SHOCK TO THE SYSTEM

Last week’s election of Donald Trump as 45^th President of the United States caught much of the country by surprise.  The bond market also failed to see it coming, and as a result, Wall Street is recalibrating quickly based on expectations of fewer regulations, tax cuts and higher interest rates.

The impact on the housing market is potentially unsettling.

In just seven days, the 10-year T-Bill has leaped by nearly 50 basis points, which equates to a .50% increase in 30-year mortgage rates.  For a $400,000 purchase with a 20% down payment, that equals a monthly payment that is suddenly almost $100 higher in just seven days. 

Put another way, over 30 years your interest costs just increased by more than $33,000.

This is a very significant development, especially in a high-cost market like Denver, which is already struggling with unprecedented affordability issues.

Much of the anxiety reflected in the bond market is based on Trump’s promises to repeal or amend Obamacare and get American workers back to full employment.  All politics aside, one key consequence of Obamacare's employer mandates to provide coverage for those working more than 30 hours a week is that millions of American workers are now chronically underemployed. 

Major corporations like Home Depot and Target have reduced hours in order to dump employees onto Obamacare exchanges, while other companies have simply increased overtime and wages for existing employees while staying away from adding new full-time labor.

As such, economic growth in much of the country (with Denver a notable exception) has been stagnant, and that has allowed the Federal Reserve to justify keeping rates at historically-unprecedented lows.  

This is part of the angst that fueled the Trump movement, and if Obamacare mandates are overturned and employers once again begin hiring full-time help, that growth is perceived as inflationary.  Add to that the prospects for lower taxes and fewer regulations, and the groundwork is already in place for much more explosive economic growth than the country has experienced in recent years. 

Of course, economics (like politics) is complicated business and we can have long debates about the merits, truths and consequences of different policies.  But this is why the market is suddenly freaking out – no one knows for sure what the landscape will look like in 12 months.

The immediate impact is higher rates, and that’s bad news for housing.  Long term, I’m still resolutely optimistic for the Denver market, because we offer employers a diverse, well-educated, youthful workforce that is equipped for our evolving economy.

But you can’t deny that double-digit appreciation has been fueled in large part by interest rates in the 3’s.  Those days appear to be over and so, realistically, do the days of double-digit appreciation gains for housing.   

THE SLIPPERY SLOPE OF NON-PERMITTED WORK

Permits matter.  

Or at least, they matter a lot more than they used to.

Here in Colorado, there are more than 30 different types of home improvements that, per code, should require a permit.  Here's a partial list:

Interior:  Air conditioning, basement finishing, boiler replacement, electrical service upgrades, evaporative cooler installations, furnace replacement, gas fireplace installations, garage conversions, kitchen remodeling (if plumbing or electrical components are touched), water heaters and any other type of work that affects plumbing or mechanicals.

Exterior:  Additions, carports or garages, driveways (new or repoured), decks and patios, fencing, enclosing covered patios, adding a shed (always be aware of property line setback requirements), window replacement (lead-based paint mitigation is required for homes built before 1978), skylights, siding, solar panels, and of course, re-roofing.  

As you can see, the list of items that technically require permits is quite long.  I would say that, based on my experience, required permits are pulled less than 50% of the time.  The number one reason people pass on permits is to try and save a few bucks, but sometimes that desire to save money ends up creating a lot of future problems.  

Up until about 10 years ago, insurance companies were a lot more tolerant of non-permitted finishes.  But then Hurricane Katrina happened.  Then the housing market crashed.  Then the stock market crashed.  And then a relentless series of hailstorms pelted the Midwest, including many parts of Colorado... and suddenly, profit-minded insurance companies became a lot more serious about finding ways to avoid paying claims.  

Permits are not that expensive, in my opinion.  Most times, city inspections and closed permits cost anywhere from $100 to $1,000, depending on the work.  Sometimes it takes the city inspector a few days to get out to the house.  Sometimes permit inspectors will nitpick repairs.  It adds time and money to the cost of remodeling, and so some contractors and homeowners just roll the dice and skip it.  

Increasingly, though, I have become more and more committed to educating my clients about the need to pull permits.  In Colorado, the purchase contract states that buyers purchase homes "as is, where is", meaning that they inherit all faults and assume liability for issues with the house.  (A new owner can always sue a former owner for non-disclosure, but that is a very hard lawsuit to win most of the time)

If your basement floods due to faulty plumbing work and there were no permits pulled, many insurers will now deny the claim. Same with basement fires, kitchen fires and roof leaks.  If no permits were pulled, the insurance company has an opportunity to get out of paying a claim. 

There are other reasons permits matter.  Increasingly, some lenders don't want to loan on homes with unpermitted additions.  These lenders will instruct appraisers to give the extra space no dollar value, because (in theory) the city could require the addition or improvement to be torn out or redone.  

There is also a legal component to this, especially if you are a landlord.  If you have a finished but unpermitted basement and your tenants are injured or killed in a fire, or poisoned by carbon monoxide from a faulty furnace installation, get ready to be sued.  And insurance may not cover you.  

Even appraisers disagree about whether value should be given for unpermitted additions or finishes.  Appraisers are not required to check for permits.  You may have one appraiser who gives a finished basement full value, but five years from now a more conservative appraiser (who may have been burned overvaluing unpermitted work) may slash or wipe out your value altogether. 

And if you want to sue your home inspector for not identifying unpermitted work, be aware that most inspectors have a liability clause in their agreements that limits recourse to the cost of the inspection, which won't come anywhere close to addressing the cost of redoing an unpermitted basement finish or illegal garage conversion.    

There are many variables here, and the time to educate yourself is before you have crossed that line.

Tens of thousands of homes in Colorado have unpermitted finishes and owners and tenants live comfortably unaware of the liability that may exist.  

You can make your own decisions about whether unpermitted work is right or wrong for you.  Truth is, almost every home has some work done requiring a permit that was done without one.  But as I often say to my clients, most things in life (and real estate) come down to odds and percentages.  You have to determine your comfort level with the risks and liabilities of unpermitted work.