HGTV EQUALS “NOT REAL”

It’s amazing to me how many people I come across who derive their perceptions of real estate from HGTV.

Including my daughters.

Yes, it’s true, my 13 and 14 year old daughters are HGTV junkies.  “Love It or List It”, “House Hunters”, “Property Virgins”… my DVR is like a never-ending loop of nightmarish real estate programming.

Here’s the problem – it’s all bogus.

I have actually tried to wade through a few of these programs with them, and I always end up in the same place… embarrassed, demeaned, and feeling like I just wasted another valuable hour of my life.

While there might occasionally be some miniscule thread of reality actually running through these “reality” shows, you have to search hard to find it.

Egotistical, golf-loving real estate agents.  Overly-zealous property stagers salivating over the prospect of a five-figure design budget.  Clueless buyers with no regard for value, negotiation or exit strategy.  It looks absolutely nothing like reality, or at least reality for someone actually selling homes to clients who actually matter.

There is a firm 80/20 rule in real estate, as there is in life.  Twenty percent of the agents do 80% of the business, and everyone else is fighting for table scraps.  Or trying to launch their acting career on HGTV.

HGTV is not for the doers.  It is for the posers.  Most of the agents on these shows are not serious professionals.  In fact, I would love it if HGTV would actually post sales production history next to each character’s name.

“Bob Smith, Real Estate Agent.  Sales in Past 12 Months – 3.  Income - $17,213.  Lives with his mom.”

“Randy Raccoon, Real Estate Agent.  Sales in Past 12 Months – 5.  Trust Fund Baby.  Scratch Golfer.”

The people who are actually selling homes, the top 20%, are far too busy closing deals and helping people to participate in this nonsense.  So you end up in a parodied world of clichés and cluelessness, scripted by screenwriters and directors who know nothing about the real world of real estate.

It doesn’t bother me.  It humors me.  But it also concerns me when people poised to make decisions involving real money with real consequences show up utterly clueless when it comes to their understanding of what a real estate transaction should look like. 

Most people will only buy a few homes in their lifetime.  Therefore, these outcomes are important.  You don’t buy a home for its cabinets or its carpet.  You buy a home based on value, based on its location, based on its resale potential, based on the improvement in your quality of life that comes from signing that purchase offer and negotiating that deal. 

If you’re smart, you buy guided by logic, not emotion.  You assemble a team of competent, ethical professionals and approach it seriously.  You shun the spotlight because there’s serious work to be done and important decisions require your full attention.    

Look, if you want to watch HGTV, have at it.  There’s far worse stuff on television.  Just realize that what you’re seeing is about as real as Marge Simpson’s blue hair.  

CONSPIRACY OF THE COMPETENT

This post is probably going to ruffle some feathers, but I think it’s worth putting out there.  I showed some restraint in posting it, however, because I actually wrote this in the fall of 2013 but held on to it for a few months so as to protect the identities of those (most recently) involved.

There’s a conspiracy going on in real estate right now.  It’s the “Conspiracy of the Competent”.

What does that mean?

It means that, all things being equal, agents who do deals prefer to do deals with agents who do deals. 

In a hot market, sellers have far more leverage than they have had in many years.  In a cold market, buyers get to set the rules of engagement.  In any market environment, the leverage shifts from one side to the other based on whose side the numbers are favoring.

Right now, if you’re selling a home, the name of the game isn’t simply “getting an offer”.  It’s getting the RIGHT offer, from the RIGHT buyer, with the RIGHT agent, with the RIGHT terms. 

Sound farfetched?

If you understand what this market is, it’s not farfetched at all.

One of the classic mistakes lower-producing agents make is that they fall in love with any deal, because they think that being under contract is all that matters.

Well, that’s like saying it doesn’t matter who you get engaged to, as long as you are engaged.

As the father of two daughters, I can tell you that kind of thinking is preposterous!

It completely matters who you contract with, because for the next 45 days, you’re going to be in an intense relationship that is almost certain to have dips, turns and drama at some point.  If both sides are committed to the interests of their clients, it’s almost inevitable.

So why would you knowingly contract with an agent who sells five homes a year when you could find someone successfully selling 20 or 30? 

Now it’s true, there are a handful of really good agents out there (perhaps semi-retired) who only sell a few homes a year by choice.  And there are some "high producing" agents who you would be well-advised to stay away from.  That’s why I get on the phone and ask questions.

I also do my diligence to figure out who the buyers are.  How did the agent meet them?  Past client?  Referral?  Blind call from a bus bench ad?  It matters.

Then we talk about the lender.  If it’s Quicken Loans or the Bank of Zimbabwe, you might want to pass.  I strongly prefer lenders who are locally-based and who have established relationships with their real estate agents, because again, teamwork and solving problems is at the core of making it to closing in one piece.

Three years ago, I didn’t vet things so invasively.  That’s because three years ago, you weren’t going to get multiple offers.  Buyers were scarce and sellers were plentiful.  That meant buyers got to call the shots, and sellers who wanted to sell had to deal with a very thin buyer pool.  And that meant sometimes you simply needed to contract with people who might cause more problems than they solve. 

Of course, every situation is unique and sometimes I do choose to work with agents who don’t sell a lot of homes.   Maybe they have an incredibly well-qualified buyer, with bank statements submitted to back up a large down payment.  Maybe they are new to the business but are working under an accomplished and well-respected agent.  Or maybe, on occasion, every now and then you simply have no choice but to contract with someone who doesn’t sell a lot of homes.  Those are often the deals that hasten ongoing hair loss and these stupid crows’ feet next to my eyes.

But all things being equal, I’m drawn to competence and proven results.

If you’re working with your hairdresser or your cousin who just got his real estate license, you might not want to hear this.  But good agents prefer to work with good agents.  

HOW MUCH HIGHER WOULD YOU LIKE YOUR PAYMENT TO BE - 12%, 18% or 24%?

I am convinced that 2013 will go down on record as the best year in our lifetime to buy a new home.  It’s pretty simple – prices were near the bottom and interest rates were ridiculously and artificially lower than at any time in history, thanks to the Federal Reserve’s efforts to jack up the economy with “free” money (okay, nearly free).

Last February, I had one client close on a 30 year loan with a rate of 2.875%.  That is a fixed rate.  Yes, it really happened.

Many others closed at 3.25%, 3.50% or 3.75%.  Again, all utterly ridiculous in the context of historical norms (see chart to right).

The fact is, that with just over 10% appreciation (last year’s average in Denver) and a 1% increase in rates (which happened over the course of the year), the monthly payment on a new purchase December 31 was 26% higher than it was on January 1. 

That’s why last year was the best time ever to purchase a home.

So what does that mean today?  Have you missed the market? 

Of course, everyone must make their own decisions, but for reasons I have outlined extensively on this blog, I think there’s plenty of gas left in the tank – but with a strong bias toward better performance at the lower price points.

As I discussed in my 2014 Client Letter, the Federal Reserve has announced it will discontinue its policy of “Quantitative Easing” (printing money for banks to use on mortgage loans, then buying back the notes at below market rates) by the end of this year. 

That’s $1 trillion in mortgage capital annually that the Fed has said will go away. 

Does that mean higher rates?  Assuming the economy continues to make strides and there are no unforeseen global disruptions (terrorism, war, chemical attacks on US soil, etc), I would place the odds of higher rates by year end in the 90^th percentile.

So have you missed the market if you didn’t buy last year?

Well, let’s consider a couple of scenarios.

Let’s say real estate matches its performance of 2013 (optimistic, but possible).  If values go up 10% and rates go up 1%, your payment one year from today will be 24% higher than it is today.

A $250,000 purchase with a 10% down payment would have a $225,000 loan.  At 4.5% over 30 years, your monthly principal and interest payment is $1,010. 

A $275,000 purchase with a 10% down payment would have a $247,500 loan.  At 5.5% over 30 years, your monthly principal and interest payment is $1,254.

That’s a 24% increase.

You can easily run scenarios on other projections as well.

A one percent increase in rates coupled with 5% appreciation leads at an 18% increase in payment.

And for the naysayers… let’s say housing is flat in 2014, with no appreciation at all.  A one percent increase in rates will drive your payment 12% higher.

That means the likelihood of higher payments at year end is a virtual certainty.  That means your dollar goes further now. 

And remember that mortgage payments, unlike rent, do not adjust for inflation or future market conditions.  A $1,200 P&I payment today will be the same payment in 2019, 2024, 2029 or however far out you wish to project. 

It’s mid-January and the market is already teeming with buyers.  Inventory remains near all-time lows.  Distressed sales are history. 

With each passing day, housing will become more expensive, meaning that when it comes to making a move, sooner truly is much better than later.

2014 CLIENT LETTER (LONG FORM)

Here is the long form version of my 2014 client letter, which goes out in the mail next week.  (Only the true housing junkies will make it through all six pages!)

Enjoy - DB

******

Dear Friends,

Greetings, and Happy New Year!

On New Year’s Eve, the Denver Business Journal released its list of top news stories for 2013.  Ranked #1?  Denver’s remarkable housing recovery, which featured record-low inventory, an increase in sales of nearly 20% and a top-five ranking in several national surveys. 

It also featured appreciation.  Lots of it.  Here are the most recent 12-month appreciation projections from various reporting sources:

Core Logic: 10.2%
Trulia:  9.6%
Zillow:  9.3%
Case-Shiller:  9.5%
Metro Denver Economic Development Corporation:  9.2%

The growth in values triggered 2013 equity gains of over $21 billion in the Denver metro area alone.

And that growth in equity resulted in increased consumer spending, which resulted in increased hiring, which resulted in increased new construction of homes and apartments, which resulted in the best year for overall economic growth since the recession began in 2007.

But what does it mean going forward?

While 2013 was a record-breaking year for housing, I believe there’s more fuel in the tank for 2014.  However, it’s going to look different.  Appreciation rates are going to drop back to more traditional levels, as higher rates and higher prices cause buyers to think longer and harder before pulling the trigger.

The fact of the matter is that when you combine interest rate increases with price appreciation, homes are significantly more expensive today than they were 12 months ago.  One recent report shows that with 10% appreciation and 30-year mortgage rates going from 3.25% at the start of the year to 4.50% today, purchasing a home on the last day of 2013 would be roughly 26% more expensive than purchasing it on the first day of 2013.

That’s going to slow some people down.

Which is a perfect lead in to the concept of “market velocity”.  I believe the low prices and low rates we saw during the first half of 2013 created a near-perfect storm for buyers and sellers alike, which resulted in unprecedented market velocity. 

Market velocity is simply a fancy term for how quickly things sell.  During June of 2013, half of the homes that went under contract were on the market less than six days.  That is simply astounding, and in 19 years as a broker, I’ve never seen anything like it.

I listed one home in February that had 29 showings and 4 offers in 48 hours – and we were not giving it away!  To the contrary, this sale established a new high for the neighborhood, but with rates being so low and payments being so much cheaper than rent, buyers were climbing over one another to take advantage of these conditions.  (We also did an amazing job of staging it, but that’s a separate conversation)

So while the conditions were great for buyers, they were just as good for sellers.  Multiple offers, over-list price offers and “escalator clauses” became very common through the middle months of the year.  Sellers made excellent profits while buyers still felt they were getting great value.  It truly was the best of times.

As I referenced above, it’s going to change some in 2014, but I believe we’re still in a good place.  Zillow recently ranked Denver as the fifth strongest housing market in the country, and the highest ranked market in the country not located in California (which saw value losses of up to 50% during the downturn, compared to losses of 10 to 15% in Denver). 

Zillow’s “Market Health Index” gave Denver an overall score of 8.1, meaning that the fundamentals of the Denver market are stronger than 81% of the metro areas in the United States.  Over 86% of all homes sold in the Denver metro area during 2013 were sold at a gain, and only 11% of mortgages remain in a negative equity position.  Prices today are higher now than they were at the peak of the market in 2006.

So clearly there’s plenty that’s going well, but there are also some things to keep an eye on in 2014. No market cycle lasts forever, and the truth is that part of our upward trajectory has been caused by unprecedented government involvement in housing. 

Let me share with you some reasons the housing recovery still has legs, as well as things to watch for that could signal a change in the future direction of the market. 

POPULATION GROWTH

If you have spent any time on I-25 in the past three years, this isn’t news to you:  the population in the Denver metro area is exploding. 

The US Census Bureau recently reported that Colorado has picked up over 839,000 new residents in the past three years, a stunning annualized growth rate of 4.76%, fourth highest of the 50 states.  A growth rate between 2 and 2.5% is considered average.

So where are these 839,000 new residents going to live?  In the past three years, there have been fewer than 100,000 permits pulled for new homes and multi-family units.  That’s a dramatic shortage which is keeping rents at all-time highs and vacancy rates at all-time lows, while also ensuring a continuing demand for housing.    

ECONOMIC GROWTH

Denver’s unemployment rate fell from 7.0% at the start of 2013 to 5.9% at the end of 2013.  The national unemployment rate began the year at 7.9% and was 7.3% as of the end of October, according to the Bureau of Labor Statistics, so Denver continues to significantly outperform the rest of the country.

Consumer confidence for the Mountain Region (which includes Colorado) hit a six-year high of 80.7, more than 10 points above the national level of 70.4.  Significantly, while consumer confidence nationally has fallen by 1.7 points since the beginning of the year, the Mountain Region reading is 18.5 points higher than it was at the start of the year. 

The NASDAQ was up 38%, the S&P 500 increased 29% and Bloomberg’s Colorado Index improved by over 28% during 2013.  Coupled with housing’s huge comeback in 2013, people are feeling the “wealth effect” of newfound equity for the first time in at least seven years.

Let me make one important disclaimer, however, about the economy.  If you have a job, own a house, and have a significant portfolio of stocks, these are good times.  Unfortunately, 35% of the population rents and an even larger percentage has no stake in the stock market.  For these people, the economy remains extremely challenging, and I don’t see it getting better. 

Right or wrong, the divide between the rich and poor is growing wider, and you need to be aware of this when you make housing decisions. 

FORECLOSURES, SHORT SALES NO LONGER RELEVANT

At the start of 2011, 45% of the homes for sale in the Denver MLS were short sales or foreclosures.  Today, that number is 5%.  From a housing standpoint, foreclosures and short sales are statistically irrelevant. 

The disappearance of foreclosure inventory is one the big factors in our overall lack of inventory.  As of today, there are just over 8,000 homes for sale in the Denver metro area, down from a high-water mark of nearly 31,000 (most of them foreclosures) during the summer of 2007. 

When you consider that over 83,000 homes were lost to foreclosure in the seven-county Denver metro area during the peak of the recession, and many of these “boomerang buyers” are now re-entering the market, you see how lopsided the supply-demand imbalance has become.

And because builders cannot build anything with a profit below about $325,000, and most of these first-generation foreclosure folks are looking for homes well below that price point, it’s not hard to envision continued upside at the lower price points.

REPLACEMENT COST

As I just referenced, while builders are most definitely cranking out the homes again, it’s virtually impossible to find a new single family home below $325k (unless you are willing to move to Fort Lupton, Firestone or Lochbuie, where the land value is essentially zero). 

Replacement cost is a very important number in the context of understanding real estate values. 

Many of you have heard a story I told repeatedly this year of a client who sold a home here in Denver in order to move to Las Vegas.  He made an offer on a 3,000 square foot ranch home on a golf course that was built in 2007 and originally sold for $525,000.  The Las Vegas property was bank-owned and he ended up in a bidding war.  The bank listed it for $255,000 and he ended up going all the way to $280,000 (and outbidding several other buyers) to get the home under contract.

When he asked me what I thought of his deal, I suggested that he take a hard look at replacement cost.  And sure enough, when the insurance company went to the house to prepare an insurance quote, Allstate estimated the replacement cost at $440,000. 

If you can buy something for $280,000 that costs $440,000 to rebuild, you are not overpaying.  And that’s why you’ve heard stories of 25% to 30% price appreciation in places like Phoenix, Las Vegas and the hardest-hit foreclosure markets during 2013.    

Because of the absolute stupidity and mismanagement of the financial crisis by the banks and the government, homes have been selling at absurd discounts, with the losses offset by the Federal Reserve and banking regulators (or, if you want to be painfully precise, current and future taxpayers).

Lower-priced homes are going to continue to be the safest bet in housing because the supply is limited, the demand for them is extreme and builders can’t build them for a profit.  Even with prices coming off the bottom, entry-level housing is still the most secure place to invest in real estate.

NEW CONSTRUCTION

Now playing in a city near you.  There’s plenty of new construction once again, although as I referenced, very little of it is what we would call “affordable”. 

New construction is booming because money is cheap, homeowners in the mid-price ranges now have equity and builders can’t help themselves. 

Are we overbuilding again at the higher price points?  I believe we are.  And when interest rates go up, eventually, new construction will be the first sector of the market to feel it.

New construction is most often an emotional purchase based on wants and desires, not need.  When economic conditions change, luxuries go out the window and people focus on what they need, not what they want.  As always, be careful with new construction in 2014.

CONDOS

Conversely, I think there is evidence to support the theory that the condo market is about to get healthy. 

Truthfully, condos are very rarely a “first choice” when it comes to housing, but I believe we are living in an economy where second choices are going to become a primary alternative (out of necessity) to more and more people, especially at the lower price points. 

And that’s what condos generally are – more affordable entry-level properties that give people a foot in the door when it comes to housing.

In the boom market of 2000 – 2006, condo buyers could get in with little or no money down.  And that’s pretty much how it went.  For five or six years, most condo buyers put no money down and had zero equity.  When the market turned, they had the least incentive to stick around, and so condo foreclosure rates soared and property values crashed. 

During the recession, conventional lenders took an exceptionally hard line on condos, with many refusing to do any loans for buyers who didn’t have 20% down.  That further thinned the buyer pool, which caused more value losses and even more foreclosures.  Then FHA essentially abandoned the condo market in 2009, and it just got awful.  This regrettable cycle finally bottomed in 2011, but now it’s starting to turn. 

I just sold a condo in November to a buyer who purchased with a 5% down payment.  Now that we’re done with foreclosures and the market is improving, more lenders are getting back into the game. 

When that happens, and you let more 5% and 10% down payment buyers into the arena, the buyer pool expands.  And since we don’t have any more foreclosures and inventory is so low, condo prices figure to continue trending upward.

Condos are not for everybody, but after avoiding them at any price for five years, I expect to sell more of them in 2014.

QUANTITATIVE EASING

Finally, we can’t discuss housing without some mention of Quantitative Easing (known as “QE”).  If you don’t know what this terms means, you should get educated quickly.  (I wrote about it extensively on my blog September 20, 2013 – go to www.DaleBecker.com for the five-minute crash course)

In short, Quantitative Easing is a policy the Federal Reserve began implementing during the darkest days of our financial crisis back in 2009.  To keep the mortgage market from completely collapsing, the Fed began printing money to fund mortgages and purchasing the notes at below market rates.  The overreach is that, five years later, they’re still doing it.

That’s how buyers have been able to get rates in the 3’s and 4’s over the past two years, when market conditions would warrant a higher rate of return for investors (and higher interest rates for buyers). 

The Fed has been pumping $1 trillion a year into the economy via the QE program, and it has done its job.  It has stabilized the market and now it has fueled significant price and equity gains, which is what the government has wanted all along. 

It’s time to stop printing money, but I fear the government lacks the courage to do it. 

QE purchases are supposed to slow by $10 billion per month starting in January, and the Fed has said it plans to be out of the market entirely by December.  I personally don’t see it happening because the benefits of low rates and soaring home prices are just too tantalizing for the government to back away from (especially in an election year), but for the future sustainability of the market, I hope it happens. 

If you have made it this far, I commend you for you diligence and desire to understand the housing market.  I have always said that I want my clients to be best-educated buyers and sellers in the marketplace, and that is why I write this annual overview at the beginning of each year.

This will be my 20^th year as a real estate broker.  In those years, I have seen all types of markets.  The one constant is that I have always worked to protect my clients and help them create opportunities for success. 

I am deeply humbled by your continued support, your ongoing friendship and the amazing quantity (and quality) of referrals you send my way. 

I wish you and your loved ones all the best for a happy, healthy and prosperous 2014!

Dale Becker, CRS

RE/MAX Masters

(303) 416-0087

DBJ RANKS HOUSING AS DENVER'S NUMBER ONE STORY OF 2013

If you lived through the Denver housing market of 2013, this story doesn't surprise you.

The Denver Business Journal has ranked Denver's housing boom as its number one story of 2013, beating out floods, recalls and yes, marijuana.

Growth in home values created over $21 billion in new equity for Denver metro homeowners during 2013, with a median priced home gaining about $25,000 in value. This led to more consumer spending, more job growth and more new construction.

The year was marked by an unprecedented inventory shortage, overwhelming buyer demand and record low interest rates, which sparked bidding wars and market velocity which was so extraordinary that in June, over half of the homes that went under contract in the Denver MLS were on the market six days or less.

Interest rates were in the 3's for much of the year, thanks to the Federal Reserve's ongoing Quantitative Easing policy.  The Fed pumped nearly $1 trillion into the housing market nationally by funding mortgages and then purchasing the notes at discounted rates.  The Fed has announced that it will end the QE program by the end of 2014 (although I am skeptical that the Fed will have the discipline to pull the plug, especially in an election year).  

Rates rose into the 4's during the fourth quarter, as markets braced for the Fed's expected pullback in 2014.

The median home price in the Denver metro area increased somewhere between 9.3% (according to Zillow) and 10.2% (according to Core Logic), which followed an impressive 8.5% gain in 2012.  

Foreclosures and short sales, which accounted for 45% of listing inventory at the start of 2011, now make up less than 5% of the active listing inventory.  

Population growth also continued to be a big story.  According to a report released on Monday, Colorado has gained over 800,000 residents in the past three years, the fourth strongest growth rate among the 50 states.  During that same time, fewer than 100,000 new homes have been built.  

This demographic pressure has kept upward pressure on rents and prices while vacancy rates remain at historic lows.  Rents increased nearly 5% in 2013 and the vacancy rate in Denver is 4.4%, although in some markets (like Fort Collins) vacancy rates are less than 2%.

Zillow also has ranked Denver as the fifth healthiest housing market in the country heading into 2014, with the best market ranking of any major city not located in California (which saw far greater value losses during the downturn).  Zillow has given Denver a rating of 8.1, meaning that the Denver market is in better shape than 81% of all markets surveyed.

DON'T PANIC - THE MARKET IS JUST FINE

Don't panic - the fundamentals of the Denver housing market remain remarkably strong.

But while a botched MLS rollout and the distractions of the holiday season have some wondering if the market is slowing down, I believe that you will see a strong January with buyers back in large numbers and agents getting the hang of our new MLS system.  

For 2014, however, we’re going to have recalibrate our thinking a little bit as year-over-year statistics begin to reflect the huge changes which have occurred over the past 24 months.

Falling inventory has been the number one driver of price increases over the past two years, caused in large part by the fact that foreclosures and short sales have essentially disappeared from the landscape after dominating our market for nearly seven years.  

The numbers are going to moderate going forward, not so much because buyer demand has abated (it definitely has not), but rather because year-over-year comparisons are now going to be made against a market that has been sizzling hot for nearly two years.

Going forward, the new story will be more moderate price increases and rising inventory levels.  Get used to it.  

But before you start to worry, consider the following (from our last full month under the Prime Access MLS system):

In October of 2012, there were 3,164 homes that went under contract.  In October of 2013, however, 3,874 homes went under contract.  That's an increase of over 20%, and compared to October of 2011, when 2,850 homes went under contract, the October 2013 numbers reflect a 35% increase.

The market is just fine, thank you.

Price increases will moderate because you simply can't pile 10% price increases on top of 10% price increases for very long.  The 10% price gains in 2013 are on top of the 8.5% gain we saw in 2012.   

I've talked with clients for years about how "tiered" our market is, with different realities at different price points... and that will continue.  Lower end inventory will continue to outperform higher end inventory, especially with builders now roaring back into the market (starting at about $325k and heading north from there) and throwing up new homes at a breakneck pace.

The name of the game remains land value and replacement cost, and as long as lower end homes are cheaper to buy than they are to build, you really can't go wrong.  

The big stories in the housing market next year will be interest rates and the national economy, which continues to struggle (even while Denver has seen impressive growth, with the unemployment rate now below 6.0%).   

We have experienced a remarkable two year run in the Denver real estate market, and inventory has now bottomed out.  Expect to see more homes for sale on a year-over-year basis with value increases in the single digits.  

But while supply will increase, the place to keep your eye is on demand.

Because as long as buyer demand remains strong, the housing market will continue to function very well.

TRANSPARENCY IS COMING

These are turbulent times in the world of real estate.  There are complex issues that the industry is dealing with that have heavy ramifications for the future.

One of the biggest has to do with the issue of transparency, and changes are definitely afoot.

What is “transparency”?  For the purpose of this conversation, transparency simply means making each individual agent’s sales history information publicly available online.

Why is this an issue?  It’s layered, and complex, but here are the key arguments the “anti-transparency” people make:

Consumers will be pre-disposed to choose agents based solely on sales production instead of competence, ethics or harder-to-quantify criteria like micro-market knowledge;

Agents who form teams will lump all production under the team leader’s name, which will drive consumers toward teams (which often have several inexperienced agents working under the name of a team leader) instead of better-qualified individual agents;

Sales production alone isn’t the only qualifier for what makes an agent exceptional.  There are many high quality agents who choose to sell 10 or 12 homes a year who will be passed over in favor of mega-producers and teams full of newbies.

As you can see, there are some legitimate concerns with this information going public.  There is also the very real fact that every agent who belongs to the National Association of Realtors (NAR) pays hundreds of dollars a year in membership dues, whether they sell four houses or forty.  And since the average number of transactions per Realtor per year is about 7.5, you can see how the vast majority of dues-paying agents may have real concerns about this disclosure.

NAR is going forward with a controversial new platform called “Agent Match”, which is now showing agent production in a few beta markets around the country. (Denver is not one of these test markets, but Fort Collins is) 

But here’s the problem – thanks to Zillow, Neighbor City and other third party aggregators, the data is already getting out there. 

Zillow’s solution (introduced just this year) was to simply step outside of NAR’s data reporting controversy and allow agents to certify their own production (mine can be viewed by going to www.ZillowReviews.com).

Zillow went one step further, encouraging agent reviews on their site (I currently have over 60 verified past client reviews posted, also available at www.ZillowReviews.com) which supports this growing trend of consumer transparency. 

The consumer wants information and transparency, and since NAR is engaged in a giant fistfight with its members, Zillow simply stepped around the fray and filled the void.

Agents need to get over it.  Sales production may not be the only criteria that matters, but shouldn’t we let consumers be the ones to make that decision? 

The in-fighting at NAR and in the real estate community is damaging the Realtor brand, and agents need to suck it up and realize that transparency isn’t going away. 

As an agent, it’s up to you to determine how the world views your brand.  Having a blog is a good first step.  Verified client reviews are also extremely helpful.  A social media presence make a difference, too. 

Yes, it is work to build a brand and maintain a great reputation online.  The dinosaurs in my business don’t like it, but change is inevitable.  You adapt, or you perish.

I’d rather put my energy into going forward than trying to protect a closed-data world that no longer exists.

DENVER MLS CHAOS

We all know that good technology can be an accelerator, that it can increase the speed at which things happen and improve the productivity and profitability of users. 

But can bad technology do the opposite?

Unfortunately, we’re about to find out here in Denver.

On November 21, the Denver MLS went through a “hard” conversion from our previous system, Prime Access, to a new system called Matrix.  The early returns make Healthcare.gov look like it was put together by Google.

The main criticism of Prime Access was that it was “too basic”.  That it was easy to use, but perhaps not evolving fast enough to match the other technological advances taking place in our business.

Matrix, on other hand, sits at the far end of the spectrum of advanced technologies.  It includes dozens of new fields (some relevant, some not) like HERS Ratings, WalkScores, Energy Star Qualifications, Ceiling Height, Carport Square Footage, Distance to Light Rail, Amperage, Latitude and Longitude, and Solar Panel Kilowatts (to name a few) that have made entering a new listing a weeklong ordeal.

Also, the printouts we share with buyers have gone from easy to read one-page summaries of basic, relevant information to the Cliffs Note version of War and Peace, with tiny 6-point font covering multiple pages of data (such as "NAHB/ICC-700 Year Certified") for each and every property, with most fields currently left blank by agents who couldn't calculate a HERS Rating if their life depended on it.

But do you want a simple map, to show you where the property is?  Sorry, not included.  Want sales history for the thousands of homes that sold prior to the launch of Matrix?  It's gone.  

There’s a right way and a wrong way to do this type of data conversion.  The absolute worst way is to implement a “hard” cutoff, with one system shutting down in entirety the day a new system goes live.

Congratulations, Denver MLS.  You just put half of your constituents out of business.

I’m not understating the problems here.  Agents (even the smart ones) are having terrible problems searching for homes, loading data and navigating the new fields.  I believe this is already resulting in agents simply throwing their hands up and checking out for the rest of the year, while other agents who are still listing homes are seeing those properties significantly under-marketed due to the failures of the new system.

In short, everyone is angry.  And they should be.

This is a serious problem, because all 19,000 agents in the metro area have one source for real estate data, and it’s the new Matrix system. 

Now, in fairness, I don’t doubt that a few months from now, we’ll all have it figured out and most agents will be skillfully navigating the new system.  But you simply can’t do it the way it was just done – with an overnight shut down of the primary marketing systems for 10,000 homes currently on the market.

I pay fat memberships dues to NAR and the Denver Metro Association of Realtors plus sizable monthly access fees for the MLS.  We’re talking over $1,000 per year.  For that money to result in this kind of bungled rollout is cause for serious concern, and it undermines the credibility (and ability to make a living) of the real estate community.

Significantly, it also effects our clients, and that's even more important.  

Meantime, MLS “outsiders” like Zillow and Trulia are delivering quality (if not always current) data to consumers that it is getting better by the day. 

Unlike many agents, I am not “checking out” for the rest of the year, but I am "working angry".  I hope other boards and associations in other cities that are thinking about “upgrading” their MLS technology look to Denver and learn what not to do when it comes to shifting technology platforms.

WHAT’S NEXT? IT’S TIME FOR THE CONDO COMEBACK

By now, everyone knows that the housing market had an amazing year in 2013.  In Denver, price increase estimates range from 10.1% (most recent Case-Shiller) to an amazing 13.9% year-over-year increase (Zillow). 

But in the field, it’s not that simple. 

As I’ve advanced for years, there is not “one” single housing market in Denver, but at least three.  Those markets are essentially the entry-level market, the move-up market and the luxury market.  They are all different, and they all perform differently.

In simplest terms, the largest gains have been posted this year at the lowest price points.  In some areas of town under $200,000, homeowners have seen price gains as high as 15-20%.  At $1 million, however, any gains have been negligible. 

The biggest reason for this disproportionate gain at the lower price points has to do with the basic concept of “replacement cost”.  In most areas of Denver, the break-even point for builders starts at about $325,000, meaning they can’t build single family homes for less than this with any kind of profit.

So they don’t.

That means you have a limited and finite supply of the types of homes most people want – the affordable ones.  But at the higher price points, builders can build to meet (and exceed) demand fairly quickly, which means your upside on higher-end homes is capped by the fact there can always be an increase in supply.

Which brings us to the subject of condos.

For the past five years, condos have been the “red-headed step child” of the Denver housing market.  (For a detailed discussion about this, see my post from May 21, 2012, linked here, or my post from January 26, 2010, linked here).

With lenders unwilling to lend, homeowners walking away and HOA’s swimming in red ink since 2009, the Denver condo market has been a basket case.  Many associations have been unable to keep up with basic maintenance demands, newer associations have been awash in litigation and falling prices have sunk thousands of homeowners into negative equity positions.

In other words, it’s been a season of great opportunity for those who know what they’re doing.

It has been my contention that, because of these problems, the condo market has been lagging the housing market recovery in Denver by 6 to 12 months.  Now, with prices on single family homes soaring and the overall feel of the housing market completely different than it was 24 or 48 months ago, the condo market is next up for a major advance.

With price rising and defaults sinking, lenders are showing a new willingness to finance in the condo market.

Earlier this month I sold a condo listing to a buyer who came in with just a 5% down payment – a rarity since most lenders have required a 10% to 20% down payment on condos since the market tanked (or was blown up by FHA) in 2009. 

With FHA taking itself out of the picture, lenders responded by essentially eliminating low down payment options.  Without FHA to finance first-time buyers, investors took over the market.  And since most investors simply will not pay retail, selling a condo became nearly impossible for most private owners – unless they were willing to sell at a big loss. 

In 2010, Fannie Mae and Freddie Mac decided to impose their own set of restrictions, and with that, the freefall was underway.  

Foreclosures flooded the market, investors bought them for cheap, and the remaining “retail” owners were left with the difficult decision whether to sell short, walk away, or wait it out.

While FHA has yet to get back into the condo market, I believe that day is coming soon.

As Fannie and Freddie begin to relax guidelines (as illustrated by my 5% down payment buyer) and single family prices continue to move out of reach for many first-time buyers, the condo market is becoming much more viable.  And should FHA begin lending into more condominium communities again, the surge in buyer demand will be both sudden and dramatic.  

One last note - because HOA’s play such a large role in condo life, it’s important to emphasize that you MUST look carefully at the financials of each HOA before making any buying decisions.  Some are so deep in red ink their recovery may lag for years, but for others, who have navigated the downturn with prudence, forethought and fiscal discipline, better times are coming soon.

EARLY PREDICTIONS FOR 2014

It seems people are always intrigued by housing market predictions.  And it’s understandable, because we all want to know how the market is going to perform and whether we should buy, sell, invest or rent.

2014 is going to be an interesting year, in large part because it will follow on the heels of one of the most remarkable years for real estate in recent memory.

Assuming there are no major economic or political disturbances (war, terrorism, global banking failures, etc.), I think the first thing you have to do is dial back your assumptions and realize that the re-calibration of our market in 2013 was caused by a few unique one-time circumstances… specifically, that after seven years of massive foreclosures we finally ran out of homes to foreclose on… at exactly the moment some 83,000 households in the seven county Denver metro area that lost homes to foreclosure between 2005 - 2008 began hitting eligibility to get back into the market.

Those factors, coupled with interest rates that were in the 3’s for much of the year, unleahsed a surge in values and appreciation that was extra obvious below $250,000, and which created enough equity for current owners of those entry-level homes to sell and use their equity gains to move up.

How much did values go up?  According to Case-Shiller, average home prices in the Denver metro area were up 10.1% over the past 12 months.  Core Logic puts the number at 10.2%, and Zillow says prices have increased an amazing 11.8% over the past year. 

What does that mean in real numbers?  Over $21 billion in equity gains for homeowners in the metro area over the past 12 months!

So what about 2014?  What does the future hold for real estate in Denver?

Again, predictions are usually exercises in folly, because there are just too many variables, but here’s what I am calling:

Below $250,000:  6% appreciation

$250k - $400k:  4% appreciation

$400k - $600k:  2% appreciation

$600k - $1 million:  Flat

Above $1 million: Minus 2%

Again, in my view, there were a number of “one-time factors” that caused our market to explode and essentially “recalibrate” to significantly higher values, especially at the lower price points.

The incredible inventory plunge coupled with the surge caused by “boomerang buyers” (foreclosure 1.0 buyers coming back into the market) really set the stage for the frenzied conditions we saw much of the year.

Going forward, buyers are going to be more cautious as rates and payments continue to creep higher, and builders are going to play a larger role in actually holding value gains in check by building far more homes in 2014 than they did in 2013.

To me, the magic number is somewhere around $325k, but that’s the price point where builders can start selling homes at a profit.  Below this number, you simply aren’t going to see any new inventory, and demand here will remain extremely strong.

Above $325k, however, new inventory will be a drag on the market because builders are once again drinking the Kool Aid and building like there’s no tomorrow.  If and when rates rise, the builders will be the first ones to feel it, and the higher end inventory that’s hitting the market by the day will be the hardest to sell if times get tougher.

Below $325,000, it’s hard to see many scenarios where values don’t hold.  You continue to have large numbers of both first-time buyers and boomerang buyers competing for finite inventory.  Rents continue to go up and there’s still value in the market when demand outstrips supply.

In my opinion, 2013 was a “once in a generation” market where unique events caused home prices to recalibrate quickly.  But the fact remains that higher rates, higher prices and higher payments are going to slow the surge in 2014, with the lower end of the market being the safest possible place and the higher end much more vulnerable to the instabilities of a still-recovering economy.

LAND BUBBLES

When people talk about surging home prices, they often think they're talking about the value of the structure itself.  But in reality, more often than not price increases are driven by land values, not home values.

John Burns Consulting, a major consultancy firm which works with builders nationwide to help them value raw land to be used in constructing subdivisions, recently released a report tracking land values in 50 major metropolitan areas of the United States dating back to 1982, 

The report looked at the median home price and then used county assessor valuations to determine on a percentage basis what part of the value was attributable to the house, and how much value was derived from the land.

In Denver, our peak "land value" year was 2001, when land value made up as much as 49.7% of the median-priced home's value.  By comparison, during the peak year of the housing bubble in Phoenix, land value made up 65.7% of the median-priced home's value. 

When land values become disproportionately high, goes the theory, there exists greater potential for a sudden and severe correction.

Today, land value makes up just 28.3% of the median priced home's value in the Denver metro area.

However, actual land value can vary widely from neighborhood to neighborhood.  Just last month, I helped a client research lot value for a small ranch home in the red hot Highlands area of Denver which sits on an 8,000 square foot lot.

Its land value, according to the Denver County Assessor - $279,300.

By comparison, my suburban home, which was built in 2005 and also sits on an 8,000 square foot lot and would sell for about the same price as the home in the Highlands (but is nearly three times larger), has a land value of $83,130.

So land really is the big driver in determining real estate values.  For that reason, home prices will almost always be more steady and predictable on the west side of town, where there is much less available land and more established neighborhoods, than in the boom/bust areas on the east side of town such as Aurora (particularly east of E-470), Parker and Commerce City.

A home's overall value really does depend on location, location, location.

An educated buyer should understand that land value, not house value, is where bubbles are created.  As a percentage of overall value, land values in Denver today are more than 40% lower than they were during our peak value years, which tells me we've still got a ways to go before anyone should worry about a bubble.