in their top three for 2014 performance with appreciation rates between 7% - 11%, depending on methodology.

It’s a combination of factors… record-low inventory, record-high in-state migration, an unemployment rate statewide of 4.1% and just 3.6% in Denver, virtually no construction between 2008 and 2012, and a controversial construction defects law that has essentially shut down the condo market since 2007.

Add it all up, and you have lots of jobs, rising incomes, amazing demographics (young, educated and willing to work) and no homes for them to buy. 

Colorado is number two in the US in terms of college graduates per capita.  There are more Millennials in Denver than any other age-demographic group.  Coldwell Banker just ranked Denver the top commercial market in the US.  The good news is literally everywhere.

Will it last forever?  No, nothing lasts forever.  But how long will it last?  That’s the real question.

The fact is that jobs drive the housing market.  If the employment rate remains low, housing will remain strong.  The natural progression is for housing to eventually become so expensive that wages cannot support prices, and at that point the market stalls. 

When does that happen?  Watch the unemployment rate, and you’ll see what the future holds.

Historically, any market with unemployment below 5% is going to have moderate to strong growth in housing prices.  At 3.6%, Denver is another league altogether.

If you are looking to buy today, get ready for a fight.  There has never been a market like this in Denver, and if you aren’t prepared to compete, you probably should just step aside.

If you are thinking about selling, you will never have market conditions tipped so heavily in your favor again.  Do you run the risk of leaving some money on the table if you sell now, versus trying to time the market.  Yes, you may leave some money on the table.  

But the key thing for you to consider is how little competition there is right now, and how we’ve never had a market where sellers are routinely seeing offers (especially at the lower price points) $5k, $10k or even $15k over list price for the best homes.

Houses are not supposed to be easy to sell.  Even in a normal market, it's supposed to take 60 to 90 days.  Today, if a listing lasts five days, chances are it's a dud.  

Talk to anyone who tried to sell a home in 2011 (18,000 homes), 2010 (23,000 homes) or 2007 (31,000 homes).  It was brutal.  

There is a lot to be said for selling in an environment where you have complete control over the market.  You can sell quickly, choosing from several well-qualified buyers.

If you stage it well, price it right, market it strategically and know how to properly manage a bidding war, you're going to get a great outcome.  If you can sift through the emotion of the market to find the most qualified, committed and properly educated buyer, this process can be quicker, easier and more profitable than at any time in memory.