THE STORY OF THE DENVER HOUSING MARKET

Yesterday, I had a client contact me about a home on Utica Street in Denver.  Built in 1907 and just one block from Sloan’s Lake, it’s a sharp little 3 bed, 1 bath bungalow measuring 1,360 square feet with a 330 square foot cellar.

Listed on Monday, it went under contract Tuesday at what is surely something close to its listed price of $350,000.

“It’s already under contract”, I sighed last night, repeating the most often used phrase in Denver real estate for the past 18 months.  “But let me do some digging and see what else I can find out.”

What I found out was this this home had an interesting, and telling, sales history. 

Foreclosed on in 2009, it was sold by the bank to a cash investor for $157,000 after being on the market for 22 days.  A few months later, it was flipped for $255,000, this time after 25 days on the market.  And now, at $350,000 in the hottest real estate market ever, it was gone in one day with multiple offers.

I have three separate listings under contract right now that were each purchased in 2011 which have seen more than $100,000 in equity gains in less than four years.  Two of the three were bank-owned when my clients purchased them, and the third was an estate sale.  Each languished on the market for weeks in 2011 before my clients bravely stepped forward to claim them.

Today, those same homes drew eight, 19 and 32 offers, respectively.  The property with 32 offers had 128 showings in four days. 

All three of those listings were starter homes, priced below $250,000, which is clearly the insane-zone in today’s market.  With no condos for sale (thanks to Colorado’s construction defects law) and nothing being built under $400k, the demand for anything resembling entry-level housing is over the moon.

The numbers in today’s market are so mind-blowing that it’s hard to comprehend.

For example…

- Four years ago, there were nine times as many homes for sale under $250,000 as there were homes listed above $1 million.  Today, there are more active listings priced above $1 million (720) than there are homes for sale under $250,000 (531).

- Four years ago, there were more than 19,000 homes for sale in the Denver MLS.  Today, there are 4,414.

- Four years ago, marketwide, there were four times as many homes for sale as there were homes under contract.  Today, there are nearly twice as many homes under contract (7,297) as there are homes for sale (4,414).

- Five to six months of inventory is considered a “balanced” market.  Four years ago, there was 6.20 months of inventory.  Today, the inventory of homes for sale in the Denver MLS stands at less than one month (0.92), which is the tightest inventory I have seen in two decades as a real estate broker.

If you are trying to buy a home in this firestorm, you had better start by figuring out how to make your offer competitive in an environment where the conversation often begins and ends with the appraisal.

Cash buyers have huge leverage because they can waive their appraisal clause altogether.  All things being equal, cash wins every time.

Large down payment buyers with reserves in the bank (to cover a potential shortfall on the appraisal) are next in line.  Then come smaller down payment buyers willing to pay some fixed amount over the appraised value ($3,000… $5,000… $10,000… whatever their comfort level is).  Then comes smaller down payment buyers who may not be able to cover an appraisal shortfall.  Then comes FHA, VA and whatever down payment assistance programs are in circulation at any given time. 

There is a hierarchy of buyers, and if you don’t have the ability to deal with a property that may fail to appraise, you’re likely to keep losing until the big dogs have all come through. 

For years, I have said that I would judge the market by the quality of buyers in the front seat of my car.  And truthfully, that quality is still pretty good. 

But eventually, all the cash and large down payment buyers will cycle through, opening up the market to smaller down payment buyers, who buy at higher prices.  Then, once they’ve cycled through, the market will open up to FHA and VA buyers, who buy at yet higher prices.  And then, if the banks are stupid enough to do what they’ve always done in the past, there will be low or no down payment programs for those stragglers who have lost out altogether, and these buyers end up shelling out absolute top dollar when the market finally stalls out. 

You can guess what happens next.

We're not close to this point yet.  For 20 years, I have always said that the numbers tell a story.  And today, the numbers are still telling us that this market has legs, and that will continue as long as people keep flocking to Colorado.

WHERE THE INVENTORY ISN’T

I’m always intrigued by numbers, and like everyone else I’ve been trying to figure out why there’s so little inventory in our red hot Denver metro housing market.

So this morning I decided to run some simple calculations merging US Census data with Denver MLS data to figure out where homes are most (and least) available, statistically speaking. 

For methodology, I pulled US Census data from 2013 on the number of available housing units in several metro area cities, and then divided that number by the number of closed sales over the past 12 months. 

Here's what I found…

Arvada - 44,503 housing units / 2,372 closed sales ...equals 1 sale for every 18.76 homes

Broomfield - 23,630 housing units / 1,234 closed sales… equals 1 sale for every 19.14 homes

Golden - 7,859 housing units / 679 closed sales… equals 1 sale for every 11.57 homes

Lafayette - 10,791 housing units / 415 closed sales… equals 1 sale for every 26.11 homes

Lakewood - 65,094 housing units / 2,656 closed sales… equals 1 sale for every 24.50 homes

Westminster - 43,336 housing units / 1,993 closed sales… equals 1 sale for every 21.74 homes

Based on this survey, the tightest of these housing markets is Lafayette, with one out of 26.11 homes being sold in the past 12 months… and the loosest, surprisingly, is Golden, with one sale for every 11.57 homes. 

Why would more homes turn over in Golden?  My best guess is because of the high number of older people who live here, and the number of investor-owned rentals related to the School of Mines.

The average tenure for a home owner in the US today is between 8 and 10 years, which means there should be one sale annually for every 10 to 12 homes in a community.  Only Golden in holding to that statistical norm right now. 

Even with significant equity gains and cash profits waiting to be realized, sellers aren’t selling.  And as long as sellers won’t sell, buyers in the metro area will keep having to pay more.  

MOTIVATED, WELL-QUALIFIED, HOPELESS BUYERS

It just happened again. 

I listed a home in Thornton a few days ago and over the first weekend on the market I had 41 showings and six offers.  Five of the six offers were more than $5,000 over list price.  Five the six offers had reputable, strong, high-producing agents. 

Three of the offers had compelling narratives about why each particular buyer wanted (or needed) to be in this neighborhood.  Agents took turns explaining how much their buyers loved the home, needed to buy, and wouldn’t fight on inspections. 

One agent volunteered to reduce her commission by $3,000 and let the sellers keep the money.

In the end, one buyer got the house.  Five buyers got nothing.

That’s how it is in Denver real estate these days.  In a market with 4,400 homes for sale (down from 18,000 four years ago and 31,000 in 2007), sellers hold all of the cards.

I listed a townhome in Lakewood in January that drew a dozen offers in three days.  All 12 were at or above list price.  Ten of the 12 were solid offers that could have worked in any other market.

In the end, one buyer got the house. Eleven buyers got nothing.

As I wrote about nearly two years ago, there is a hierarchy of buyers.  It starts with cash buyers, who don’t need appraisals, don’t have to go through underwriters and can close within a few days.  If a cash buyer writes a reasonable offer, he wins.

Next are the large down payment buyers, who have the resources to deal with an appraisal that comes in low and the financial IQ to realize that just getting a home under contract sooner rather than later is the smartest move they can make in this environment.

Then comes the mid-range down payment buyer who may be willing to waive contingencies… perhaps taking a home “as is”, waiving the appraisal contingency, or offering to pay for title insurance.

They comes the smaller down payment buyers, who may let some of their earnest money go hard early in the contract period (or even upon acceptance) to show how serious they are.

Then come the FHA/VA buyers, who often get frozen out simply because their financing is more dependent on the underwriter and the appraisal.

And at the bottom come grant-money buyers, down payment assistance buyers and those with no reserves at all beyond their minimum down payment.  Many of these buyers are simply roadkill on the superhighway that is the 2015 Denver housing market.

Agents, what do you do?  The sad reality is that most good listings are drawing several well-qualified offers from highly motivated buyers.  As I said, with my last two listings, 15 of 18 offers would have been fully acceptable on their own just two or three years ago.  But today, that offer that would have worked in 2011 or 2012 might be number eight or nine on the priority list in 2015.

Adapt or die.  Buyers, if you aren’t ready to fight, don’t get into the ring.  This is a nasty, competitive market and unless you are fully committed to competing, you might as well just sign another lease.

Remember that a normal market will have twice as much active inventory as homes under contract.  With 4,400 homes on the market today and 6,600 under contract, you could literally TRIPLE the number of homes on the market and you would still have a balanced, appreciating market. 

With that kind of inventory disparity, higher prices are a foregone conclusion yet again in 2015. 

You can choose to believe the numbers, or you can choose to believe your crazy uncle in Illinois or New Jersey or Florida or some other market with high unemployment, lots of distressed inventory and a broken economic system.  If Uncle Vinny tells you smart buyers never offer full price, or that threatening to walk away over a leaky faucet is a solid strategic move, hang up the phone.

Here in Denver, for the foreseeable future, prices are going up.  Period.

Each day you’re out of the market is costing you money.  The longer you wait, the higher those prices go. 

If, after educating yourself and considering the market, you think things will calm down in 18 – 24 months, then go ahead and have a seat.  You are definitely entitled to that opinion, and you could be right.  But if you’re thinking about buying in 2015, then this is a loser’s attitude.

Right now, successfully buyers are focused on one thing:  getting a house under contract. 

If you’re focus is on something else… getting a “deal”, lowballing the seller, fighting over appraisals, nickel and diming on inspections… please step aside. 

The serious buyers are coming through.  

BACK ON MARKET

The two most common words in Denver real estate may be "Under Contract", but three new words are trending... "Back on Market."

In an emotional environment where multiple offers and bidding wars are the new norm, buyer’s remorse is a growing problem.  If you beat out seven other buyers, then are asked to double your earnest money and waive your appraisal clause, you might find yourself feeling a bit grumpy about the entire process before the ink on the contract is even dry.

Get to inspections, throw in an older furnace, a dishwasher that occasionally leaks and a window that refuses stay to open without aid of a broomstick, and you have the recipe for… back on market.

The number of homes going under contract only to re-appear back on the market a week later is definitely on the rise.  In fact, I have recently written several “backup offers” on homes already under contract because so many deals are falling apart during the contract period.

A few weeks ago, I had a Littleton client interested in a sub-$300k home which had multiple offers.  Despite writing a strong offer, waiving contingencies and even agreeing to take the home “as is”, we were beaten out by another buyer.  

The one caution flag on this home was a do-it-yourselfer's back deck directly off the kitchen which was not in the best of shape.  It was only about 18 inches off the ground, so we didn't feel it was a great safety hazard, but it was suffering from splintering wood, loose rails and uneven balusters.

It was something my client and I discussed when we wrote our offer, and I felt like it was the biggest obstacle a buyer would face with this home.  But what would the real cost be to tear it off and replace it?  Maybe $3,000?

In a market where prices in many areas of town are going up 1% a month, walking away over a $3,000 concern isn't automatically a wise move.

So we circled back and submitted a strong backup offer, basically mirroring our original offer but allowing $1,000 of earnest money to go “hard” and become non-refundable upon acceptance, should the first contract fall for any reason.  We also agreed to take the home "as is", keeping only our right to cancel if the inspection turned up more issues.  

And sure enough, when the first buyer started balking about it, I got a phone call. 

“Your buyer still interested?”, asked the seller’s agent.

“Of course,” I said.  "We've seen the deck and we're not afraid of it.  Let's get this done."

And sure enough, a day later buyer number one was out and we were in.

We did our inspection, and while the long-term prospects for the deck are questionable, the rest of the house checked out fine. 

My clients closed, moved in, and ended their long and winding journey through Denver's fiery-hot real estate market.    

I’m not saying that backup offers are the preferred method for navigating the market.  They are not.  Backup offers are a strategy, just like doubling earnest money, waiving appraisal contingencies, taking homes “as is” or staggering your earnest money release.

With 85% to 90% of the inventory under contract in most areas of town below $300,000, this is an exceedingly hard market for buyers to navigate.  This market calls for different approaches.  What may have worked in 2012 or 2013 is irrelevant in 2015.    

I talk to my sellers extensively about the growing "back on market" trend.  It's critical to treat everyone in a real estate transaction with respect, and to do what you can to keep some goodwill tucked away for the under contract period, because there are going to be bumps.

Inspections and appraisals are now huge issues.  In many transaction, fear and greed have supplanted logic and reason.  For sellers, finding a buyer isn't the challenge.  The challenge is finding the right buyer, with the right agent, working with the right lender.  It's securing an offer from someone who knows what's at stake, has the financial resources to compete, understands the market, and is committed to the deal.  

Staging is fun, photos are exciting, showings are great... but the real action now comes once a property is under contract.  

Buyers are feeling worked over and abused, and if you push too far, you may well find yourself in that uncomfortable and confusing space known as "back on market".  

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. 

HIGHER PRICES IN 2015? THERE CAN BE NO OTHER INTERPRETATION

We're 29 days into the new year and the verdict for 2015 is already in... higher prices, again.

The Denver market has started off 2015 every bit as hot as it was at any time during 2014.  That in itself is amazing, because prices have already risen 20% or more in most parts of town and buyers have been engaged in savage bidding wars since the spring of 2012.

While all segments of the market shy of $1 million are doing well, the fact remains that the entry-level is at a level of frenzy we’ve never really seen before.  Check out these current absorption rates at different price points in the metro area:

0-$250k:  0.53 months of inventory

$250k-$400k:  1.13 months of inventory

$400k-$600k:  3.36 months of inventory

$600k-$1M:  5.39 months of inventory

$1M and up:  15.30 months of inventory

Five months of inventory is considered the benchmark for a balanced market.  Less than this, you have a seller’s market.  Above this point, buyers have the upper hand. 

You can see how tiered our market is, with intense completion below $400k, solid demand up to $600k, and then steady deterioration going up from there.

Because of this, over the past several months consultations with first-time buyers have become more and more of a challenge.  Yesterday, for example, I met with a terrific young couple looking to buy a starter home in Littleton for less than $300,000.  They’re well-qualified, realistic, motivated… everything you want in a buyer.

But what about the market?  That’s where the water gets deep, and depressing, quickly.

Right now, in Littleton, there are 73 detached homes in the MLS under $300,000.  Great.  Problem is, 68 of the 73 are under contract!  That’s 93% of the listed inventory!

I’ve been doing this for 20 years, and I’ve seen all kinds of markets in both Colorado and California.  Good and bad, hot and cold.  But never anything like this.

So I stretched out the search and decided to look at detached homes in some other cities under $300k:

Arvada – 7 homes on the market under $300k, 86 under contract (92%)

Golden – 3 homes on the market under $300k, 6 under contract (67%)

Wheat Ridge – 3 homes on the market under $300k, 12 under contract (80%)

Westminster – 17 homes on the market under $300k, 77 under contract (82%)

Broomfield – 5 homes on the market under $300k, 26 under contract (84%)

Highlands Ranch – 4 homes on the market, 12 under contract (75%)

Adding Littleton into the mix, that’s a total of 44 homes on the market under $300k and 287 under contract!  87% percent!

Let me parse that for you… in a “normal” market (and this is so far from a “normal” market I’m not sure we’ll ever see “normal” again), you’ll generally see about twice as many homes for sale as you have under contract. 

A 2 to 1 ratio of homes on the market versus homes under contract usually equates to five months of inventory, 60-90 days to sell a reasonably priced property and 3-4% annual appreciation. 

Okay, let’s run the current numbers both ways:

If there are 44 homes on the market, in a “normal” market 22 would be under contract… we have 287!

If 287 homes are under contract, in a “normal” market there would be 574 homes for sale… we have 44!

Do you see how insane this is?

Per the “old” rules, 33% of our inventory should be under contract.  But for these cities I’ve just listed below $300,000, it’s 87% of the inventory. 

Here’s what this means… if you are selling a home at a lower price point, lucky you!  You will never see a market this strong or easy to navigate again.  Buyers are lined up, down the street, waiting to see your home and write an amazing offer.

Prepare for appraisal challenges, lots of emotion and possible attempts by the buyer to re-negotiate down during the contract period.  This is what happens when you have multiple offers and a market where emotion supplants logic, and where contract prices often cannot be justified by past sales.

If you are buyer, however… buckle up.  There are going to be huge challenges here, especially if you have a smaller down payment. 

Getting something under contract is challenging enough… but getting that house to appraise is almost as difficult.  So do you have the means to deal with a low appraisal?  Are you financially strong enough to waive your appraisal contingency altogether?   

Do you have the ability to take a home “as is”, with no repairs?  Do you have the ability to let some of your earnest money go “hard” upon acceptance?  What else can you do to make your offer stand out in a supercharged and hyper-competitive environment?

These are serious and hard subjects, but the fact is, in a crowded marketplace, courage is mandatory. 

If you aren’t ready to deal with this type of competition, then maybe buying an entry-level home just isn’t in the cards for you in 2015. 

Whether you buy, sell, or sit on the sidelines, one thing is crystal clear as the first month of 2015 comes to a close… prices are going up, again.  The numbers allow for no other interpretation.

THE FRENZY CONTINUES

As I stated in a recent post, the two numbers I plan to watch closely in 2015 are the unemployment rate and the inventory of homes for sale.

Unemployment is crazy low – currently just 3.6% in Denver.  And inventory is crazy low – as of this morning, there are just 4,535 homes for sale in the Denver MLS, another all-time low dating back to the creation of the Denver MLS in 1985. 

Hopefully, unemployment remains low.  If it remains below 4%, this is going to be another lid-lifting year for housing in Denver.  Even if it rises to 5%, we’ll still have a highly functional market.  Lower is better, but our employment market is so strong right now that we are a long way from any serious concern.

With inventory, the picture is a little different.  Inventory is going to rise this spring – it has to.  But how much must it rise to make a difference?

The magic formula, as I have described before, is lining up the number of homes under contract at any point in time and comparing that to the active inventory.  A 2 to 1 active to under contract ratio is normal, which means 60 to 90 days to sell your home, 3-4% appreciation and a nice, calm orderly life for real estate professionals.

This market (nor the life of full-time real estate professionals) hasn’t resembled normal in over three years!

As of this morning, there 5,681 homes under contract in the Denver MLS, compared to the active inventory mentioned above of 4,535.  Under the 2 to 1 theory, we would need 11,362 homes on the market to hit equilibrium.  We are at 39% of that number. 

Which means inventory could DOUBLE and it would still be a seller’s market!

Having said that, I still think the numbers will tell the story of where we are headed in 2015.

My working theory about this market is that when it calms down – and it has to calm down at some point – many people will be caught off guard.  That’s because there are thousands and thousands of sellers on the sidelines who are just sitting tight, biding their time and enjoying their accumulating piles of equity.

When things start to slow down – or more accurately, when the media starts to report a slowdown (which, in fact, will be several weeks or even months after insiders see the changes occurring) – inventory will shoot up quickly as everyone tries to get out at the top of the market. 

That’s exactly what happened in California at the end of 2005, as I was on my way out the door, and it will happen here.  Sellers will wait too long, market conditions will change, and suddenly the whole universe of "market timers" will all list at once.  

Will that cause values to fall?  I seriously doubt it.  You simply have too many high quality employed buyers with real down payments and solid credit scores.   They’re not going to bail out at the first sign of change the way subprime buyers did almost a decade ago.

But the insanity of multiple offers, bidding wars, over-list price offers and contingency waiving will eventually go away... sellers will have to work, wait and negotiate to get their homes sold.  Just like in the old days (which means, pre-2013).  

Selling a home is not supposed to be this easy, and one day down the road, it won’t be.  But for now, sellers are experiencing the greatest market conditions in at least 30 years.  Enjoy them while they last, because one day, you won't have the unbelievable leverage that you do today.

AIR TRAFFIC CONTROL

I listed a townhome in Lakewood today for $168,000.  Twelve hours later, I have had 22 showings, six offers in hand, several others on the way and a bidding war is in progress as I write this at 8:45 in the evening.

Will it ever end?  The shortage of entry-level housing product in the metro area is amazing to behold.  Five years ago this week, there were 6,774 homes for sale in the Denver MLS under $250,000.  Today, there are 558.

To drill deeper, try this on for size.  As I just mentioned, right now there are 558 homes on the market priced below $250,000.  There are 660 homes in the Denver MLS priced over $1 million.  So there is more million dollar inventory in the Denver MLS than entry-level inventory. 

That is simply unprecedented. 

Now let’s flip it over and look at homes currently under contract.  Below $250,000, there are 1,948 homes currently under contract.  Above $1 million, there are just 118. 

So while the number of homes for sale below $250k and above $1 million are basically the same, there are almost 17 times as many homes under contract below $250,000 as there are above $1 million.

If you aren’t tracking on this, let me make it simple.  There is nothing for sale under $250,000 and there are literally thousands and thousands and thousands of prospective buyers racing around town trying to find something, anything, in this price range.

I listed a home in November for $244,000 in a good part of Wheat Ridge that drew a dozen offers in four days.  I listed another sub-$200k home in October that had 34 showings and a top offer $27,000 over list price.  In fact, when I list anything below $250,000 these days, I pretty much block out two solid days on my calendar because all I’m going to do is take calls from buyers, answer questions from agents and do my level best to skillfully manage the bidding wars that are almost certain to break out.

Is it all about top dollar?  Sometimes, but not always.  It's important to know who is in your transactions.  That means I want to know who the buyer is, why they have an interest in this neighborhood, how they met their agent, and of course, how much commitment their offer shows.

I want to know about the agent.  Does the agent sell homes, or is he or she a part-timer?  Can they demonstrate a track record of solving problems?  How did they meet the buyer?  How well are they educated?  Have they written offers on other homes?  Are they prepared to waive appraisal contingencies, jack up the earnest money, take the home “as is”, or come up with other ways to make their offer stand out?

Who is the lender?  Local?  Or some obscure Internet company?  You can offer $1 million for my $168,000 listing and it doesn’t matter if it never closes.  Show me proven results.

There is nothing about this enjoyable for buyers, or agents.  Including the listing agent.  About the only ones having fun are the sellers, who are cashing out with big profits and feeling pretty good about the whole thing.

As an agent, managing a feeding frenzy / barroom brawl is hard to do, especially if you are legitimately trying to give everyone a fair chance while doing what it takes to fulfill your obligations to your seller.  Namely, to get the best offer from the strongest buyer, ethically, while mitigating risk and protecting your seller’s interests.   

Tomorrow, we’re going to sift through a pile of offers and have a series of conversations with agents who are just as tired of showing houses as their entry-level buyers are of chasing after them.  Ultimately, there will be one winner and a disgruntled group of frustrated also-ran’s who once again gave it their best shot, only to get nothing. 

For prospective sellers, I want to caution you.  It will not always be this way.

In fact, at some point a market transition is going to happen.  And when it does, I suspect we’re going to see a whole lot of inventory show up very quickly, because when people sense we’re near a top, everyone wants out.  I’ve seen it before, and I know it will eventually play out this way again.

If you choose to wait a while longer, you may pick up a few more dollars.  But if you overplay your hand, if you want until the market tops and then tips the other way, you will miss the best seller’s market in the history of Denver. 

The best time to buy is when no one is buying.  And the best time to sell is when no one is selling.  End of story.

BREAKAGE

In a hot market, it always happens.  As interest in real estate surges, so do the number of agents.  In a hot market, everyone feels like a winner, everyone is a genius.  Optimism abounds.

That is, until you head out into the trenches.  

Every year, NAR puts out statistics which only vary slightly from year to year.  Fifty percent of all new agents will quit the business inside of 12 months.  Three out of four newbees will never renew at the end of their first licensing cycle.  Truth is, real estate is the ultimate revolving door business, with thousands of freshly-minted optimists coming in and thousands of downtrodden skeptics going out every single year.

I'm not here to wish for the demise of new agents, or to live in fear that someone else is going to come along and "steal" my clients.  I believe there is plenty of business to be had, if you (and here's the big IF) know how to create value for people that others do not.

For 20 years, I have built what I call an "others-based" practice.  By making your clients' goals your own, and by looking after every transaction as if it were your own, you create value.  By making the time and energy investment to attend high-level training classes and learn negotiation strategies others don't take the time or won't spend the money to learn, you become more valuable.  By occasionally sticking our neck out, by leveraging your own resources or reputation to get a deal done for someone you truly care about, you earn long-lasting relational equity, which is the lifeblood of this business.

But in the grown-up world of real estate, where stress, drama, and yes, fallible humans reside... sometimes bad things happen.  One of the reasons so many people go out of this business by their heels is that they cannot handle the emotional fallout of rejection, failure and even betrayal.

Rejection happens... it's a sign of life.

Failure is an opportunity to learn, correct and improve... let it teach you.

But betrayal is the most difficult to process, because it cuts to the core.  You just have to let it go.

We've all got stories of being hung out to dry.  Sometimes it's being undercut when another broker sweeps in at the eleventh hour and offers to list a home for a lower commission.  Sometimes it's when one of your clients wanders into a builder's office on a whim and is charmed into signing a contract for new construction without representation.  And sometimes it's showing someone houses for month after month after month, only to have them give up without ever taking the bat off their shoulder.

Real estate (and sales in general) is a world full of paper cuts.  Things happen that hurt.  But whether you let them take you down or use them to become stronger is totally up to you.

The bottom line is I live in a world where I take responsibility for everything that happens, because that's the only way you can grow and mature.

Failure, at any level, can make you bitter or make you better.  My coping mechanism involves processing bad outcomes quickly, grieving them fast, looking for the lesson, correcting where necessary, and then moving on... quickly... to other productive things I can be doing for others starting right now.

Whatever you give your mind over to grows and gets stronger.  Think failure, and failure becomes your dominant thought.  Think fear, and your fears take root.  But think solutions, and your brain will work to solve problems.

There is plenty of business in the world, if you can master the art of creating value and survive the bumps that are inevitable in any sales environment.  You don't need to let one person derail your momentum, or undermine your commitment to faithfully being the best version of yourself you can possibly be.  

Pick yourself up, dust yourself off, and get on with it.

PRICE AND PAYMENT

Markets are interesting, but even more interesting is the way different people respond to them.

Denver’s real estate market is so strong these days, with total median price appreciation averaging 17-20 percent just in the last two years, that buyers have one of two reactions.

Either…

I can’t believe how much prices have gone up.  My friends got better deals than me.  I’m not sure if I can afford to buy a home.  What if the market crashes? 

Or…

Our economy is strong and I have a great job.  Show me a house I like and I’ll buy it.  I’ll beat out anyone who thinks they want this more than me.  Rates are so low that I’ll happily take this payment for the next 15 or 30 years, regardless of what prices do. 

Guess whose offers are getting accepted?

This is a very difficult market to navigate as a buyer’s agent, especially a cautious one with a deep addiction to logic and a strong desire to see everyone do well.

Fact is, buyers did better two or three years ago.  But it's also a fact you can't go back in time, and today's decisions need to be based on today's market, which remains incredibly robust and healthy.

I want the numbers to make sense.  I’m sympathetic to the angst many buyers are feeling in today’s record-low inventory, high-demand market. But that same logical streak that whispers to be cautious also tells me that the fundamentals of this market are so strong that boldly going forward remains the wiser choice.

As I posted a few days ago, there are two numbers I plan to watch in 2015.  One is the inventory of homes for sale, the other is the unemployment rate in Denver.  Because these two numbers will tell you the overall health of our market.

If inventory is low and everyone is working, then pricing is built on a very firm foundation. 

Jobs, not affordability, drive housing markets.  If the unemployment rate remains below 5.0% (currently 3.6% in Denver and 4.1% statewide), this market will be driven by confidence and optimism.  If the inventory stays low, it means sellers are not seeing enough value in selling, which means prices aren’t high enough yet to change prevailing behaviors.

And with fewer than 6,000 homes on the market, an all-time low for the Denver MLS (which dates to 1985), we are incredibly thin on inventory.  In fact, to reach balance in our market, we would need to see somewhere between 13,000 and 14,000 homes for sale, which means we could double the current inventory and still have a seller's market.  

Is there a day down the road when we reach a tipping point, when confidence finally dries up and the market levels off?  Yes, of course.  The question is whether that day is six months out, 24 months out or 60 months out… and what is the opportunity cost of sitting on the sidelines waiting for conditions to change?

Fact is, there’s an opportunity cost to waiting.  It’s called rent.  Unless you are a cash buyer or living in your parents’ basement, you’ll either pay rent or pay a mortgage.  It’s your call to make.

I showed a home last night listed at $449,000 to a young couple expecting a first child.  They really like the home, it checks most of the boxes on their wish list.  But the comps for the neighborhood are mostly in the $410k - $435k range. 

“Do you think it’s worth $449,000?” I was asked. 

“If you base it on past sales, the answer is no,” I said.  “But this market isn’t about past sales.  It’s about present demand, and present demand says they’re going to get this number, whether it appraises or not.”

The home came on the market yesterday and mine was the seventh business card on the counter.  That’s a ton of showings for a $449,000 home in one day.  Four years ago, seven showings was a good month for a home at this price point.

While we agreed the home may be $10,000 to $15,000 overpriced, based on past sales, there was another factor that I felt my buyers were neglecting to adequately consider.  And that is interest rates, which have currently dropped back down to the 4% range.

With a $360,000 loan at 5% over 30 years, the principal and interest payment is $1,933 per month.  At 4% over 30 years, the monthly payment is $1,719.  That’s $214 per month of savings, which multiplied over 12 months comes to $2,568 per year in lower payments, simply because of prevailing interest rate conditions. 

Funnel that money back into your mortgage with added payments to principal, and you’ll pay off your 30 year loan in less than 15 years, and you’ll cut your interest costs in half.  So now, rather than talking about paying $10,000 more than past comps support… we should also be giving consideration to an interest rate environment that will allow for more than $100,000 in interest savings over the life of the loan, and owning this home in 12 to 15 years instead of 30.

Price and payment.  They’re both important, but too many buyers who fail to recognize the value of low rates are making decisions based solely on price.