CORONAVIRUS UPDATE LETTER #2 - APRIL 18, 2020

Dear Friends,

Three weeks ago, I sent out some initial thoughts about the Coronavirus and how it was impacting our housing market here in Denver.

Since then, there have been many new developments and we remain in a very fluid situation.  In fact, as I write this on Saturday morning, the Governor’s first “stay at home” order is set to expire in eight days.  My personal opinion is that the order is more likely to be modified than lifted, but I do think we will start taking steps to re-start the Colorado economy soon. 

On the front lines, we’ve had nurses, doctors and first responders acting heroically.  But we’ve also seen a different kind of heroism from shelf stockers, truck drivers and cashiers.  It takes courage to get up and face the public every day when we’re being told the world is full of carriers, both symptomatic and asymptomatic, and that we’re one sneeze or cough away from catching a virus with no effective treatment and no known cure.  Over the past few weeks, I have never said “thank you for your service” to strangers with such frequency and sincerity. 

In the housing world, it’s also been a strange and different season… to say the least. 

On March 26, the Governor’s first mandatory “stay at home” order appeared to exempt real estate as a critical business.  But the vagaries of the hastily-constructed order, which declared “real estate transactions” as a critical function of the state’s economy, created more questions than it answered.  

When does a “real estate transaction” begin?  When a buyer is under contract on a home?  When a seller lists his or her home for sale?  When a buyer signs an exclusive agency agreement with an agent?  Many agents chose to go about their business as if nothing had changed, which led to a flurry of complaints to the Attorney General and the Real Estate Commission from sheltering-in-place Coloradans who would look across the street at their neighbor’s listed home and watch countless strangers and agents rolling through seemingly oblivious to the reality of a public health crisis.   

Complaint.  Complaint.  Complaint.  Response. 

A few days later, the Governor and the Attorney General clarified the “critical business” exemption in the executive order by specifically limiting real estate services to homes already under contract.  For existing listings, there were to be no more public showings nor any more open houses until the order is lifted.   

But even then, many agents continued meeting clients, listing houses and taking showings, despite the fact that willfully violating the Governor’s order is a criminal offense.  As complaints from the public continued to roll in, on April 8 the Attorney General dropped the hammer on the real estate industry and declared that the ONLY permitted activity related to real estate would be real estate closings.  No in-person showings, no open houses, no inspections, no appraisals, no nothing except for the actual act of closing a real estate transaction.

With that, the Colorado Association of Realtors (CAR) and affiliated trade groups blew a gasket, as contractually… a buyer who is under contract has a legal RIGHT to do a home inspection… the lender will REQUIRE a home appraisal before funding a loan… and section 19.4 of the purchase contract guarantees the buyer the RIGHT to do a final walkthrough prior to closing.  In effect, the new order blew up contract law and eliminated due diligence and due process, leaving thousands of Colorado home buyers stuck in their contracts unable to move forward while putting their earnest money deposits at risk of forfeiture.  It was a completely unworkable legal position. 

Under intense lobbying pressure from CAR, mortgage lenders and title insurers, 24 hours later the Attorney General’s office reversed course again and re-authorized inspections, appraisals and walk-throughs for homes under contract, but only with strict social-distancing protocols in place.  Today, some agents continue trying to list homes, relying on virtual tours, Zoom calls or Facetime showings to get around the ban on in-person showings and public open houses.  Others are encouraging buyers to write purchase offers on active listings sight-unseen, with minimal earnest money and a contingency which allows the buyer 48 – 72 hours after acceptance to physically view (“inspect”) the home as a back-door way around the Governor’s order.  It’s all gimmicky and violates the intent of the order, which is to protect public health. 

Why would you list a home under these circumstances?  Well, sometimes there are compelling reasons and you just can’t wait, but as I said to a prospective seller on a call this week, listing your home in this environment is like setting up a lemonade stand on a street corner at 3 o’clock in the morning and hoping a thirsty stranger comes by.  It would make far more sense to wait until the stay-at-home order is lifted and the surge of buyers return.  Right now trying to sell a home in this environment is like grasping at straws.   

So, where does all of this craziness leave us? 

The chart below compares showing activity in 2020 to last year.  As you can see, showings began to nosedive in mid-March, then cratered after the “stay at home” order was issued by Governor Polis:

   

The consequences of this are obvious and severe.  With showing activity down almost 90% from the start of the year, there will be very few closings in May and that drought could extend into June.  No closings not only means no income for real estate agents and brokerages, but also no revenue for title companies and no purchase loans for mortgage lenders (who have been saved by the deluge of refinance activity, but are nonetheless impacted by the sales crash).  Several title companies have already initiated layoffs and furloughs and most real estate brokerages are cutting staff.  Redfin has let go of 41% of its agents nationwide and Zillow, Open Door and other “iBuyers” have all closed up shop on those operations.  Appraisers, inspectors, contractors and the even home improvement chains will also suffer mightily as the number of real estate transactions continues to spiral down. 

We’re all dealing with challenges – that’s the most obvious thing I will say today.  And I have great empathy for everyone whose business or job has changed or been eliminated in the past 30 days. 

But for a few moments, I want to focus on the future.  Because there is an “other side” to this, whether that’s 30 days from now or 14 months from now.  And there are a lot of things to be thinking about as it relates to the housing market.

WHEN WE RESTART THE MARKET

One way to look at the housing market right now is as if it’s been placed into a medically-induced coma.  As I’ve said during several client calls recently, there’s going to be an insane amount of activity straight out of the gate when restrictions are lifted and the real estate market snaps back to life.  There are still buyers in this market, plenty of them.  In fact, you could argue that this temporary halt is like constructing a dam in front of a fast-moving river.  When the dam is opened, there is going to be an immediate flood of activity. 

But once that initial surge is over, sellers are going to find a very different landscape.  As of right now, there are still more than 8,700 active listings on the Denver MLS, which is up nearly 30% from a year ago.  It’s not that there were tons of listings when all this craziness started… in fact, the spring market had been very strong and inventory was extremely low.  The main reason inventory is up 30% is that virtually nothing can go under contract during this temporary time-out.  Most active listings are just sitting. 

So while all of this buyer demand is walling up behind a temporary dam, so is listing inventory. 

In addition to the 8,700 active listings on the market, another 1,200 homes were withdrawn (temporarily placed on hold) from the market in the past 30 days while an additional 1,100 listing contracts were terminated altogether.  So if you add the 8,700 active listings and the 1,200 withdrawn listings, plus account for the hundreds and hundreds of properties that would have been listed in March and April that never got to market… within a few days of the restart we will probably have the highest inventory levels for homes we have seen in a decade, at the same time thousands of buyers come pouring back into the market. 

Add it all up, and it’s going to be… bonkers.

But once you’re past that initial surge and the most motivated buyers have come through, the narrative is going to change rather quickly.  With unemployment likely to be near 15% at the start of summer, in the macro the buyer pool is going to be thinner.  But for reasons I’ll get to in a moment, I think the listing inventory is likely to just keep climbing as we get closer to Labor Day and election season. 

As we already know, the travel and leisure sectors of our economy are taking a direct hit from Covid-19.  Traffic at DIA is down more than 90% while major hotels like the Gaylord have completely shuttered operations.  This is also going to have profoundly negative impacts on our mountain communities, which rely heavily on tourism, and the Air B’nb market in Denver, which was flourishing prior to the outbreak of the virus.

In fact, earlier this morning I ran searches on Air B’nb for homes in Denver offered for rent during the July 4 holiday week.  Searching in tight pricing increments so I could precisely count the number of listings, I tallied up 1,340 available properties (just in Denver) during what should be one of the busiest weeks of the summer travel season. 

Unlike the airline and hotel industries, which received massive government bailouts, no such help is coming for the Air B’nb industry, which is comprised largely of sole proprietors and “mom and pop” operations.

Most of the Air B’nb owners I know have mortgages and are highly dependent on rental income to stay in business.  Right now, that income is pretty much zero.  And even when travel starts to happen again and we slowly regain traction, it may be a year or more before occupancy rates get back to where they were before our world was turned upside down in March.   

So what does that mean?  Most likely, it means you will see a much higher than normal percentage of these units hit the market over the next few months, along with rental properties that have suddenly become a lot less appealing as the dynamics of our market change and the depth of the financial hit becomes apparent.  The Denver Apartment Association reported that 31% of renters had not made full rent payments on April 1, although the Denver Post reported this morning that as of this week (after arrival of the first stimulus checks) the number of renters not making April payments had dropped to 9%.  Come May 1, I would expect delinquencies to surge again as savings are depleted and the unemployment situation becomes more dire. 

WHAT COMES NEXT

In the short term, we’re going into a season that is going to be very painful for a lot of people.  But it will only be for a season.  By this fall we may see short sales and foreclosures if people can’t keep up with their mortgages and can’t find gainful employment over the summer.  But for those who are employed, interest rates are likely to stay in the 3% range for the foreseeable future and I am anticipating more inventory for sale this summer/fall than we have seen since the Great Recession.  That means choices, value and lower payments.  Whether you are a first-time buyer or someone looking to invest in real estate, the numbers later this year will likely be more attractive than they have been in a long time. 

But because state health officials anticipate this virus will run its course and be neutralized in 12 – 18 months (or sooner with a vaccine or effective treatment), there is plenty to suggest there will be a strong recovery on the other side of this.  At the onset of the pandemic, unemployment in Colorado was a record low of 2.5%.  Nationally, unemployment was just 3.5%.  One way to look at this is that at the onset of the pandemic, Colorado’s economy was exceptionally healthy.  And our healthy economy has a much better chance of fighting off the economic impact of the virus than a sputtering economy.  States that had higher unemployment rates to start the year like New Jersey (4.8%), Louisiana (5.1%) and Wyoming (5.8%) will have a much harder time regaining footing when this is all over. 

So if you can hold on… you should try to hold on.  But if you own something you simply can’t afford and don’t have the reserves to handle several bad months of cashflow… then you might need to weigh your options.   

(Side note:  You may also be able to defer or forbear mortgage payments for a few months if you are having trouble keeping up – you should reach out to your servicer ASAP if you are in this situation.  Please note there is a BIG difference between forbearance and deferment.  In forbearance, your payments are rolled 3 – 4 months into the future, when they are all due at once – like a balloon payment.  This option will not work for most people.  What is far preferable is deferment, where payments due over the next few months are skipped and then tacked on to the back end of your mortgage 15 – 30 years down the road.  Deferment can get you through this, forbearance is just kicking the can down the road.  Please seek proper legal advisement if you are offered either of these alternatives as this letter is not to be construed as legal advice.)

If you are in a situation where you need to sell, I would recommend you do it sooner rather than later, both to capitalize on the large surge of buyers we will likely see straight out of the gate (May/June) but also to get out of your negative cash flow as soon as you can.  In the fall, I expect market times to lag and buyers to have more leverage.  For many, selling this fall will not be an enjoyable experience. 

None of this is pleasant and, like you, I wish we could just go back to February or December or October or any other month before our lives were turned upside down by this insidious virus. 

In writing this letter, I am not attempting to capitalize on or make light of anyone’s misfortune.  My heart breaks for everyone whose world has been rocked by this terrible circumstance.  Like many of you, I know people who have contracted the virus and I know people who have died from it.  I know healthcare workers who are serving valiantly and families that are grieving.  I know countless friends and clients who have lost jobs or taken terrible hits in the stock market.  We’re all adjusting to a new set of realities, and we need to do our best to support one another during this unprecedented season.   

If I can be a resource for you – and I’m not merely talking real estate – please do not hesitate to reach out.  This is a moment where all of us have the ability to impact others through our actions.  It’s a moment to rise up and be the best version of ourselves. 

One last note, which hopefully will provide a small dose of joy in a difficult season.  Four weeks ago today, our family decided we would take the plunge and get a “Quarantine Puppy”.  We purchased her from a breeder in Pueblo and named her after one of favorite Colorado mountain towns.  

This is “Miss Frisco”, a chocolate lab who is 12 weeks old today.  She has been a welcome diversion and a burst of energy (and a lot of work)… but we’ve found our hearts have grown almost as much as she has over the past 28 days.  While she is struggling with social distancing (puppies love all humans) and has yet to master the art of going on a walk (which we often refer to as “going for a drag”), she’s also making great progress and is already an indispensable member of our family.  Not sure how soon before she’ll be riding shotgun on showing appointments, but I could see it happening as soon as Victoria and Elizabeth go back to college.  As of now, the plan is for Frisco to begin studying for her real estate license in the fall ; ) 

      

Thank you for taking the time to read this lengthy update.  I hope you find value in it and that you and your families are safe and well.

I look forward to sharing another update with you soon!

Dale Becker, CRS

RE/MAX Alliance

(303) 416-0087

CORONAVIRUS UPDATE LETTER #1 - MARCH 28, 2020

Dear Friends,

I hope this note finds you well.

What a month… seriously, what a month.  In my 26 years as a real estate broker (and 53 years as a human), there simply is no “comp” for what we are living through right now.

I have been wanting to get an update out as I know many of you are on pins and needles about where things are headed.  What’s unique about this particular moment is that we aren’t dealing with one serious challenge… we’re dealing with two direct hits at the same time – one to our collective health and one to our entire economy. 

Over the past several weeks, the government has had a choice – save lives or save the economy.  For a long time, we tried to walk some imaginary tightrope between the two.  That wasn’t going to work.  Although I am not necessarily a huge fan of Governor Polis politically, I do think he has acted forcefully and decisively in putting lives first.  Colorado’s response to the Coronavirus has made me proud, because we’re doing it better than many states around the country.  But we are still going to feel pain, and I believe the hardest days are still in front of us.

I have said we have been processing a week’s worth of news every day during this crisis.  And that’s true.  Whatever bold conclusions you might come to on Tuesday are often rendered irrelevant by Friday, simply based on the firehose of information coming at us.  And there’s lots more to come.

But because many of you have reached out me, and because I care about helping you get through this difficult season, I wanted to share some of my observations with you so you can think more strategically about the housing market (and your own finances) going forward.

HOMEOWNERS

If you are facing financial hardship, make your payments if you can.  But realize a number of mortgage payment deferment programs may be coming soon.  No one is going to get out of their financial obligations, but they may be restructured (such as skipping payments and then having those payments tacked on to the back end of your mortgage).  Communicate with your lender or servicer early if you are having difficulty.  They are being compensated to route you toward solutions.  Here is a good resource for updates on mortgage servicing and government programs related to the Coronavirus pandemic:  https://www.nar.realtor/political-advocacy/coronavirus-aid-relief-and-economic-security-act 

THOSE LOOKING TO BUY

There is so much uncertainty in our current economic landscape that it’s very hard for me to endorse buying right now, unless you simply have to.  Will this last three months, or 13 months?  I have clients right now who live in Broomfield who are very eager to move to Littleton because of a new job.  But my question is, does it make sense to sell your affordable home in Broomfield (when the buyer pool has shrunk by 50% or more), buy a larger home in Littleton (with a larger payment and mortgage) and then end up stuck there if your job goes away?  I’d rather drive for a while than hope things just magically work out.  We need more information to make informed decisions.  Right now it’s all a guess.  Defense, not offense, is my general recommendation until we know how long this will last.   

THOSE LOOKING TO SELL

If you can wait, wait.  Again, the buyer pool has shrunk by 50% and we are already dealing with enough stress related to the economy and our health.  To add another highly stressful ingredient to your life – having strangers coming through your home in the age of Coronavirus – with only lowball offers and extremely shaky contracts to show for it… that’s hard to justify as being good for your mental health.  The one thing about this current situation is I have to believe it’s only for a season.  There is an end to this, sooner or later.  In Wuhan, it took four months for the surge in virus cases to subside and now that economy is getting back to “normal” (for now).  We’ll have to see if another wave of cases is coming later this year, but for now, that economy is surging back into overdrive and we’ll likely see dramatic improvement here once the first wave of cases has rolled through and we’ve adapted.  Even if you are carrying a vacant home for a few months at $1,500 - $2,000 per month, that’s better than panic-selling into a $25,000 discount. 

THOSE LOOKING TO REFINANCE

I’ve also had several people ask me about refinancing.  This is a huge subject, because the mortgage markets have gone through unprecedented turmoil during the month of March.  Rates have been all over the place, guidelines are changing by the hour, programs are disappearing overnight and some lenders are refusing to honor rate locks made during the first days of the crisis, when 30 year loans temporarily dove south of 3% as the 10-year T-bill fell to a floor-shattering low of 0.29% (it had been well over 1.00% at the start of the month).  For context, there is a combined total of about $11 trillion in mortgages in the United States today.  The system is built to handle about $1 trillion of new capacity each year.  During the one wild week at the start of the month when the stock market first cratered and interest rates plunged through the floor, the system took on over $4 trillion in new mortgage commitments.  Lenders were experiencing such overwhelming demand that they quickly responded by raising the “spread” between the 10-year T-Bill and 30-year mortgage rates from the normal 2-2.25% to nearly 4% to simply shut off the volume.  That’s why rates when from 2.875% on a 30-year loan to north of 4.00% in about 48 hours, even though the stock market continued its nosedive.  Credit markets froze up, unable to handle the financial commitments they had made… at which point the Fed stepped in and announced it would begin buying mortgages (printing money) to cover the huge chasm between commitments and available resources.  It’s all unprecedented.  With all of that as background, here’s what I think.  When things calm down (two to six months out), we will come out of this bruised and battered economically (at least for a while), which means rates should eventually level off at a very low level.  That’s probably the best time to refinance, assuming you still have a job.  You may have missed “a window”, but you haven’t missed “the window” to refinance in 2020, in my opinion.   

LANDLORDS

For landlords… I would encourage you to keep in mind that your tenants are going to remember how you treat them over the next few months for a long, long time.  I have been in contact with many landlords over the past few weeks regarding this very fluid situation.  Early on, I suggested all landlords reach out to their tenants to see how they are doing.  But I also suggested they hold off on offering payment plans or reduced rent until we knew what was going to be in the stimulus bill.  With $1,200 cash payments to most people making under $100k per year and (up to $3,000 for a household of four with two kids and two adults), there should be money for at least some of your rent payment, if not all of it.  Evictions have been temporarily banned in many municipalities, so the wise move is to engage, empathize, and be human.  Had these payments not been authorized by Congress, then immediately reducing rent or restructuring payments would have made sense.  But now that we know cash is coming, landlords are on better footing.  We all need to get through this together, landlords and tenants alike, so the more affirming and flexible you can be now, the better it will be for you in the long run. 

THE REAL ESTATE INDUSTRY

Wow, so much change is coming here.  I’ve said for a while that with 23,000 licensed agents in the metro Denver area, a huge die off was already coming.  I had predicted half of those licensees would be out of this business in three years.  Let’s revise that to “12 months”.  A whole bunch of smaller brokerages are also going to struggle to make it through this.  The number of agents and brokerages is set to collapse.  And if you’re thinking the big, Wall Street backed disrupters are going to sweep in and pick up the slack… you might want to rethink that.  While Zillow has won the “eyeball war” by providing a wealth of information to consumers, the fact remains they have never turned a profit in 14 years.  Last week they pulled the plug on their Zillow “Instant Offers” program, which was financed by VC capital and was nowhere close to being profitable.  Open Door has shut down its iBuying operations and Redfin Now was the first to tap out of the iBuyer market.  When this is all said and done, the industry is going to look much, much different.  Big brokerages and brands will survive and agents with money in the bank can hold their breath until things come back.  Less well-capitalized entities will fail.  I have no idea if Zillow, Open Door and Redfin can survive a financial collapse, at least under their current models.  I don’t believe the housing market will ever function the way did just 30 days ago.  Those who can pivot quickly, leverage technology and create value will pick up the market share for all those “orphaned” buyers and sellers who will no longer have cousins in the business. 

GOVERNMENT AND TAX POLICY

This is not 2008 – it’s far more serious.  The first stimulus bill passed in 2008 to deal with the onset of the Great Recession was for $165 billion.  We eventually spent about $1 trillion in government stimulus to get through the Great Recession.  The rest of the recovery was accomplished by dragging interest rates to zero and having the government print money and loan it to banks for free.  This is a totally different moment, with an initial response 15 times greater than what we did in 2008.  We may blow right past $30 trillion in federal debt by the time this is all over, which would be nearly $90,000 for every American.  The stimulus bill passed in March is more than 10% of our country’s annual GDP.  If you earn $100,000 per year, this one-time event would be like a $10,000 charge to your Visa bill.  And oh yeah, with $23 trillion in debt, your Visa bill already had a $100,000 balance.  This is crazy.   There’s no way we can continue to exist without huge changes in tax policy. 

So… while there is much that we don’t yet know, one bet I would be willing to make is… there are going to be significant changes to tax law as it relates to housing.  1031 exchanges could be in jeopardy.  And I would not be surprised at all if there was a move to re-write the primary residence capital gains exemption (which currently requires you live in a primary residence two of the past five years to avoid capital gains taxes) to be extended to a minimum of five of the past eight years (as was proposed in the 2017 GOP tax bill).  In the near future, I can’t see how the government won’t come looking for a larger share of all that housing equity homeowners accrued between 2008 – 2018. 

OPPORTUNITIES IN THE FUTURE

Speaking bluntly, I think we’re going to be hard pressed to see further growth in housing prices, at least for a while.  The market we are exiting was predicated on 3% unemployment and the DJIA between 25,000 – 30,000.  Those days are gone, and so I to think a recalibration is coming.  I do not think it will be as severe as 2008, because we’ve learned some lessons.  Banks aren’t going to foreclose (at least not at the rate we saw back then) because they cannibalized their own portfolios by doing so.  The only reason we had 26,000 homes for sale in the Denver MLS in 2008 was because more than half of those were foreclosures.  We have 7,000 homes for sale today.  We’ll probably have more this summer, but banks will be smarter about managing their own assets.  They will choose to defer payments, modify payment plans or otherwise work to keep people in place.  That should be somewhat stabilizing.

In the short run, having access to cash is most important.  You need cash to feed your family, keep the lights on and pay your mortgage/rent.  So for now, cash is king.  But in the long run, the government’s only strategy for getting out of this is to print-print-print-print-and-print some more.  That means in the long term, asset prices should go up while cash loses its value.  So in the short term, cash is king.  But in the long run, hard assets (including housing) will likely outperform parking your money in the bank and taking miniscule returns, or even negative returns if we follow Japan’s lead and venture into “negative interest rates” (deposit $10, get $9.50 back when you want your money).  There will be an opportunity to buy on the other side of this… but again, until we know how long this is going to last, we can’t say when that buying opportunity will arrive.  It could be in six months, or it could be 18 months out.  But there will be an opportunity for investment once things settle down.    

FINAL THOUGHTS, FOR NOW

Although I love talking to you, I sincerely wish that I did not have to devote my Saturday to writing a letter of this nature.  March has been an exceptionally difficult month as I have been something of a “real estate triage nurse”, trying to hold deals together and managing my clients’ emotional swings while also trying to take care of my own family and help Victoria and Elizabeth reacclimate to living at home.  Everyone is feeling a sense of loss, and there’s nothing easy about this strange season we are in.  

But character is revealed in times of adversity.  How you behave in crisis points to who you really are as a person.  We have the opportunity to come out of this better and stronger as people and as a nation, but only if we choose to do so.  Let’s lean into caring for our neighbors and listening to voices of hope.

There will be many more earthquakes in the days to come and we are far from being through this.  But it will end, eventually. 

I recently posted on Facebook how grateful I was to be introduced to the teachings of Jim Rohn 20 years ago.  For those who don’t know, Jim Rohn was known as “America’s Foremost Business Philosopher” and taught life-changing classes and seminars throughout the 1980s, 1990s and early 2000s (he passed away in 2009 at 79 years of age).  So much of who I am today was shaped by things I learned from books Jim Rohn authored and recorded seminars I’ve listened to again and again over the past two decades.  One of his best teachings is what he called the “Ant Philosophy”.  In short, ants have survived since the beginning of time because they have learned to “think winter all summer”.  In other words, when the grass is green and the sun is out and life is good and many are lounging… ants are working.  Preparing for the winter.  Taking care of the colony.  Doing the work while they are able.  But then, when winter comes and they are trapped underground and it seems dark and cold and hopeless, ants have learned to “think summer all winter.”  It’s as if they say to one another, “Don’t worry – it’s only for a season.  We’ll be out of here soon enough.  The sun will shine again and we’ll get outside.  Surely it won’t be this way much longer.” 

Right now, the Ant Philosophy applies to us.  Yes, we may be headed into a season of winter and it may be difficult… but we will get to the other side of this.  The sun will shine again, we’ll be free to go out and hike and play and gather and congregate and support and reconnect with one another… probably with more depth and integrity and honesty that we’ve ever exhibited before.  Our character is being re-shaped right now.  Although it’s not an easy process, I believe we are collectively going to be better and more authentic for having gone through it.  Let’s cling to that hope. 

Be well everyone. 

I can’t wait to see you all again soon –

Dale Becker, CRS

RE/MAX Alliance

(303) 416-0087

THE IMPACT OF THE CORONAVIRUS ON THE DENVER HOUSING MARKET

We are living in interesting times.

Our current political climate is completely polarized, the Fed has kept the "pedal to the metal" via massive borrowing and low rates for a decade, and now we have the makings of global pandemic.

I have written a couple of significant reports over the past few months which I have shared with past clients talking about our current economic climate.  In short, since the onset of the Great Recession the Fed has dragged the Fed Funds rate to zero, allowed our national debt to balloon to more than $23 trillion and doubled the amount of currency circulating through our economy, from $8 trillion a decade ago to nearly $16 trillion today.

All of this "cheap" money has spurred asset growth, job creation and soaring stock and housing markets... great things if you own stuff.

But the downside of stoking a roaring economy just because it's politically expedient is that if you do have a slowdown or a crisis, your number one tool - lowering interest rates - is already off the table.

Japan's economy sunk into a 20-year funk because its monetary policy consisted of massive borrowing to create artificial growth at a time when its borders were closed to outsiders and its population was shrinking.  There's no path to growth without growth.

Today, we've got a United States clearly divided into factions of have's and have-not's.  You can pretty much figure out how that translates politically.  Good luck with national unity after this election, no matter who wins.

Add to all that the sudden arrival on the scene of a mysterious virus that is jumping continents and sparking alarm in countries all over the world, and it's possible you might be feeling just a little bit of anxiety.

Well, I'm not here to tell you how it will turn out, but I can give you some thoughts about what I think it means for the Denver housing market - at least in the short term.  

In those major reports I sent out last September and again in January, I made it quite clear I thought the second half of 2020 would probably be our slowest housing market in a decade.  I predicted demand would be front-loaded into the calendar (as it already is) and the second-half slowdowns we have seen in 2018 and 2019 would be worse than in prior years.

Affordability has become the number one issue in the Denver market, with first-time buyers increasingly tapped out and "organic" price growth in our market is stalling because we just don't have the same number of people coming in at the bottom.

I've always said the housing market functions like a pyramid, with more demand at the bottom simply because you have far more $300,000 buyers than $1 million buyers.

Or at least it used to.

If you look at the numbers today, you'll see there are twice as many homes under contract right now in the $600,000 - $1 million range than starter homes and condos under $250,000.

And relative to supply, you currently have 3.19 months of inventory under $250,000 while we have just 2.22 months of inventory for homes priced between $600,000 - $1 million.

What does it mean?

It means that, increasingly, properties in the Denver market are being "traded" among people who already own homes and have significant equity, with far fewer people coming in at the bottom.

The have's are buying and trading houses with one another.  The have not's are voting for Bernie Sanders.  

The pyramid shape I described above is becoming a diamond, with not much demand at the bottom (due solely to affordability, not a lack of desire to own), a lot of activity in the middle, and then tailing off again when you get to millionaire's row.

So what does the Coronavirus have to do with this?

As I write this on Thursday, the Dow has dropped nearly 3,000 points in four days.  Global supply chains are being interrupted, international travel is freezing up, oil prices are plummeting and fear is spreading as fast as the virus itself.

And as the stock market falls and traders take defensive positions, mortgage rates are plunging to record lows as investors seek "safe havens".

Rates will continue to fall as long as the stock market continues to crater, and so while you may not like what's happening to your 401k, hopefully you can recoup some of those losses with a lower mortgage payment... assuming you buy or refinance now into this fear-based window of opportunity.  

Yes, the decline of the stock market is a negative and it's going to evaporate some wealth.  But in terms of the Denver housing market, which is driven by younger demography (smaller 401ks with more Millennials earlier in the saving-for-retirement process), lower rates are going to be a greater positive in the short term than falling valuations with the Dow Jones... at least as long as we don't come completely off the rails.

We saw the inverse of this effect two years ago, when the GOP tax bill was passed in December of 2017.

Affordability was already stretched thin in the Denver market after six years of solidly rising prices... and when Wall Street was rewarded with a massive gift courtesy of the GOP tax bill, the stock market surged forward and interest rates were sucked up into the vapor trail.

The effect was chilling and severe on the Denver market.  During the second half of 2018, once tax returns were filed and corporate profits reported, the stock market began its march to 25,000 while interest rates blew up, going from sub-4.00% to the low to mid 5's within about 120 days.

Those higher rates and payments proved to be too much to sustain the momentum of a market that was already stretched thin on affordability, and that ushered in an era of much slower growth and even stagnation in some areas.

It caused me to shift from my position from "offense" to "neutral" about this market going forward, and I've been much more cautious in advising clients since the middle of 2018.

What does that look like in real life?

In 2013, I personally closed deals for 16 first-time buyer clients.  Value in the market was so obvious and the upward trajectory so clear that buying a home was seemingly the right answer to almost any question.

Last year... I closed exactly two first time buyers, both well-qualified with good incomes and conservative financial profiles.

So narratives change with the market, and that's why the Coronavirus is important.

Assuming it doesn't kill us all, it is opening up the window of affordability and it is going to make the Denver housing much more attractive in the short term.  Whether that window is open for a few weeks or a few months remains to be seen, but the surge in activity is noticeable already.

I still think our Q3/Q4 market is going to be soft, but as Q1 comes to a close, conditions right now are the strongest and most attractive they will be all year.

Want to sell?  Do it now.

Want to buy?  Going forward, we're walking into the unknown.  

The main impact for now is that the Coronavirus is going to cause demand in our market to be even more front-loaded than we anticipated, and may make the second half slowdown even more severe. 

HARD WORK, ACCOUNTABILITY AND A DOSE OF "EQ"

Being an excellent Realtor is about much more than showing properties, listing homes and writing contracts.  Being an excellent Realtor is about solving problems, discerning value and developing an exceptionally high level of "EQ", or emotional intelligence.

When it comes to huge financial decisions, understanding emotional intelligence and the way humans process information is every bit as important as logic, reason and numbers.  

Many years ago, when fax machines were the breakthrough technology and I was just starting out, my managing broker in California imparted some wisdom that has stayed with me for 25 years.  

People make decisions based on how they feel.

Internalize this, and you will solve problems that other people cannot.  You will hold deals together that otherwise would die.  And you will earn loyalty and faithfulness from past clients that will sustain your business for years to come, no matter how many discounters and tech-based disruptors and disintermediators enter the market.  

If you can be attuned to how people feel, and then help them work around their fears and insecurities, you (and your clients) will win.

There are many reasons people fail as real estate agents, but I would say the two leading "causes of death" are as follows:

1.  Lacking a work ethic commensurate with what it takes to succeed in an insanely competitive market, and/or;

2.  A lack of emotional intelligence sufficient to put and hold deals together.  

Most of my clients will tell you that I over-educate, over-anticipate and over-manage almost all aspects of their real estate transactions.  And I'm not apologizing.

In my view, I am responsible for everything that happens in a real estate transaction.  I am responsible for doing my job, the other agent's job, the lender's job, the appraiser's job and the title company's job.  I am the filter for all information coming in and going out.  If anyone drops the ball, I simply own it as if it was my fault, because even though that involves taking on ridiculous responsibility, it also gives me tremendous power.  

I am not dependent on other people for my outcomes.    

So how do you function at this level effectively?

For one, you must realize that there is a huge difference in real estate (and in life) between identifying problems and actually solving them.  Great real estate agents understand that when there's a challenge, there is also a solution.  And part of your job is to figure out what that solution is, what it will cost, how long it will take, who will be most affected and what other alternatives might exist.

Don't show up at my door with problems, show up at my door with solutions.

This is one reason I document so many things with video.  I have a private YouTube channel with more than 2,000 videos I've accumulated over the past decade of leaky faucets, faulty electric panels and hail-damaged roofs.  I share information with contractors quickly and efficiently (always valuing their time more than my own, which is one of the keys to success) so I know what problems will cost, who can address them and how quickly we can get the work completed.  

Having a team of loyal, competent vendors who treat clients well and respect the value I create for them is one of the secret ingredients of effectiveness.  It's why I've spent thousands of dollars on an annual basis putting together a "Professional Services Directory" for my past and current clients, holding luncheons and networking events to bring tradespeople together and, frankly, removing people quickly from my contractor ecosystem when they fail to perform.

All to say, like any healthy and thriving business, I work hard to create value and take accountability.  I am humble enough to value others' time more than my own and confident enough to apply pressure and call in favors when I need to.  

Think of it this way.  If you're a passenger on an airplane and you experience turbulence, do you want the pilot to get on the intercom say "Ladies and gentlemen, we've hit some turbulence and I don't know what we're going to do.  It sucks.  Air traffic control was slow getting us out of DIA and now we're in this stupid storm.  Arggh!"  

Or would you rather hear, "Ladies and gentlemen, we apologize for the turbulence.  We're going to divert to the north and we should be back on a smooth track shortly.  We may be a few minutes late to our destination, but we'll do everything in our power to make up the time.  We appreciate your business and we're glad you're with us today."  

A good pilot has well-developed skills and emotional intelligence.  Same with real estate brokers.  Emotional intelligence is about calming the waters, both in your own mind and in the minds of clients.  Take the emotion out, focus on solutions, eyes on the prize.  

But fact is, much of my professional life is spent dealing with people who want to blame, vent and argue instead of simply focusing on solving problems (which is the fastest way to a paycheck, by the way).  They would rather slap the water with a paddle than row toward dry land.  

There's a great die-off coming in the agent population, not just in Denver but all throughout our industry.  With 55,000 transactions in the Denver metro market each year and 22,000 licensed agents, there simply isn't enough business to go around.  Professor Darwin was right, at least when it comes to real estate.  Only the strong will survive.

Those who survive will be those who have mastered the art of creating value, those who are willing to outwork everyone around them and those who understand emotional intelligence.  There are no shortcuts, and in an industry that has willingly and historically embraced part-timers, dabblers and wannabes, the new market will not be kind to those unwilling to adapt.  

OFFERS THAT ARE SO CLOSE, YET SO FAR AWAY

Is no offer better than a bad offer?  

In a recent post, I explained the reasoning behind sometimes taking a pass on certain offers even when there are no other offers on the table.  Selling a house is not unlike getting engaged... it's important that you get it right the first time, and if you chose the wrong person, it's going to come at a cost. 

Same with buyers.  

If you hitch your wagon to a flaky, under-committed buyer just because no other offers have materialized, you are taking on a ton of risk.  Because when a house goes under contract and then comes back on the market a week later, everyone automatically assumes something was wrong with the house, when in reality the buyer may not have even done an inspection.  

(There's no box to check for "cold feet" in the MLS, by the way)

So in the past few days I have once again swerved into an unusual set of circumstances around a new listing.  In our new tire-kicking, wait-and-see market of 2019, I've had really good activity for this property, with eight showings in the first week and several interested parties.  

In fact, that interest eventually manifested into four different offers... three that came in within 24 hours of each other and a fourth that came in after I had shown offers one, two and three the door.  

Here's a synopsis of what those offers looked like:

Offer #1:  Full price, but with a contingency to a home built in 1902 which has been on the market for 46 days and shows no indications of selling anytime soon.

Offer #2:  Full price, but in this case the buyer is in a lease through March and wanted us to wait almost four months to close (seriously).

Offer #3:  $10,000 below list price with a first-time buyer using down payment assistance programs and who is maxed out at this price point.

Given the three options, the only one that felt workable was #2.  I asked the agent what her buyer was paying in rent ($1,600 per month) and said if we could figure out how to bridge that divide, we might be able to patch something together.  

My seller's home is vacant and she has moved out of state, so she wants to sell quickly.  But like all sellers in this market, she really has just one shot to "get it right" when choosing a buyer... because as we go into the holidays, should we be off the market for several days (or weeks) and then end up coming back on the market (for whatever reason) in December, it's likely going to be a cold, lonely Christmas season.  

I asked the agent for Buyer #2 to talk with her client and try and figure out a plan, whether that meant breaking the lease early, subleasing, even offering up the rental on Air BnB for a few weeks (if approved by the landlord) to make the deal work.

Instead, I got this.

"My client is making a 20% down payment and so for each $5,000 we lower the price, he'll keep an extra $1,000 in his pocket," she said.  "Since he needs $4,800 to cover the rent through March, he needs to lower the price $20,000 for it to work."

And with that, she sent me an offer $20,000 below the offer she had submitted two days earlier.  

Hammer, meet forehead.

If that's the best problem-solving you can come up with (and apparently it was), there's 0% probability that I want this agent within 100 miles of my seller's home.  

Fortunately for us, as the aspirin was kicking in and my headache was finally subsiding, the showings kept coming... and within two days, we had another seriously interested party.

Full-price, no contingencies, four week escrow, 20% down.  

Yes, yes, yes, yes.  

And now we're under contract.  

But the lesson here is that in 2019, good agents have had to develop (or re-develop) the discipline to say no to things that don't make sense.  Even when there's nothing else on the table.  

The process sucks, and frankly, some desperate agents are upset with me because I won't accept their marginal offers.  Which I attribute to the fact that, in this market, there are a whole bunch of starving agents who need these deals worse than their clients do.  

But please, do some thinking and come up with solutions.

For the agent dependent on the contingent sale for the home struggling to sell built in 1902, put some teeth in your offer.  Let $1,000 of earnest money go hard every 7 days until we've maxed it out, or perhaps let some portion of it go hard after the inspection, or give yourself 15 days to get the contingent home under contract concurrent with an immediate price reduction.  

Do something, but don't just serve up a garbage offer.  

To agent #2.  The ball was at the one yard line.  We were talking about a $4,800 issue in terms of how to cover the buyer's rent for three months.  Maybe you throw some money in, we throw some money in, the buyer takes the home "as is" and we close in four weeks.  There was a path here, and you gave us absurdity.

And to the first-time buyer stretching to come in $10k low, you're just not going to get that deal five days into the process on a home drawing lots of interest.  Find a home that's been sitting for 46 days (I know of one built in 1902) and maybe that seller will be open to a $10,000 chop.  

The point is, the whole real estate ecosystem is in transition these days and there is plenty of wreckage to go around.  A much larger than normal percentage of transactions are falling apart because buyers are nervous and agents don't know how to solve problems.  

I guess this is why my phone keeps ringing and my services are in demand.

It takes discipline (and faith) to say no.  But increasingly in 2019, "no" is a much better response than saying yes to something that's ticking with a fuse sticking out of it.  

TAKING A PASS ON QUESTIONABLE OFFERS

A changing market ushers in changing realities. 

For one, selling a home in a weekend with multiple offers is far from the reality for most sellers these days.  More often than not, it's taking longer, sometimes a lot longer, to achieve a desired outcome.  Depending on price, condition and location, your timeframe for getting a home under contract can range from a few days until... never.

I recently listed and sold a home for past clients whome the market had treated well.  Just five years ago, they purchased a starter home for $270,000 in a solid neighborhood close to a regional park with excellent Jeffco schools.  It was less than 1,600 square feet of finished space, though, and with two small kids now part of the family equation, moving up to something larger made perfect sense.

We listed the home at $429,000, a number supported by neighborhood comps and a full 59% higher than the price they paid just five years ago.  The equity from their gain would provide a hefty down payment on their larger replacement home and I had no concerns about their situation.  In current Denver housing parlance, they are what is known as "winners".  

Of course, the process of selling a home today is often very different than what we have known for the past seven years.  No more multiple offer shootouts, no more over-the-top escalator clauses and no lines of people forming in the driveway an hour before the open house.

Even so, with two young kids and a smaller floorplan to begin with, I recommended that they clear out for our first weekend on the market.  Sticking around is not worth the hassle of being chased out of your home repeatedly and having to live you're in the display case at Neiman Marcus.

So over that first weekend, we ended up with a handful of showings and good feedback, but no offers.  With my clients returning to town Monday afternoon, we had planned to meet that evening to review anything that might show up, or if nothing materialized, to strategize going forward.

I circled back with agents Monday morning who had shown over the weekend to gauge prospective interest, and as it turns out, we did have two buyers with some legitimate interest.  Both had homes to sell, and that's where it got interesting.

"My clients don't want to end up homeless and so they don't want to put their home on the market until they have a replacement property under contract," said the first agent.  

"Okay," I said, "but give me something to work with here.  Where do they live now?  What price point are you looking to list it at, and what's your professional opinion about how quickly it might sell?"

Our conversation continued and eventually the agent did provide the address, as well as a proposed list price.  As I am prone to do, I pulled this agent's sales history from the MLS and found a transactional desert... five lifetime transactions, one listing in 18 months as a licensee.  

The second agent I spoke with also had a client with a home to sell.  This time, however, the home had been on the market for several weeks without a contract.

"What's wrong with it?", I asked.

"It's a great home, my clients just haven't been that serious about getting it ready because they haven't found a home they love.  And they really like your home."

"So you listed it, it wasn't market ready, no one bit, and now your sellers are suddenly going to get serious if we accept your offer?"

Sigh.

Shortly thereafter, as I was walking out the door to present our first wobbly offer, the second wobbly offer came through.  Five thousand dollars over list with a contingency asking for 45 days to put their heretofore unsalable home under contract.  

45 days?

I drove to my sellers' home and we sat down at the kitchen table.  

"In the old days," I began, "we spread offers out on the table, we would talk through the pros and cons of each, remove the bad ones, keep the good ones, and eventually settle on a winner.  Tonight, I don't think I want to take either of these offers out of my briefcase."

I explained that despite the fact we had two offers, both at or over list price, they were a long way from sure things.

"Both of these properties have issues, and both of these agents do not inspire confidence.  It would be easy to say yes to one and try to make it work, but honestly, if we go under contract and come back on the market three weeks from now you're not going to be happy, and most people are going to assume there is something wrong with your home."

So we did something I can't recall doing in my 13 years in Colorado.  We dropped our only two offers in the shredder.

It's better to wait for the right buyer than to cross your fingers and hope that clueless people get it together.  As I explained to both agents the next day, there were and are all kinds of ways to put this deal together.  All you have to do is let 50% of the earnest money go hard after inspections and guarantee us you'll have a contract in 15 days.  Just step up, somebody.  .  

Silence.

So that's all we needed to know.  People who are committed, or who have agents who are committed, figure out how to get things done.  The indecisive, uncertain or non-committal end up in a ditch. 

With 23,000 agents in the Denver metro area, we are drowning in freshly-minted licensees but thirsting for good old-fashioned competence.  

My clients stayed on the market and another weekend passed.  Then, on Monday, we received the call we had been waiting for all along.

"My buyers love the home and their kids go to the school just down the street.  They're willing to do whatever it takes to make this work."

Full price, non-contingent, quick closing and nice people.  Check, check, check, check.

Three weeks later we closed, and we even secured a short-term rentback that gave my clients time to close on their replacement home and move in an orderly manner.  Everybody got along famously and all parties were treated fairly and with respect.  

Not every transaction turns out so well, but the lesson here is that it is wiser to do your diligence up front and get the right people on board from day one rather than hitching your wagon to the first pack mule that comes along and hoping things work out.  

In life and in real estate, more often than not, competence, patience and faith will yield the right results.  

THE LUCKY SELLERS CLUB IS CLOSED

After a good run spanning several years, the Lucky Sellers Club is officially...closed.

We're sorry to break it to you, all those who loved tossing a home on the market at any price in any random condition.  Owners and agents alike, it's been a great seven years, and we hope you enjoyed it.

When most habitable listings would draw 30 - 40 showings and five to 15 offers in a weekend, putting your home on the market with shag carpet, wood paneling, popcorn ceilings and laminate counters wasn't an issue.  Sure, it might cost you a few bucks off the bottom line, but when the buyer pool was deep and listings were scarce, it only took one desperate first-time buyer tired of losing in multiple offer shootouts for you to cash in.

Agents, too, enjoyed being a part of this unique club, while it lasted.  Because if you could somehow persuade a seller to sign a listing agreement with you, regardless of how bad the inside might smell or how totally lacking your own skillset might be, you could be a part of the Lucky Agents Club.  

Listing agreement has been signed, let's book that vacation to Mazatlan!  

The problem now is that, if you list a home with obvious defects, the market is no longer interested in assuming someone else's liabilities.  In fact, with active inventory having nearly doubled since the start of this year, a lot of buyers are downright insulted that you wasted their time with a home that offers so little value.  

As I've been saying to my sellers for the past several months, going forward you have two choices... compete on condition, or compete on price, but to compete in neither category leaves you in no man's land, right alongside 11,000 other active listings that can't find buyers in today's transitioning market.

We've got a lot of bad habits to correct that have taken root over the past several years, and with the licensed agent population now north of 23,000 in the Denver metro area, the truth is a large number of our fellow agents have never said "no" to anything.  

You see, historically speaking, selling a home takes time, money and effort.  Sometimes, historically speaking, it's not a very enjoyable process, for the agent or the seller.

That's one reason so-called iBuyers have a model that may get traction over time.  If you're sitting on a $400,000 home you've owned for 31 years and you know that you have ripped and padless carpet, nicotine-stained walls and a collection of yellowing and stained sports pages from the Rocky Mountain News featuring John Elway headlines piled high in the basement, it may not appeal to today's more discriminating Millennial buyers.  If that's you, why not sell it directly to Open Door or Zillow for $350,000 and close on your terms?

Heck, five years ago it was worth $275,000, so $350,000 may feel like a gift!  

Agents face a real challenge right now.  Sadly, for the 12,000 new, so-called "real estate professionals'  who have taken out licenses since 2011, no one told you that one day you would actually have to create value.  That you would need to solve problems and compete in a shifting market.  That you might one day need to make hard decisions about working with certain types of personalities, because while anyone can deal with a headstrong seller for a few days in a market where homes would sell in a weekend... working with Mr. and Mrs. Difficult for months on end (while not being paid a penny, nor being assured of any compensation at all) might not be your cup of tea.  

(Sidebar:  HGTV, when you're ready to launch that new show called "Impossible Sellers", give me a call.  I know people!)

I have seen firsthand the magic of the Lucky Sellers Club, when it was a thing.  I've turned down listings when sellers have insisted on over-the-moon pricing, only to see them cash in (on occasion and against all logic) when partnered up with a member of the Lucky Agents Club.  

I've also seen a bunch of these listings sit for weeks or months, take multiple price cuts, change agents or brokerages, and eventually turn into rentals or VRBO's - grateful that I had the discipline to say no to the forehead-whacking hammer hits that other agents signed up for in pursuit of a buck when the market made everyone feel like a genius.  

Going forward, attrition is going to replace delusion as the primary driver of our market.  It's going to be a war of attrition for agents, and truthfully, for sellers, too.  Putting a home on the market guarantees little any more.  Agents must be prepared to compete, and sellers must also be prepared to compete, because for the first time in years not all inventory is good inventory.  

The Lucky Sellers Club is being replaced by the Logical Market.  It's a market that will have winners and losers, and it will take work and skill, not good fortune or a greater fool, to get your home sold in a price-flattening environment.  

THE RISE OF iBUYERS

How does it feel to be living through the age of disruption in real estate?  For decades, the real estate template was mostly untouched.  In the past decade, change is taking place all over.  

Welcome to the beginning of the iBuyer era, which is simply a generic term for huge corporations stepping in and buying homes directly from individual sellers for cash.

For many years, “fixers” were the domain of HomeVestors, We Buy Ugly Houses and traditional mom and pop real estate investors who scoured the landscape looking for old people (usually) willing to sell their dated, dirty and smoky homes for cheap.

Throw some paint on the walls, recarpet, drop in some new countertops… and bam, an instant $60k - $100k of profit was just waiting to be had!

Over the past few years, Wall Street has become very fond of the housing market, and new startups like Offer Pad, Open Door and Knock have jumped directly into the space of making cash offers to longtime owners who don’t want the headaches of fixing up and marketing a home for sale and those willing to leave (lots of) cash on the table in exchange for convenience.  

With their success, others have come rushing in, with Zillow, Redfin, Keller Williams and (soon) even RE/MAX quickly putting platforms in place to play the iBuyer game.

It’s important to understand how these models work, however, as now that Zillow (in particular) is going mainstream with their iBuyer product (open their app to check the Zestimate for your home and the first thing you see is an invitation to sell your home to Zillow directly), consumers are suddenly being inundated with iBuyer awareness.

I recently showed a home in Boulder that was being offered for sale through Zillow directly.  It was listed for $745,000 and had new (unimpressive) apartment-grade carpet and fresh stock eggshell paint.  No staging, and a yard that was more dead than alive. 

Public records showed they had “purchased” the home for $725,000 just a few weeks earlier, which didn’t seem right.  So I did what the old reporter in me always does… I starting digging deeper.

In this case, the path to the truth was to reach out to Zillow directly and ask them about buying my own home.  I clicked on a button and within about two minutes the phone rang – it was a polite, courteous, well-trained Zillow sales associate who asked me a few questions and then asked me to upload pictures of the kitchen, baths, Master bedroom and front/back yard spaces of my home.  

Within 48 hours, she said, someone would reach out to me with a “preliminary” offer for my home. 

I took a little time to clean up, took about eight different photos, and emailed them to my concierge.  She called me to confirm receipt (excellent customer service, by the way) and told me I would have that preliminary offer within two days.

I noticed repeatedly that she kept saying the word “preliminary”, so I asked for an explanation.  In short, she said, Zillow will evaluate your home based on the pictures, consider the health of your market area and then factor in their “convenience fee”, which is the grenade sitting in your living room about to blow up.  

The convenience fee is the amount Zillow is going to charge for the "convenience" of selling your home directly to them, without Realtors, marketing, staging or showings.  In my case, that convenience fee was a markdown of about 8% below what my home is worth in today's market (which has little correlation with my Zestimate, by the way).

At this point, my concierge told me that the next step would be to send out their home inspection service.  If they found additional deficiencies (old furnace, leaky water heater, a bad roof or other major mechanical failures) she said my offer would be adjusted “accordingly”.  Realistically, there's probably another 2%-5% markdown coming after the inspection, depending on condition.  

By now, I pretty much had the information I needed to understand their product and so I opted out of additional follow up. “My job’s looking a little bit more secure,” I said.  “I think I’m going to stay put.”

The takeaway here is that working with Zillow, Offer Pad, Open Door or any of the other iBuyer options in our market today will likely result in a chop of somewhere between 12% - 15% of your home’s value. That’s pretty severe. 

But the severity of that markdown won’t be found in public records.  It will be found on the sellers’ settlement statement.  To the case of the home in Boulder, Zillow offered $725,000 for the home, which is not far removed at all from the $745,000 they re-listed it for in the MLS.

Looks pretty enticing, eh?

But in reality the seller paid a convenience fee that may have been $75,000, and that’s something that doesn’t show up in public records.

I would be very careful about getting too cozy with any home offered through an iBuyer program, because with the extraordinarily strong market we’ve had in Denver for the past seven years, why would anybody sell at that kind of discount?  Unless there were some very serious and negative issues going on, whether we’re talking structural problems, mold issues, or someone getting shot in the living room during a drug deal gone bad. 

All of these iBuyers have a few things in common.  They are well-funded, they train their sales and service reps at a high level, and they are going to raid your equity. 

Is there a market for this product?  Yes, absolutely.  If you’re 82 years old, widowed, a smoker and overwhelmed by the thought of renovating 50 years of neglect and enduring weeks of showings to get your home sold… then this might be your ticket.

But those instances are going to be rare and, more often than not, a last resort. 

I’ve always said that when you buy a home, you also buy history.  And if I’m paying a retail price for a home that’s been treated like garbage, there had better be a compelling reason (and commensurate discount) to do so.

Paying retail for a product that somebody didn't want - especially when that former owner knows more about that house than anyone else - is asking for trouble, in my opinion.  

And with 40% more homes on the market in Denver today than just one year ago, there certainly are plenty more choices.  

It's been said that, at a poker table, if you can't figure out who the sucker is within two hands, it's probably you.  Big corporations are not looking to sell these homes to shrewd, savvy buyers.  If you sit down at the table with an iBuyer company and can't quickly figure out who's being duped, you might want to think about excusing yourself and getting the heck out of there.   

ACTIVE INVENTORY IN DENVER MARKET HITS HIGHEST LEVEL IN MORE THAN SIX YEARS

If you were thinking about putting your home on the market in 2019, you may have missed your best chance for a quick and easy sale.  The spring market is officially done and over.  

As I've chronicled before, the Denver spring market hits early, and the absolute best time for anyone to get a home on the market is between mid-January and Memorial Day.  The market traditionally downshifts after Memorial Day, and the summer slowdown is already very much underway, even though summer doesn't "officially" arrive until June 21.

With 9,149 active listings on the market, the number of homes for sale is up 29.3% from one year ago, and up 45% from the beginning of the year.  Listing inventory figures to continue increasing right through until Labor Day, when the number of homes on the market traditionally peaks.  

It's a very different world than what we have experienced over the past six years, and both buyers and sellers need to adjust their expectations going forward.  

A total of 7,969 homes did go under contract in the past 30 days, which actually reflects a 2% increase from a year ago, so demand is holding up.  That's key, because if demand were to crater, prices would be at risk of falling. 

As it is working out right now, the increase in listing inventory simply means buyers have more choices, less urgency and are less likely to write "over the moon" offers.  That will dampen, but not extinguish appreciation.  

But the days of 10% appreciation and multiple offers on any moderately attractive listing are over.  The era of extreme market velocity is over, and what that means is that sellers must realistically expect to spend a much longer period on the market before receiving an offer.  

It also means we're going to have to correct a lot of bad habits that have been allowed to take hold during this epic market run.  

The number of real estate licensees in the Denver metro area has doubled since 2011, which means more than half of the agents in this market have never experienced anything other than "sold in a weekend with multiple offers".  

That means they didn't need to devise marketing plans, they didn't need to promote listings and they have never experienced the joy of meeting with disgruntled and disappointed sellers week after week to explain why there's little or no activity on their home.  

The exodus of so-called agents is underway, and will only intensify going forward.

For sellers, the reality is clear.  You have one shot at a first impression, and if think your home "may" need carpet, paint or new appliances, it probably does.  And maybe a new roof as well.

When prices were going up $30k per year, buyers would overlook things just to get a property under contract.  Now, with prices at all-time highs and mortgage payments for lower down payment buyers clearly higher than rents, the incentive to take a bad deal is gone.

Buyers' remorse is also now a real thing.  I've listed seven homes in the first five months of the year and four of them lost buyers after going under contract.  That's not fun.  

In the "old" days (pre-2019), having a pile of offers in one weekend allowed a good listing agent to sift through the buyer pool and screen candidates like an employer reviewing job applications.  It was easy to go through the offers and assess which buyers were best qualified and which agents had a track record of success.  It was a game of odds and percentages, and your odds of getting to closing in one piece and without drama were obviously greatly enhanced when you could put the best qualified people on the bus. 

Now, it's much more random.  When offers are scarce, you simply can't be as picky.

That means sometimes saying "yes" to buyers and agents you would not have agreed to contract with in the past.  And more often than not, marginal agents have questionable buyers.  Which leaves sellers in a precarious position.  Do you take the only offer in front of you, and hope you can hold it together?  Or do you stick it out and endure the continued inconvenience of sporadic showings and an uncertain future in hopes a better buyer comes along?  

The decisions are not so easy, and the headaches are much more frequent.  To survive this process, you need wise counsel, strong communication skills and a real strategy that goes beyond putting a sign in the yard and getting out of the way.  

For years, the hard conversations in this market have been with buyers.  Starting now, the hard conversations are happening with sellers, and that's one reason why the agent pool is going to continue thinning as the listing inventory keeps increasing.     

THE DANGERS OF BOOTSTRAPPING

As April arrives and we hit peak selling season, the overall state of the Denver housing market is still relatively healthy.  Our local economy is strong and robust and our demography remains positive... but after several years of booming prices, it's my contention that values are flattening and the market is reaching a point where many first-time buyers are simply priced out.

This has ramifications, because demand "from the bottom up" has been the driver that has created the equity boom that has created the wealth effect which has made Denver one of the most economically vibrant cities in all of America. 

For as long as I have been in real estate (which is now going on 25 years), I have described market demand as a pyramid, which simply means there are always more buyers and more demand at the bottom of the market... and because of this, there is almost always built-in price protection for entry-level buyers because demand exceeds supply.

That premise - that demand is always most strong at the entry level - is now being tested.  

I measure demand in terms of "absorption rate", which is defined as how many months it would take, at the current pace of sales, to sell every home on the market, assuming there was no new inventory coming online. 

The real estate industry has long posited the axiom that six months of inventory reflects a balanced market, favoring neither buyers nor sellers.  

I personally feel that the real number for equilibrium is more like four months, because the way real estate is transacted in the digital era is very different than they way homes sold 15 years ago.  It used to be that open houses, sign calls, newspaper ads and postcard mailers were how people found out about homes.  Selling a home was like marinating a steak - it took time and results often came slowly.

In the digital age, everything happens quickly.  A new listing hits the market, and within minutes smart phones are pinging all over Denver.  Listing activity is front-loaded to the first few weekends a home is on the market, and if you can't sell a home within a few weeks, you have a problem.

The thought that six months of inventory reflects a balanced market is totally dated convention, but then much of the legacy thinking in our industry is aged and flawed.

For context, here are current absorption rates for all prices brackets I track in Denver:

$0 to $250k:  1.82 months of inventory
$250k to $400k:  0.76 months of inventory
$400k to $600k:  1.42 months of inventory
$600k to $1M:  2.21 months of inventory
$1M and up:  3.82 months of inventory

But back to the original premise... from the time I began selling real estate in Denver in 2006 until the end of 2016, we without fail had the quickest absorption rates in the sub-$250k price category.

Predictably, as you worked your way up the pricing ladder... the $250k - $400k range was the next tightest market segment... followed by the $400k - $600k range... followed by the $600k - $1M range... followed by homes priced at a million dollars and up, which often sit on the market (even in good times) for many months before selling.

More buyers at the bottom, fewer buyers at the top, the demand pyramid made perfect sense.

Starting in November of 2016, however, we saw a change.

At this point, homes in the $250k - $400k range actually began selling faster than the sub-$250k range, and the reason for this is that while the move-up buyers were flush with equity, the incoming crop of entry-level buyers was finding it harder and harder to both qualify and come up with down payment money.

While demand for homes at all price levels has remained strong during our housing boom, the stress on first-time buyers hit another last milestone last February (2018), when for the first time in all the years I have been tracking numbers demand was actually stronger in the $400k - $600k range that the sub-$250k entry level.

Increasingly, it has become apparent that the housing party in Denver is mostly reserved now for those who already have significant equity, which is the kind of elitist market dynamic I left when I departed California at the end of 2005.

Put another way, if you've owned a home since 2011, you're flush with equity and living a much more secure financial life than the younger people coming into our market today.

And for that generation of owners who won the housing lottery simply by taking action at the right time... they have significantly more options and opportunities than those recent college graduates coming out of school with $100k in student loans looking at median home prices pushing $500k.

That's one of the reasons Colorado Springs (historically much more affordable than Denver) is now ranked as the #1 housing market in American for 2019 by Trulia, and why Denver no longer appears on that Top 20 list.  

So while the established owners are able to use their equity toward down payments on larger move up homes, emboldened by their own balance sheets and the feel-good headlines we've grown accustomed to... the first-time buyers in our market have been falling further and further behind, or giving up on the dream of home ownership altogether.

The issue here, as I see it, is that push in our market has always come from the bottom up.  And now that housing is out of reach for many would-be first timers, you simply don't have the farm system in place to keep driving prices higher as you work your way up the pricing scale.  

The word I have used to describe our market, repeatedly, over the past nine months or so is "fragile".  When interest rates suddenly spiked into the 5's last fall, it hit our market hard and fast.  The types of homes that had sold in the spring in one weekend with multiple offers suddenly began sitting 15, 30, 45 days before any offer would materialize.

And without the frenzied bidding wars that characterized the spring market... sellers started seeing offers that were less than full price.  And then buyers (the nerve!) started asking for repairs.  And you started running into more valuation issues with appraisers.  And by the end of the year, there was grounds for reasonable doubt about whether you would see any appreciation in 2019 at all.  

The good news, at least from our standpoint, is that all of our political dysfunction and drama in Washington has caused interest rates to drop back down in to the low to mid 4's - for now - which significantly helps affordability and breathes life back into our market.

But active inventory is still up 36% from a year ago.  More homes which go under contract are coming back on the market than I have seen in many years.  Buyers' remorse is a real thing, and the "get a home at all costs" mentality that drove the market from 2012 - 2017 is transitioning into a mindset that is much more cautious and deliberative in nature.  

If you pay attention to other markets which have boomed in recent years (Seattle, San Francisco, San Diego, Austin, etc)... you see a steady thread of headlines.  Inventory is up and prices are flattening, not because people don't desire houses in high-cost markets.  They simply can't afford them any more. 

And that means you should be adjusting your thinking accordingly. 

I have become much more conservative with my buyer clients in 2019, to the chagrin of my managing broker and to the detriment of my bottom line.  I'm not interested in people bootstrapping their way to minimum down payments with monthly mortgages $300 to $600 higher than rents.  Why does that make sense, especially if prices are flattening?

If your reputation is the currency of your business, you always think in the long term, even when it costs you money.  My commitment has always been to the "happily ever after", and not the quick buck so many others are chasing.  

Owning a home is an expensive proposition.  Roofs age, furnaces quit, sewer lines break and exteriors need painting.  For most people, it's still worth it.

But if you don't have reserves... if you are fully dependent on two incomes... if you're not prepared for the unpleasant financial surprises that sometimes come with home ownership... you need to be thinking long and hard in a grown-up way about whether or not it really makes sense to commit to this market right now.  

If you have cash, equity, plenty of reserves and a good, stable job... by all means, buying is almost always logical and a financially-sound decision.  

But I spend a lot of my time these days having lengthy conversations with young people who seem intent on bootstrapping it, and for those who are not receiving solid advice, I worry that an uncomfortable percentage of today's bootstrappers may be tomorrow's short sales.