Monday, April 24, 2017

A PERMANENT LOW INVENTORY MARKET

There's been a lot of wild swinging and panicked desperation among buyers throughout the Denver  housing market in the spring of 2017, but especially in the sub-$400k price range.

Right now, in the entire Denver MLS, there are fewer than 1,700 total homes for sale below $400,000.  For comparative purposes, at this time in 2011, there were more than 15,000 homes for sale below $400,000.

The inventory is gone, and it's not coming back.

There are several reasons for this, but chief among them is the fact that if you purchased a home in this price range in 2011, 2012, 2013, 2014, 2015 or even 2016... you have an asset that increased dramatically in value with an interest rate near historic lows during an era when rents in many areas of town have nearly doubled.

To illustrate this shift in the market, between 2006 and 2012, I helped 55 clients buy homes for less than $200,000.  Since 2013, I have helped four.  

For those lucky 55 who bought homes under $200,000, regardless of how small their down payments were (and all have long since petitioned their lenders or refinanced to get out of mortgage insurance to further improve their cash flow positions), no one has a payment higher than $1,100 per month.  Yet many of these entry-level homes would easily rent for $1,600... $1,800... or even $2,000 per month today.  

The bottom line is if you own one of these cash flowing beasts, there is absolutely no reason to sell.  

And because I am wired to tell the truth instead of chase commissions, I have spent significant time and energy over the past few years encouraging my younger clients to hold onto these homes rather than selling them, because by renting them out and applying the full rental amount to their monthly housing payments... it's possible to own and control a huge financial asset free and clear within 10 to 15 years.

Great for your popularity and position as a trusted advisor, but generally terrible for business.  

As a result, I have several clients who are under 35 who own two, three or even four properties... all purchased during this historic surge in Denver home values.

The fact is, there is no new construction coming online anywhere under $400k anytime soon.  And as a result, you have a fixed inventory of homes in this price range, while population growth of nearly 2% per year has brought a net gain of nearly 100,000 people per year into Colorado since 2012.  

If you own and control a home worth less than what the builders will build for, you're set. 

Now the market is going to struggle with these new realities, because historical norms don't hold up in the face of new realities.

When I got into the real estate business 23 years ago, the average time homeowners stayed in a home before selling it was less than six years.  And for two decades, I based many of my business model decisions on the belief that if I sold a home in 2007, it was likely to turn over again in 2012 or 2013. 

Take great care of people, stay in touch, create value, be a resource... and boom, the listing is yours a few years down the road.

Not happening anymore.  The latest figures from NAR show that, on average, owners are staying in their homes more than nine years.  And with each passing year, that average time in the same home increases.  In a zero inventory market like Denver, those time periods will only get longer.  

In the past 11 years, I have helped nearly 250 buyers in Colorado purchase homes, more than 20 buyers per year.  After seven or eight years of racking up these numbers, I should have a listing pipeline that sets me up for life.  

In the past two years, however, I have had a total of 14 past buyer clients sell their homes... eight in 2015, and six in 2016.  Under the old model, I would easily have twice this number... but the truth is for tons of owners, it simply makes more sense to hold than to sell.

That's one reason why we ended February with less than 5,000 homes on the market in the Denver metro area for only the third time in 32 years.... with a population that's nearly double  (3.2 million in 1985 versus 5.6 million in 2016) what was here when the Denver MLS was launched in 1985.

This spring has been brutal on buyers, and on buyers' agents, frankly.  I have written 28 offers in the first four months of the year and 23 of those contracts went down to defeat in multiple offer situations.

Listings below $400,000 routinely draw five to 15 offers, buyers routinely modify or waive appraisal clauses, and the entry-level housing market itself has literally turned into an auction between the have's and the have not's.  Guess who wins?

The buyers coming here with good jobs from out of state... the buyers with significant cash reserves and a willingness to pay beyond past values... and the buyers backed by the almighty resources of Mom and Dad... win.  

The traditional entry-level buyers with 3% or 5% down, not much extra cash in the bank, and a conservative financial mindset... get trampled.

I have talked extensively with my clients about how much this market reminds me of California in the 1990s, when the population exploded, the job market surged and home prices doubled in a 10-year period.  

People stopped moving because they couldn't afford to move up.  Staying became the new going.  Inventory became permanently constrained and the only remedy for market equilibrium was perpetual rising prices.  

Homeowners pulled cash out of their homes and made improvements.  Poor neighborhoods became middle class neighborhoods.  Middle class neighborhoods became upper middle class neighborhoods.  And well off neighborhoods put up wrought iron fencing, hired security guards and became exclusive "gated communities". 

Meanwhile, people who didn't own got completely left behind, and a permanent underclass was formed.

I'm not saying the parallels are 100% aligned between California in the 1990s and Colorado today... but they are close.

I've seen the future, and I left it 11 years ago to come here.  

We are in a permanently constrained low inventory market, and you better figure out how to deal with it... or start scouting for other states that offer better affordability.