Dear Friends,
Happy Saturday evening – and Happy Mother’s Day (in advance) to all those wonderful moms out there!
As most of you know, today launched the official “Safer at Home” phase of Denver’s Coronavirus response. Since late March, we have essentially been under a series of rotating/adjusted/realigned/new-and-improved “Stay at Home” orders that either did-or-did-not allow buyers to view homes, did-or-did-not allow under contract homes to proceed to closing, did-or-did-not allow inspections and appraisals, and did-or-did-not allow agents to do anything other than order takeout, do lots of yardwork and facilitate occasional Zoom calls.
It's been clear as mud with more twists than the Mind Eraser (gratuitous Elitch Gardens reference for those of you old enough to remember when theme parks were a thing).
Coming out of the “Stay at Home” order, we now have Covid-19 Buyer Addendums, Covid-19 Seller Addendums, and Covid-19 Contract Addendums. If you want to visit a real estate office, you’ll need your temperature scanned upon entry and exit, you’ll have to sign an affidavit affirming you are symptom free, you’ll need to wear a mask and you must maintain proper social distancing protocols at all times. In our office, to comply with state mandates, you’ll enter the front lobby from the main entrance on Grandview and exit out the back door, into an alley on the north side of the building.
Agents (now deemed “field service workers” under the latest state health order) have also been given a crazy set of responsibilities related to Covid-19 whether we are working with buyers or sellers. This includes ensuring buyers have masks and gloves, that there are no overlapping showings, that we keep a log with names, phone numbers and email addresses for every individual we have an in-person interaction with, that buyers and sellers sign liability waivers before viewing any home or having their home viewed, and that we ensure all solid surface and high touch areas of our listings are wiped down with approved disinfectants between every showing.
Other than that, it’s pretty much business as usual.
But for all of that, this weekend represents a significant potential milestone in the journey back to “normalcy” for the Denver housing market.
As most of you know, I have been data-driven and analytically-inclined for as long as I have been in the real estate business and I track everything that happens inside this market with charts and spreadsheets. Over the past two months, the data has been so incomprehensible and scrambled (showings down 95% in April compared to January, for example) that you would probably be better served staring into a kaleidoscope or consulting an astrologer than looking at an inventory spreadsheet for guidance.
But since spreadsheets are our thing… as of today, we’ve got more than 10,000 homes listed for sale in the Denver MLS, the first time we’ve had more than 10,000 homes for sale in May since 2012. With showing restrictions being lifted today, nearly 2,000 new listings have been placed on the market in just the past five days!
But in the short term, we’ve also got thousands of buyers who have been sidelined since March coming back into the market. The analogy I’ve used extensively over the past few weeks is that I expect these first few weeks to be like two giant waves slamming together, with sellers coming from one direction and buyers from the other. It’s going to be nuts, and it’s going to be turbulent. But once that initial surge of buyers has been absorbed into the market, I think it’s likely we’re going to see the landscape shift as summer arrives.
The economic reality of 15% unemployment and an ecosystem of empty airplanes, hotels and shopping malls is going to cause some inventory to be pushed onto the market later this year that otherwise wouldn’t be showing up. I have a past client who is a pilot with United Airlines, where 70% of the pilots have been furloughed and the company has suggested that “best case” is 50% of those are brought back by the end of the year. The oil and gas industry is in shambles, the mountain tourist communities are empty and last I heard, Nolan Arenado was at home in California playing wiffle ball with his brothers while Coors Field is being colonized by murder hornets.
How severe will the price damage be? The answer, of course, is it depends on how long we limp along under the black cloud of the Coronavirus. If we can avoid a second wave of infections and progress toward reopening restaurants, bars and small businesses by the end of the month, the damage might be negligible. But that’s a big “if”. If we go back into lockdown six weeks from now because of another wave of infections, price (and societal) damage will be significant.
It's pretty basic economics, in my opinion. If you have more buyers than sellers, prices go up. And if you have more sellers than buyers, prices go down. I think it’s pretty clear we’re going to have more sellers and fewer buyers as a result of the economic damage of Covid-19, at least for a while. Will it be a few more sellers? Or a lot more sellers? That’s the $64,000 Question, and a lot of it depends on whether enough buyers will have jobs to offset all the new inventory that is coming.
WE MAY ALL BE IN THIS TOGETHER, BUT SOME ARE MORE IN IT THAN OTHERS
So again, it’s important to state that there are no comps on a “black swan” event like this and we’re all flying a little blind. But I have seen and experienced a lot in 26 years as a broker, including how the market responded to the horrific events of 9/11 and the subprime meltdown of 2007-08.
My instincts here tell me that while politicians and celebrities have been selling the notion “we’re all in this together”, the reality is the poor are getting clobbered while the well-off are being inconvenienced. (Quick sidebar: As you know I strive to avoid politics, and I also know a lot of people are hurting across the economic spectrum. I am generalizing here, but when you look at the macro trends, unemployment in the lower-end Census tract neighborhoods of Denver may be as high as 40%, while in more affluent areas it is often less than 10%. Education and technical skills give you a better chance to pivot and adapt. If you’ve been waiting tables, working retail or serving in the hospitality industry, it’s a catastrophe.)
I also think the government’s response (print money, bail out corporations and save the stock market) was, as usual, disproportionately aimed at preserving wealth for Wall Street elites and the so-called “one percent”. While in Colorado alone we’ve had over 420,000 claims for unemployment in a state with 5.8 million people in less than two months… the S&P 500 closed Friday at 2,929, up 31% from its low of 2,237 on March 23 and, if you can believe it, up 2.4% from when it closed at 2,860 on May 8, 2019.
How on earth can the S&P be in better shape today than one year ago when unemployment nationally is 17% and climbing? If you don’t think the Fed’s monetary policies control the markets, you’re missing something.
Endlessly printing money devalues the dollar but inflates the price of hard assets. So if you own hard assets (like houses, stocks or a large supply of Clorox wipes) values inflate with the money supply. But if you don’t own stuff, then whatever worthless trinkets you do own become worth less while the price of everything else goes up.
I can’t fix that. All I can do, objectively, is identify where the vulnerabilities exist and try to share that data with you so you can make more informed decisions.
This is not intended to be a political rant. In the context of housing, this tells me that the greatest vulnerability is at the low end of the market, where the price of a gallon of milk is more important than the price of a share of Apple stock.
THE BOTTOM OF OUR MARKET WAS ALREADY SOFTENING
We were already seeing a softening at the very bottom of our market before the Coronavirus pandemic hit. If you have read any of my extensive market research reports over the past 18 months, I repeatedly made the point that we’re running out of buyers at the bottom rung of our market due to affordability issues. Increasingly, the housing market in Colorado is becoming a place where equity rich homeowners trade houses with other equity rich homeowners. Increasingly, the Denver market has come to feel more and more like the ritzy and exclusive California market I left nearly 15 years ago.
Historically, the housing market has functioned like a pyramid, with more buyers at the bottom and fewer buyers at the top. For 90%+ of my real estate career, demand at the bottom outstripped demand in the middle, which outstripped demand at the top. It was a common sense analogy that stood the test of time. All those buyers at the bottom of the pyramid created price support and pushed values higher. Remember, it’s all supply and demand, and when you had a low supply of homes relative to demand, prices were sure to go up.
In the past 2 – 3 years, there’s been a shift. For evidence, let’s take a look at the Denver Market Data Spreadsheet I have inserted below. In the sub-$250k market right now (mostly condos, obviously), there are 1,488 active listings for sale but just 386 homes under contract… a ratio of 3.85 active listings for each home under contract. But in the $400k - $600k price range, there are 3,216 active listings for sale and 2,358 homes under contract… a ratio of 1.36 active listings for each home under contract.
So while there are just 1.36 active listings for each home under contract in the $400k - $600k range, there are 3.85 active listings for each home under contract below $250,000.
What does this mean? It’s means we have more buyers for move-up homes than starter homes. For comparison, if we go back to May of 2015, at that time there were 790 listings on the market below $250k and a whopping 2,819 under contract – a ratio of 0.28 active listings for each home under contract. (This was right about the time I had 32 offers on a $240,000 listing, a benchmark for the madness that was the Denver housing market just a few years back)
Five years ago, at the entry level, demand was swamping supply… which was driving all price points above it higher. Comparing that ratio of 0.28 to 3.85, today’s entry-level buyers have roughly 15 times the number of choices relative to buyers in the market compared to what existed just five years ago.
Even in February, before the Coronavirus shook the foundations of our market, there were 2.21 active listings under contract below $250k to every home under contract… or roughly 8 times the number of choices relative to buyers in the market compared to five years ago.
So the unique transition has been one to where the market functions more like a diamond, with not much demand at the bottom or top but tons of activity in the middle. And because most of our rapid price growth happened because there were so many buyers crowding in at the base of the pyramid, under the diamond model (with fewer buyers at the bottom) you simply don’t have that same upward push on prices. That’s why I thought prices were poised to flatten out going into this, and that’s why I think you have to be very careful with your decision-making moving forward.
In summary, if there are foreclosures or distressed sales, I think you’re going to see a higher percentage of these concentrated at the bottom of the market, where job losses have hit the hardest and the buyer pool is already thin. I don’t believe you will see significant price regression, though, because if there are foreclosures I expect to see equity-rich investors swoop in and scoop them up quickly. I don’t want to see any distressed sales, personally, but if you’re an investor and you’re looking for the soft spot in the market, it’s probably down near the bottom and it’s probably 6 to 9 months out.
A LOGICAL PLAN FOR OPENING UP COLORADO, AND MOST EVERY OTHER STATE
Let’s face it – over the past two months, life has just been weird.
We’re all off our routines. We’re living and/or working at home, often with people who used to live somewhere else, with neighbors who never leave the cul-de-sac and cars that sit in the driveway for days on end. Many of us check Twitter 600 times a day, some of us have howled, and almost all of us have seen (and smelled) more fresh bread baked in our households in the past two months than in the past five years.
For me, I’ve been acutely aware that we are living through history. Twenty years from now, our kids/grandkids will want to know something about this strange era, when everyone stood six feet apart and covered their faces with masks. Our descendants will gasp in disbelief when they read in history books that their ancestors used to celebrate birthdays by blowing out candles on birthday cakes!
During this time, I’ve encouraged my daughters to journal, take pictures and record their thoughts. From 5:30 to 6:30 most nights, we engage in a 60 minute “family social hour” where we all come out of our bedrooms/offices/caves, sit in the family room or on the back deck together and reminisce about different times and places (i.e, the “good old days”). We’ve had themed nights (“Spring Break”, “Christmas in April”, “May the 4th Be With You”), themed meals and when none of that made us feel better, we bought a puppy.
We’re all a little stir crazy.
But we’ve got another problem, and that’s how we smartly and strategically come out of this medically-induced economic coma. Different states are taking different approaches. I firmly believe the next 30 days are among the most important in the history of our country. Will we effectively manage Coronavirus and start to get back on our feet? Or will we slide back into sickness, shutdowns and a full-blown economic depression?
While I don’t have all the answers, it’s not for lack of seeking.
Earlier this week, I came across a commentary which definitely caught my attention. If you’re interested in trying to figure out how we can “intelligently” open up our economy again, it’s worth a read: https://steakhouseindex.com/shi-5-6-20-the-data-has-spoken/
While Covid-19 is a real health crisis and we all must deal with some level of risk, the fact is that the impact of this virus has disproportionately hit seniors and those with pre-existing conditions. These are the groups that need to be protected and supported the most. In California, with more than 56,000 confirmed cases, there has yet to be one death reported for anyone under 18. The commentary suggests opening schools and pushing for those under 50 to get back into the workforce, albeit with social distancing and strong safety protocols. Those from 50 – 64 have a slightly higher risk level, while those above 65 have accounted for 78% of the deaths in California while making up just 22% of the population.
The data suggests that an age-based reopening is the smartest strategy. I am not saying without qualification that this will put us on the road to recovery… but it does parse the data in a way that changed how I’m thinking about the pandemic. We need to compassionately defend those who are most vulnerable while encouraging those who are most able and at lowest risk to get back to work.
What I do know is that we’re all going to have to learn to live with this for a while, and frankly, it’s going to suck a lot of the time. But we will (eventually) get through it, and we all have opportunities right now to make a difference in the lives of others. Now is the time to be salt and light.
Happy Mother’s Day, Happy Graduation and Happy “Safer at Home” to you all!
Let’s hope this is the beginning of a series of victories for our state and for our nation.
With gratitude,
Dale Becker, CRS
RE/MAX Alliance
(303) 416-0087
