WHY BUYER'S AGENTS ARE ON THE WAY OUT

We are living in an age of disruption.  I think about it every day, because recalibration, adjustment and course corrections are the fundamentals of survival. 

Huge changes are underway in the real estate world, but many of them are occurring below the surface, like a tide beneath the waves.  From the shore the water may look calm, but just below, the shifting currents are creating violent turbulence.

Technology is a primary disruptor, and it is touching every area of our lives.

We now live in an app-driven, on-demand world.  Millennials, in particular, have been raised in an era where technology equates to instant gratification.  Want a pizza?  Tap a button.  Need a ride?  Tap a button.

Want a house?  Soon, tap a button.

In the old days, like about 36 months ago, agents still had control over data.  If a property hit the MLS at 2:30 on a Thursday afternoon, the only ones who knew about it were the brokers.  We could make a mental note to call our client the next morning, suggest seeing it at 4:30 (or some other convenient time that fit our schedule), and still look like a great provider of service to the consumer.

Today, it doesn’t work like that.

Zillow’s $5.5 billion (current market cap) march into the real estate world has changed the game.  While Zillow’s data often remains inaccurate, inconsistent, and sometime downright wrong, the one thing you can say is that Zillow has applied crunching and disruptive pressure to traditional real estate models.

By adding data constantly, by increasing the value of their brand by relentlessly pursuing new ways to provide more information about housing, schools, crime data, assessments, zoning, rents, agents, and most recently “comparable homes”, Zillow has effectively forced the real estate world to change.

The response?  MLS systems have shifted by becoming more consumer-centric, more transparent, and less agent-focused. 

Zillow created alerts for site users, letting them know when new listings showed up on Zillow (even if those “alerts” were initially happening five, seven or ten days after a home was listed, based on Zillow’s spotty data feed).  As Zillow’s growing influence allowed it to strike (or buy) deals for real-time access for data with more MLS systems across the country, the value and accuracy of this service improved.

Eventually, MLS’s decided they needed to “go direct” to give consumers the same choices they were finding on Zillow.

That flipped the model, and put consumers (instead of agents) in charge of information.  And that’s okay… in fact that is progress.  But it is also disruption, and if your value proposition as an agent consisted solely of unique access to data, you value proposition has just been wiped from the face of the earth.  (And sadly, for a large number of agents, there is no value proposition beyond data!)

As I have written about before, the real estate pond is overstocked with agents.  We live in an 80/20 world where 20 percent of the agents dominate (those with real value propositions, not just access to data) and 80 percent fight for table scraps. 

If you aren’t in the top 20% (soon to be the top 10%), you will not survive the coming years.  

What can a buyer’s agent do to create value?  Ultimately, I think the buyer’s agent is going to go the way of the Dodo bird.  But to stave off extinction, there are some key survival traits that will allow some to outlast others.

For one, you need to be an educator, not just a door-opener.  You need to understand economics, not just aesthetics.  You need to be a negotiator, not just a contract writer. 

You need a strong network of professional service providers who will take great care of your clients at reasonable prices.  You need resources like insurance agents and mortgage lenders and accountants who can provide fast, accurate and money-saving information to your clients.

You need to be a marketer, not just a licensee.  You need to be an adapter, not a reactor.  You need to stick to your past clients like glue, providing value in unique and creative ways and always letting them know how much they are appreciated and how committed you remain to serving them, even after the sale. 

But even if you do all this, the current is still going against you. 

There’s a saying among experienced real estate agents:  Listers Last

Listers last because they are in control.  Listings are the equity of your real estate business.  And soon, I believe we are moving into a world where listers will increasingly control both sides of a real estate deal.

Within five years, I believe that many listings will be sold (or at least placed under contract) through an iPhone app.  A new listing appears, a pre-approved buyer sees it, and taps a button that says “submit contract now”. 

The listing agent offers a 1% commission rebate to the seller and a 1% commission rebate to the buyer (thereby cutting out negotiations), functions as a transaction broker for a 4% commission, and the buyer’s agents are left wondering what just happened.

Is this happening today?  Not yet.  Well, it is actually, sort of. 

The preponderance of “Coming Soon” signs (which I have written about previously) are the precursor of this type of system.  A significant number of deals are happening in Denver right now without ever seeing the MLS, and agents (ethically or not) are double-ending deals off the strength of the market and a little 1 x 3 sign rider hanging in the front yard.

Do buyers get the same level of representation working with the seller’s agent that they would get from their own dedicated buyer’s agent?  Absolutely not. 

In fact, I think there are huge ethical conflicts about trying to double-end deals that affect both buyers and sellers and I won’t do it unless I am specifically instructed by my seller to do so.

But my opinion is in the minority.

As more and more real estate data migrates online in the coming years, the perceived value of a buyer’s agent is going to erode.  Consumers, especially Millennials, will no longer value the buyer’s agent, even though they “don’t know what they don’t know” about the value of experience, negotiations and the overall complexity of a real estate transaction. 

Marginal agents will not survive, and even the good ones will have a very hard time competing with the currents of technology and consumer-empowerment.

Adapt or die.  That’s the way the world works, and it’s time for real estate agents to get a lot more strategic about what they are doing and why they are doing it. 

Otherwise, the fate of the Dodo bird awaits.

RACING THE CLOCK

Here's a snapshot of a conversation I am having about three times a week, courtesy of the red hot Denver housing market:

Client:  "Is this house really worth (pick your favorite number) $350,000?"

Me:  "I don't know, but someone is going to pay it." 

This is obviously a less comfortable position than in previous years, when the value of homes was easily measured by past comps instead of present demand. 

But right now, present demand is determining value, and with demand overwhelming supply, prices are going to continue going up.  Many buyers are even factoring in projected future appreciation when determining what to offer for a home.

When will it end?  The question of when it will end is a good one, and an important one.  Obviously, interest rates are a huge motivating factor right now, as rates in the low 4's remain highly attractive to buyers scrambling to lock in a 30-year mortgage payment before higher rates make homes less affordable.

So when and how will our market turn?  Of course, there's no way to know for sure, but I believe any slowdown will start with new construction, which is far more likely to freeze up when rates rise due to the chilling effect of payment shock.

Right now, virtually all new single family construction in the metro area starts at $350,000 and goes up.  Truth is, there are only a handful of new communities where buyers can purchase anything in the $300s. 

Let me show you why I think higher end new construction will be the first domino to fall when rates finally surge.  It's simple math, really.

-  $400,000 purchase with 20% down payment = $320,000 loan; At 4.25%, the P& I payment on a 30 year loan is $1,575.

Assuming 10% appreciation (which is not unrealistic for 2015), let's project forward 12 months.

-  $440,000 purchase price with 20% downpayment = $352,000 loan; At 5%, the P& I payment on a 30 year loan is $1,890.

That means 12 months from now, under this very realistic scenario, the payment for the same home is nearly 21% higher than it is today.

New construction is selling like crazy right now, and this is why. 

But a year or two from now, if payments really are 21% (or more) higher for the same home, it's going to have a chilling effect.  In fact, you could easily argue that builders are racing the clock to build and sell as many homes as possible based on low payments.  When payments go up as interest rates rise, and they will at some point, demand for new construction will slow appreciably. 

The most bulletproof sector of the market, in my opinion, remains the sub-$400k market.  That's because supply is finite, builders won't build them (because they can't do so profitably), and it's what the vast majority of buyers are looking for.  

When rates rise, I see continuing activity, but with buyers getting squeezed into smaller and smaller resale homes and condos as they literally are priced out of the new construction market. 

Risk in real estate is directly proportional to market positioning.  The entry-level and sub-$400k markets are darn near bulletproof in my opinion, based on an overwhelming demand-supply imbalance.  But when you start tapping into new construction, where supply is not fixed, rates will matter more. 

For builders, the race is on.  Sell 'em now, while rates are low.  Because when rates rise and the market slows, the first place to clear out will be the sales office of your favorite local new construction builder.

WE NEED YOUR HOUSE

I have seen variations of a real estate marketing campaign on social media channels several times lately.  It’s a picture of Uncle Sam, finger extended, somehow implying that the patriotic thing to do in a low inventory market is to sell your house.

Excuse me?

I have also seen several recent emails and Facebook posts from agents right here in Denver with headlines like “We Need Inventory” and “Realtors Need Houses to Sell”.

Say what?

A great cleansing is coming soon in the real estate world, and it will start with agents who don’t understand that none of this is about them.  Real estate is about the consumer… the first-time buyer, the downsizing retiree, the family selling an estate home after a loved one has passed.

Looking at this business from the Realtor’s perspective is like looking backwards through a pair of binoculars.  It distorts reality, and even worse, it makes the big things (your clients and their needs) seem small when they should be at the center of everything.

In the old days, like three years ago, much of the value Realtors brought to the process was simply through access to data.  Access to the MLS, access to past sales history, access to neighborhood comps. 

In the post-Zillow world, that advantage is gone.

If your value proposition consists of knowing what Mrs. Smith’s home sold for down the street, you’re done.  Today, everyone knows what Mrs. Smith’s home sold for.  What you had better  know, if you want to remain relevant, is what the finishes were like inside the home.  Why she chose to sell it.  How many offers she had.  Whether or not permits were pulled for the basement finish.  If there were structural issues. 

If you are going to bring value to this process, knowing the basics isn’t enough. 

I’ll say it again.  If MLS data is your value proposition, you are done.

Now, you need to know how to market (starting with yourself).  You had better be able to demonstrate how you are a skilled negotiator.  You need to know how to create value.  You must have a strong network of vendors who can help you solve problems.  You must connect people to others who can help them.

Clients expect you to sell their home for top dollar, or find value on the buy side.  You need to be able to demonstrate proven results.  You have to be able to show (not just tell) somehow what sets you apart.

15,000 agents in Denver have signs in the back of their cars.  Yet 1,500 do 90% of the business.  

Third party endorsements are huge.  Reviews matter.  A lot.  When someone Googles your name, you need to make sure they find you.  First. 

You need to save your clients time.  Millennials, in particular, value time.  They have grown up as digital natives in an “on-demand” world.  They embrace disruption.  They like efficiency.  They want results.  They don’t care about how things used to be done.

Adapt or die.  Especially today.  Especially in Denver, the hottest real estate market in the country.  Millennials are now the largest demographic group in Denver.  Many work in tech-based fields.  They make their living disrupting. 

How are you going to create value for them?  What makes you relevant?

If telling them that “Realtors need houses to sell” is your pitch, you might want to start by putting a sign in front of your own house.  Because that type of thinking will soon have you moving on to another line of work, much sooner than you may have planned. 

INVASION OF THE NEWBIES

It’s hard to tell what is going up faster… home prices in Denver, or the agent count in the Denver MLS.

As of this morning, there are 15,682 agents in the Denver MLS, up over 8% in the past year and more than 20% since the beginning of 2012.  In a strong market, newbies are attracted to real estate like moths to a flame.

I see this every day, as offers come pouring in on my listings.  One of the first things I do when evaluating any offer is that I figure who the players are inside the transaction. 

Who is the buyer’s agent, how long have they been selling, how many homes have they sold in the past five years?  Who is the lender, are they locally or Internet-based, is there any disciplinary history with them or their company that I should be aware of?  And, of course, who is the buyer?  How many offers have they written?  Why is this home or neighborhood important to them?  And how did they get connected with the agent and lender?

Increasingly, as the market has been overrun with buyers, I am seeing more and more buyer agents with 3 lifetime transactions, or 11 lifetime transactions, or quite often, zero lifetime transactions.

With sellers, my job is twofold.  Get the best price and terms possible, and mitigate risk. 

You can look at the other agent as the co-pilot in your transaction.  If that agent has landed 100 flights safely, I feel pretty good.  If they have skidded to a stop at the end of the runway twice (in who knows how many attempts?), then that is a factor worthy of consideration.

Yes, I am biased toward accomplished agents, because I know how difficult it is to hold transactions together in an emotionally-charged market.

One reason buyers under $300k are having such a difficult time is that “it’s hard to compete with crazy.”  Some of the offers I have seen on my listings are just ridiculous…

-  A $235,000 offer (FHA, asking for closing costs, with down payment assistance) for a home on which they second highest offer was $215,000.  Did you know you can find comps in the MLS?

-  An “uncapped” escalator clause that promised to beat any offer ($1 million? $20 million?) by $1,000 and “pay $10,000 if the property doesn’t appraise”.  Pay $10,000 to whom?  To me?  To the sellers?  To charity?  Sounds like a pretty good deal for somebody.

-  And, of course, amateur hour contracts that arrive with missing deadlines, no signatures and a promissory note for the earnest money. (“My buyer has NO money!”)

As a listing agent, I have the discipline to say “no” to crazy.  But many less experienced agents do not.

I’ve said it several times, and I’ll say it again here… often, the highest offer is not the best offer, unless it speaks directly to the appraisal and it’s got an acceptable buyer/agent/lender team.  (Although that “crazy offer” can often be used to jack up escalator clauses on better qualified buyers… thank you very much)

In multiple offer situations, I look at every offer, and then break them down into contenders and pretenders.  In a market where so many buyers are being nudged or pushed into taking homes “as is” or waiving appraisal clauses, you know that many of these buyers are going to get wobbly with the slightest bit of turbulence.  You have to account for this up front, and one way to mitigate the risk is to make sure you have a competent co-pilot working the other side of the deal.

To date, there have been 13,651 closings this year in the Denver MLS.  That equates to 27,302 transaction sides.  Spread among 15,682 agents, that equates to 1.74 sides per agent so far this year. 

But of course, we all know that the world doesn’t work that way.  If we simply apply the Pareto Principle, which says 20% of the people get 80% of the results, what we really have are 12,546 agents fighting over 5,460 transaction sides (0.43 sides per agent).  Feel your collar tightening at all?  That’s not how it looked on HGTV, is it?  Hard to pay the bills on half a sale every four months.

When it’s all said and done, there is going to be a lot of roadkill in the agent world over the next few years.  A lot of buyers will go down, too, working with agents who simply don’t have the skillset or experience to succeed in such a competitive market. 

I often say that most things in life come down to odds and percentages.  While no one can guarantee any one result, the fact is there are levels of probability.  Some agents give you a 90% chance at success, some give you a 70% chance, and some give you a 10% chance. 

In baseball, these are called batting averages.  A .350 hitter is much more coveted than a .180 hitter.  Yet, remarkably, way too many people think that everyone who owns a bat, or a real estate license, is a slugger.  Check the numbers.

Information is available to help consumers make better decisions.  Go to ZillowReviews.com.  Google someone’s name.  Ask a friend for a referral.  Whether buying or selling, it’s up to you to get the right people on your team.

In real estate, the barrier to entry is low.  But the barrier to success is high, and it requires a price most people won't pay.  Choose wisely, or live with the consequences of hiring a batboy to do a cleanup hitter's job.

WHEN THE MUSIC STOPS

I’ll be the first to admit I’ve had challenges adjusting to the current housing boom in Denver.  Call me crazy, but I lived through 2006 – 2010 and I saw what it looked like.  31,000 homes for sale in the Denver MLS.  Seventy percent of the inventory bank-owned or short sales.  Retail sellers with no prayer of being able to sell in the face of gutted, discounted competition. 

You should have seen it!

What, you were there?  You saw it?  Really?

That’s hard to believe, because the people overrunning the Denver market these days bear no resemblance to the people I was spending all my time with from 2006 to 2010, the ones who swore that buying a home was like standing over a trap door.  The ones who would never offer “full price” for anything.  The ones who said that smart people rented.

So how do you reconcile that with today? 

Already this year, I have listed homes that received 32 offers, 19 offers, 14 offers, 12 offers and 8 offers.  Those homes had top offers $33k, $24k, $21k, $12k and $11k over list price.  (Not that we accepted every “top” offer… if you don’t address the appraisal clause in an offer like that, you’re not being serious)

This is the most emotional housing market I have ever seen in 21 years as a broker.  Buyers (and their agents) are literally making crazy offers to try and get homes under contract.  Often, I have to wonder if the agents want the deals more than their clients.

Working with buyers in this market has become darn near impossible, at least under $300k.  That’s because crazy now makes the market.  All too often, well-qualified, well-counseled, legitimate buyers get completely blown out by crazy agents with crazy buyers who write offers that make no sense at all. 

But too many sellers and their agents are enticed by the siren song of a crazy offer, significantly over list price with no chance to appraise.  I’ll say it again – if the buyer’s offer doesn’t speak to the appraisal clause (i.e. waiving the appraisal clause altogether, or willing to go $5k over appraised value, or whatever the buyer feels is appropriate), then you are asking for trouble.

I am spending a lot of time right of now trying to project 12 months into the future.  This kind of emotion can’t last forever.  Right now we’re number one in the country for home price appreciation.  Next year, we won’t be.  Even if we were number four or number five among all fifty states, the headlines in the Denver Post will ominously read “Denver Market Losing Steam”, or “Denver Housing Cooldown Continues.”  It’s predictable.

There will come a tipping point, probably something that none of us can see.  It could be an international event.  It could be a shake up on Wall Street.  Or maybe it will just be a surge in interest rates. 

With all of the new construction in the metro area six to 12 months from completion, what would happen if rates went to 5.5% this fall?  How many buyers under contract right now (with rates in the 3s) would fail to qualify at 5.5%?  If that happened, what would happen to the new construction market?  How many buyers would walk away?  How much unsold inventory would there suddenly be?  Who would make payments at 5.5% when the guy across the street closed on the same home 12 months earlier at 3.5%?

Do I anticipate this will happen?  No, I don’t. 

But could it?  Yes, it could.

I am disturbed at how “drunk on housing” everybody seems to be right now.  I realize that rents are skyrocketing and rising home equity is creating a massive wealth effect.  But everything has a season. 

How long will this season last?  As I wrote earlier a few months ago, the two numbers I will be watching in 2015 are the number of active homes on the market and the area unemployment rate. 

Right now, unemployment in Denver is 3.5%, statewide it’s 4.1%.  We are at the top of every national list for jobs, growth, consumer confidence and projected future appreciation.  If the employment market remains strong, then housing should continue to march in lockstep.

Today, buyers have real jobs, real credit scores and real down payments.  That wasn’t always the case in 2006, and that means our buyer pool is significantly stronger today than it was then.  Even if some of their offers are crazy, at least buyers are employed.

The inventory of homes - currently about 5,300 - is down 15% from a year ago.  The ten year average for homes on the market during the spring is around 16,000, so inventory remains incredibly tight.  

But I still have to listen to that still, small voice that says nothing lasts forever.  When everybody is heading east, you have to at least give some thought to heading west.  Or at least take a few steps in that direction.

Twelve months from now, we’ll all know exactly what we were supposed to be doing in the spring of 2015.  Buying.  I mean selling.  I mean moving to Fort Collins.  I mean moving to Charlotte. 

It’s not easy to make decisions in the moment, just as it wasn’t easy to leave California in 2005 after a ten year run on housing and move to Denver.  People said I was crazy.  I wasn’t. 

I’m not leaving Denver.  I love it here.  And I think our market is still legit.  But it’s less legit that it was a year ago, and certainly a lot less legit than it was three years ago, when people unknowingly walked into small fortunes just by signing on the dotted line. 

The numbers made incredible sense, then.  They make less sense today.  Although you would never know it if you walked into any builder’s office at 2 p.m. on a Saturday afternoon.

COLLATERAL UNDERWRITER

It’s no secret that appraisals have been a challenge in Denver’s scalding hot real estate market.  Last month, the heat got kicked up even higher with the official launch of Fannie Mae’s Collateral Underwriter system, a new database which contains property data from over 12 million appraisals which have been completed since 2011.

The purpose of Collateral Underwriter, according to Fannie Mae, is to stop appraisal fraud by creating a database with information on what may eventually be every residential home in the country. 

Under the new system, all properties are rated on a scale of 1 to 5 in different categories.  Additionally, data is gathered regarding value adjustments appraisers make for lot size, bed and bath count, age, location, condition, views and gross living area.

Now, if an appraiser uses 123 Main Street as a comparable, Fannie Mae can see what other appraisers have said about the same property in different appraisals.  If one appraiser makes a sizable price adjustment for an extraordinary view and another appraiser gives the view no value… appraiser number one can expect to be contacted by Fannie Mae asking them to comment on why they gave so much value to the view when another appraiser ignored it.

Can you see where this is headed?

I’m not saying Collateral Underwriter is good or bad.  I am saying that it has the effect of forcing appraisers to be conservative with their adjustments, or they run the risk of having future appraisals flagged for further evaluation before Fannie Mae will accept them.

The truth is, not only does Collateral Underwriter evaluate real estate, it also evaluates appraisers.  And appraisers who want to work with Fannie Mae-approved lenders (i.e. virtually everybody who originates loans) are going to be influenced by this new program.  Get flagged often enough for questionable valuations or adjustments, and the appraiser could lose his or her Fannie Mae certification altogether. 

One appraiser I spoke with recently told me he is already rejecting over 50% of the appraisal assignments he receives, in large part because he doesn't want to touch deals that might cause friction with the Collateral Underwriter system.  He's looking for safe, clean, easy appraisals.

Which means that many of the tougher appraisals (which usually means unique homes with non-conforming features or homes under contract at prices above recent neighborhood sales) are going to start falling into the hands of the least competent appraisers, or those most desperate for business, and there is going to be more turbulence around them as Fannie Mae kicks appraisals back for additional comment and review.

What it probably means is this… it’s going to make appraisals take longer and be more expensive.  It is going to slow the loan process and delay loan approvals.  And it is going to result in more conservative valuations, which really is the reason Fannie Mae launched the program. 

If you are writing an offer that’s out of sync with neighborhood values, or if you are listing a home that falls outside the parameter of recent sales, you can bank on more scrutiny – and a bias toward lower valuations – with those appraisals. 

Collateral Underwriter is intended to serve as a damp towel on top of rising real estate values.  It is designed to hold the market in check and stop bubbles from forming.  It will make appraisers more conservative and occasionally kill legitimate deals. 

If you are a listing agent, engaging with the appraiser upfront and providing everything you’ve got in terms of comps, improvements and market demand is now more important than ever. 

And if you’re listing a home and your agent isn’t talking to you about Collateral Underwriter, then chances are you have someone who doesn’t know what’s going on… and how is that likely to turn out?

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.