STILL WAITING ON SENSIBLE CONSTRUCTION DEFECTS REFORM

Denver has an affordable housing shortage, and it’s extreme. 

We’ve talked before about how Colorado’s so-called “Construction Defects Law” has shut down the condo market.  In short, the 2005 law essentially creates “uncapped” liability for associations to sue builders with a simple board majority vote if there is a construction defect.   

As a result, everything you see going up downtown is an apartment building, not a condominium complex.  And with construction costs at all-time highs (with the highest-ever land, labor and material costs), rents have soared like never before.

In 2007, 25% of all new construction in the state was condos.  Today, condos make up just 3% of all new construction.

It’s one of the things that has kept our housing market strong.  Limited inventory plus ridiculous rents plus low mortgage rates makes owning a home – even at prices 30% - 50% higher than they were three years ago – more attractive than paying sky high rents.

Eventually, there will be a bill passed by the legislature that will soften this law, and shortly thereafter you will see thousands of apartments converted to condos in relatively short order.  In fact, if and when this law passes, you will probably see prices fall in the short term due to the sudden glut of more affordable housing options. 

If you own a condo today and you’re thinking about selling, this should be part of your thought process.  Right now, demand is high and supply is low.  That creates an obvious selling opportunity.

Next year, or in 2017, or whenever the legislature finally takes some of the teeth out of this law, condo inventory will surge.  Because of the reduced inventory of rentals, rents will probably stay high.  But buyers will suddenly have lots of choice, instead of none, and the predictable result will be a softening of prices. 

It will also be harder to sell an older condo, because developers will be forced to price more aggressively to compete with thousands of new units coming online.  Old units will look, well, old.

Our market is already starting to shift, and I am expecting that to continue into 2016.  Appreciation of 12 – 15% per year for three straight years just isn’t sustainable.  Five percent appreciation would be a great year, in my opinion, given the massive run-up in prices since 2012.

Will the market collapse?  Not as long as lenders remain militant about ensuring buyers have real jobs, real down payments and real credit.  The market crashed in 2008 because thousands of buyers had no skin in the game and no reason to stick around when things got tough.  That’s not the case today.

But too many people have short memories, and I believe too many people are buying homes (or attempting to move up) first and foremost because they want to make money.  Don’t fall for that trap.  You should be able to afford what you buy, like where you live and stick to a budget.  The ones who get burned when the market cools down will be those who let greed drive their decision-making.

The Denver housing market today is a lot more complicated than it was three years ago.  To make smart investments, you have to think more critically because the margin for error is much slimmer.  You can’t rely on past performance to dictate future results.  That’s naive thinking, and you can’t be lazy right now.  You’ve got to think critically, look beyond the headlines, and make a decision for yourself as to what you think the Denver housing landscape will look like in 2016 and beyond.

If you currently own a condo, you need to know that there is future volatility around that investment.  What it ultimately looks like will be determined by what the legislature does with Construction Defects Reform.  But if you’re thinking about selling, you know what the landscape looks like today.  Tomorrow is anyone’s guess.

COOLING DOWN

The Denver market is transitioning.  You can see it in the numbers.

For only the second time in the past 68 months, inventory actually increased on a year-over-year basis over the past 30 days.  Yes, you read that right… for 66 of the prior 68 months, year-over-year inventory has fallen.  So this is a noteworthy development, for sure.  

As I have said before, interpreting these numbers requires some context.  Denver is still the #3 ranked housing market in the country, according to Zillow, and second according to Case-Shiller.  We are healthier than 90% of the markets in the US, and with an unemployment rate of less than 4% in Denver, the Rocky Mountain region remains an economic powerhouse. 

We have become the “go to” market for Millennials (thank you California) and companies have come flocking to Colorado for its comparative low-cost, low-regulation business environment.

Home values in Denver have appreciated by a mind-blowing $18 million per day since the beginning of 2012, with the average home going up in value by $76,000. 

The news has been so good for the so long that many people have come to accept these conditions as the “new normal”.  Except that would be flawed thinking.

A closer look shows that our magical four-year run in housing is starting to wind down.  Just take a look at the numbers:

The current inventory of homes for sale – 8,747 – has essentially doubled since the January low of 4,420.  Last year, by comparison, inventory rose only 37% between January and October.

For homes priced below $250,000, the absorption rate has doubled since June… from 0.33 months of inventory (unprecedented demand) to 0.69 months (still very healthy, but not the same). 

Absorption rates have also doubled in the $250k - $400k range, from 0.48 months in May to 1.01 months today.  In fact, absorption rates are up at least 70% in all price points since the spring, meaning it is taking about twice as long to sell a home now as it did in our epic, crazy, frenzied spring market. 

Because the headlines always trail what’s happening on the street by several weeks, most people are not aware of how conditions have changed in the last 60 to 90 days.  But changing they are.

I have seen it with my own listings… fewer showings, fewer offers and (generally speaking) less qualified buyers.  The buyer pool is thinning, and what drove double digit appreciation was demand.  As that demand calms down, so will prices.

For the first time in two years, I recently accepted an offer with FHA financing, down payment assistance and the seller contributing money toward closing costs.  That doesn’t happen in a red-hot market. 

For the most part, the days of selling your home in a weekend with multiple offers are over.  The days of giving buyers 96 hours to submit offers – “highest and best due by 5 p.m. Tuesday” – are over. 

We’re headed back to traditional real estate, where (gasp!) it might actually take a few weeks to sell your home, and where (double gasp!) you might actually have to negotiate with your buyer to close the deal.

Agents who can’t articulate this information to their sellers are going to continue to overprice their listings, and buyers will continue to look but not swing.  Listings will sit longer, grow stale, and languish on the market.  2016 is shaping up to be a solid year for alcohol sales in the real estate industry.

There are still buyers out there, and there are still reasons to buy.  Rates remain a gift from the Fed.  Owning is still cheaper than renting in most parts of town.  But the days of double-digit offers, buyers waiving appraisal clauses and taking homes “as is” are mostly over.

At these prices, buyers want quality and value. 

If you are selling, you need to get in front of this.  The market has been one-sided for so long, we’ve forgotten what normal looks like.  For too long, it’s been too easy. 

Next year, not every seller is going to get their home sold.  And many of the newbie agents who have come racing into the real estate world are going to get their first cold, hard taste of the “real” real estate business, the one where education, communication and negotiation replace raw emotion as the primary drivers in our real estate market.