HEADING FOR THE HILLS

Things to continue to evolve through this summer of adjustments in the Denver housing market.  

A few weeks ago, I listed a foothills property on two acres up in Golden Gate Canyon.  This 2,500 square foot mountain home had continental divide views and offered relatively easy access to the city of Golden and the metro area via a 25 minute drive on State Highway 46.

Historically, properties like this in the foothills outside of Denver have been financially risky propositions.  With a relatively short spring-summer selling season, an abundance of second homes and a disproportionately high number of foreclosures over the years - not to mention ever-present fire risks - I've always preached caution to those who would romanticize a home in the woods.

As a result of these built-in risk factors, selling a home in the foothills has often been a lengthy process.  Through the years, it has not been uncommon to see listings sit anywhere from two to 12 weeks in search of an offer.

Long story short, sensing a potential run on mountain and foothills properties (and wanting to price in some fat in case we didn't get it), we listed this home at more than $30,000 over our most recent closed comparable.  If there's going to be a run on homes in the foothills, I said to my clients, I want to make sure we're priced in front of it and not leaving any money on the table.  

Sure enough, within 48 hours we had eight showings which (under mountain real estate math) would be like 40 showings for a home in the metro area.  We quickly had two over-list price offers, which we negotiated even higher, with a full appraisal waiver from the winning bidder to protect us from the fact we had no comps to support value.

Even more remarkably, in following up with the six other showing agents, the narrative for each buyer was exactly the same:  metro area homeowner, would need to sell their Front Range home to buy in the foothills, and most likely would bring us an offer if we would consider a contingency.  

Let's look at this another way.

If only one-tenth of one percent of the Denver metro area population (currently around 3 million) decided to move to Evergreen, Conifer or Bailey, that would be 3,000 additional residents moving into the area.  Given that there have only been 1,140 total sales between these three communities in the past 12 months, you can see what a dramatic impact even a small shift from the metro area to the foothills would have on prices.  

Going forward, a reliable Internet connection may be more important that an easy commute if you're planning to participate in this new work-from-home revolution.  And homebuyers are apparently will be pay quite a premium to live amongst the trees instead of the tall buildings.   

CORONAVIRUS UPDATE LETTER #3 - MAY 9, 2020

Dear Friends,

Happy Saturday evening – and Happy Mother’s Day (in advance) to all those wonderful moms out there!

As most of you know, today launched the official “Safer at Home” phase of Denver’s Coronavirus response.  Since late March, we have essentially been under a series of rotating/adjusted/realigned/new-and-improved “Stay at Home” orders that either did-or-did-not allow buyers to view homes, did-or-did-not allow under contract homes to proceed to closing, did-or-did-not allow inspections and appraisals, and did-or-did-not allow agents to do anything other than order takeout, do lots of yardwork and facilitate occasional Zoom calls.  

It's been clear as mud with more twists than the Mind Eraser (gratuitous Elitch Gardens reference for those of you old enough to remember when theme parks were a thing). 

Coming out of the “Stay at Home” order, we now have Covid-19 Buyer Addendums, Covid-19 Seller Addendums, and Covid-19 Contract Addendums.  If you want to visit a real estate office, you’ll need your temperature scanned upon entry and exit, you’ll have to sign an affidavit affirming you are symptom free, you’ll need to wear a mask and you must maintain proper social distancing protocols at all times.  In our office, to comply with state mandates, you’ll enter the front lobby from the main entrance on Grandview and exit out the back door, into an alley on the north side of the building.      

Agents (now deemed “field service workers” under the latest state health order) have also been given a crazy set of responsibilities related to Covid-19 whether we are working with buyers or sellers.  This includes ensuring buyers have masks and gloves, that there are no overlapping showings, that we keep a log with names, phone numbers and email addresses for every individual we have an in-person interaction with, that buyers and sellers sign liability waivers before viewing any home or having their home viewed, and that we ensure all solid surface and high touch areas of our listings are wiped down with approved disinfectants between every showing. 

Other than that, it’s pretty much business as usual. 

But for all of that, this weekend represents a significant potential milestone in the journey back to “normalcy” for the Denver housing market.

As most of you know, I have been data-driven and analytically-inclined for as long as I have been in the real estate business and I track everything that happens inside this market with charts and spreadsheets.  Over the past two months, the data has been so incomprehensible and scrambled (showings down 95% in April compared to January, for example) that you would probably be better served staring into a kaleidoscope or consulting an astrologer than looking at an inventory spreadsheet for guidance. 

But since spreadsheets are our thing… as of today, we’ve got more than 10,000 homes listed for sale in the Denver MLS, the first time we’ve had more than 10,000 homes for sale in May since 2012.  With showing restrictions being lifted today, nearly 2,000 new listings have been placed on the market in just the past five days! 

But in the short term, we’ve also got thousands of buyers who have been sidelined since March coming back into the market.  The analogy I’ve used extensively over the past few weeks is that I expect these first few weeks to be like two giant waves slamming together, with sellers coming from one direction and buyers from the other.  It’s going to be nuts, and it’s going to be turbulent.  But once that initial surge of buyers has been absorbed into the market, I think it’s likely we’re going to see the landscape shift as summer arrives. 

The economic reality of 15% unemployment and an ecosystem of empty airplanes, hotels and shopping malls is going to cause some inventory to be pushed onto the market later this year that otherwise wouldn’t be showing up.  I have a past client who is a pilot with United Airlines, where 70% of the pilots have been furloughed and the company has suggested that “best case” is 50% of those are brought back by the end of the year.  The oil and gas industry is in shambles, the mountain tourist communities are empty and last I heard, Nolan Arenado was at home in California playing wiffle ball with his brothers while Coors Field is being colonized by murder hornets. 

How severe will the price damage be?  The answer, of course, is it depends on how long we limp along under the black cloud of the Coronavirus.  If we can avoid a second wave of infections and progress toward reopening restaurants, bars and small businesses by the end of the month, the damage might be negligible.  But that’s a big “if”.  If we go back into lockdown six weeks from now because of another wave of infections, price (and societal) damage will be significant. 

It's pretty basic economics, in my opinion.  If you have more buyers than sellers, prices go up.  And if you have more sellers than buyers, prices go down. I think it’s pretty clear we’re going to have more sellers and fewer buyers as a result of the economic damage of Covid-19, at least for a while.   Will it be a few more sellers?  Or a lot more sellers?  That’s the $64,000 Question, and a lot of it depends on whether enough buyers will have jobs to offset all the new inventory that is coming. 

WE MAY ALL BE IN THIS TOGETHER, BUT SOME ARE MORE IN IT THAN OTHERS

So again, it’s important to state that there are no comps on a “black swan” event like this and we’re all flying a little blind.  But I have seen and experienced a lot in 26 years as a broker, including how the market responded to the horrific events of 9/11 and the subprime meltdown of 2007-08.  

My instincts here tell me that while politicians and celebrities have been selling the notion “we’re all in this together”, the reality is the poor are getting clobbered while the well-off are being inconvenienced.  (Quick sidebar:  As you know I strive to avoid politics, and I also know a lot of people are hurting across the economic spectrum.  I am generalizing here, but when you look at the macro trends, unemployment in the lower-end Census tract neighborhoods of Denver may be as high as 40%, while in more affluent areas it is often less than 10%.  Education and technical skills give you a better chance to pivot and adapt.  If you’ve been waiting tables, working retail or serving in the hospitality industry, it’s a catastrophe.)

I also think the government’s response (print money, bail out corporations and save the stock market) was, as usual, disproportionately aimed at preserving wealth for Wall Street elites and the so-called “one percent”.  While in Colorado alone we’ve had over 420,000 claims for unemployment in a state with 5.8 million people in less than two months… the S&P 500 closed Friday at 2,929, up 31% from its low of 2,237 on March 23 and, if you can believe it, up 2.4% from when it closed at 2,860 on May 8, 2019. 

How on earth can the S&P be in better shape today than one year ago when unemployment nationally is 17% and climbing?   If you don’t think the Fed’s monetary policies control the markets, you’re missing something. 

Endlessly printing money devalues the dollar but inflates the price of hard assets.  So if you own hard assets (like houses, stocks or a large supply of Clorox wipes) values inflate with the money supply.  But if you don’t own stuff, then whatever worthless trinkets you do own become worth less while the price of everything else goes up.      

I can’t fix that.  All I can do, objectively, is identify where the vulnerabilities exist and try to share that data with you so you can make more informed decisions.

This is not intended to be a political rant.  In the context of housing, this tells me that the greatest vulnerability is at the low end of the market, where the price of a gallon of milk is more important than the price of a share of Apple stock. 

THE BOTTOM OF OUR MARKET WAS ALREADY SOFTENING

We were already seeing a softening at the very bottom of our market before the Coronavirus pandemic hit.  If you have read any of my extensive market research reports over the past 18 months, I repeatedly made the point that we’re running out of buyers at the bottom rung of our market due to affordability issues.  Increasingly, the housing market in Colorado is becoming a place where equity rich homeowners trade houses with other equity rich homeowners.  Increasingly, the Denver market has come to feel more and more like the ritzy and exclusive California market I left nearly 15 years ago.   

Historically, the housing market has functioned like a pyramid, with more buyers at the bottom and fewer buyers at the top.  For 90%+ of my real estate career, demand at the bottom outstripped demand in the middle, which outstripped demand at the top.  It was a common sense analogy that stood the test of time.  All those buyers at the bottom of the pyramid created price support and pushed values higher.  Remember, it’s all supply and demand, and when you had a low supply of homes relative to demand, prices were sure to go up. 

In the past 2 – 3 years, there’s been a shift.  For evidence, let’s take a look at the Denver Market Data Spreadsheet I have inserted below.  In the sub-$250k market right now (mostly condos, obviously), there are 1,488 active listings for sale but just 386 homes under contract… a ratio of 3.85 active listings for each home under contract.  But in the $400k - $600k price range, there are 3,216 active listings for sale and 2,358 homes under contract… a ratio of 1.36 active listings for each home under contract. 

So while there are just 1.36 active listings for each home under contract in the $400k - $600k range, there are 3.85 active listings for each home under contract below $250,000. 

What does this mean?  It’s means we have more buyers for move-up homes than starter homes.  For comparison, if we go back to May of 2015, at that time there were 790 listings on the market below $250k and a whopping 2,819 under contract – a ratio of 0.28 active listings for each home under contract.  (This was right about the time I had 32 offers on a $240,000 listing, a benchmark for the madness that was the Denver housing market just a few years back) 

Five years ago, at the entry level, demand was swamping supply… which was driving all price points above it higher.  Comparing that ratio of 0.28 to 3.85, today’s entry-level buyers have roughly 15 times the number of choices relative to buyers in the market compared to what existed just five years ago. 

Even in February, before the Coronavirus shook the foundations of our market, there were 2.21 active listings under contract below $250k to every home under contract… or roughly 8 times the number of choices relative to buyers in the market compared to five years ago.

So the unique transition has been one to where the market functions more like a diamond, with not much demand at the bottom or top but tons of activity in the middle.  And because most of our rapid price growth happened because there were so many buyers crowding in at the base of the pyramid, under the diamond model (with fewer buyers at the bottom) you simply don’t have that same upward push on prices.  That’s why I thought prices were poised to flatten out going into this, and that’s why I think you have to be very careful with your decision-making moving forward. 

In summary, if there are foreclosures or distressed sales, I think you’re going to see a higher percentage of these concentrated at the bottom of the market, where job losses have hit the hardest and the buyer pool is already thin.  I don’t believe you will see significant price regression, though, because if there are foreclosures I expect to see equity-rich investors swoop in and scoop them up quickly.  I don’t want to see any distressed sales, personally, but if you’re an investor and you’re looking for the soft spot in the market, it’s probably down near the bottom and it’s probably 6 to 9 months out.

A LOGICAL PLAN FOR OPENING UP COLORADO, AND MOST EVERY OTHER STATE

Let’s face it – over the past two months, life has just been weird.

We’re all off our routines.  We’re living and/or working at home, often with people who used to live somewhere else, with neighbors who never leave the cul-de-sac and cars that sit in the driveway for days on end.  Many of us check Twitter 600 times a day, some of us have howled, and almost all of us have seen (and smelled) more fresh bread baked in our households in the past two months than in the past five years. 

For me, I’ve been acutely aware that we are living through history.  Twenty years from now, our kids/grandkids will want to know something about this strange era, when everyone stood six feet apart and covered their faces with masks.  Our descendants will gasp in disbelief when they read in history books that their ancestors used to celebrate birthdays by blowing out candles on birthday cakes! 

During this time, I’ve encouraged my daughters to journal, take pictures and record their thoughts.  From 5:30 to 6:30 most nights, we engage in a 60 minute “family social hour” where we all come out of our bedrooms/offices/caves, sit in the family room or on the back deck together and reminisce about different times and places (i.e, the “good old days”).  We’ve had themed nights (“Spring Break”, “Christmas in April”, “May the 4^th Be With You”), themed meals and when none of that made us feel better, we bought a puppy. 

We’re all a little stir crazy. 

But we’ve got another problem, and that’s how we smartly and strategically come out of this medically-induced economic coma.  Different states are taking different approaches.  I firmly believe the next 30 days are among the most important in the history of our country.  Will we effectively manage Coronavirus and start to get back on our feet?  Or will we slide back into sickness, shutdowns and a full-blown economic depression? 

While I don’t have all the answers, it’s not for lack of seeking. 

Earlier this week, I came across a commentary which definitely caught my attention.  If you’re interested in trying to figure out how we can “intelligently” open up our economy again, it’s worth a read: https://steakhouseindex.com/shi-5-6-20-the-data-has-spoken/

While Covid-19 is a real health crisis and we all must deal with some level of risk, the fact is that the impact of this virus has disproportionately hit seniors and those with pre-existing conditions.  These are the groups that need to be protected and supported the most.  In California, with more than 56,000 confirmed cases, there has yet to be one death reported for anyone under 18.  The commentary suggests opening schools and pushing for those under 50 to get back into the workforce, albeit with social distancing and strong safety protocols.  Those from 50 – 64 have a slightly higher risk level, while those above 65 have accounted for 78% of the deaths in California while making up just 22% of the population. 

The data suggests that an age-based reopening is the smartest strategy.  I am not saying without qualification that this will put us on the road to recovery… but it does parse the data in a way that changed how I’m thinking about the pandemic.  We need to compassionately defend those who are most vulnerable while encouraging those who are most able and at lowest risk to get back to work. 

What I do know is that we’re all going to have to learn to live with this for a while, and frankly, it’s going to suck a lot of the time.  But we will (eventually) get through it, and we all have opportunities right now to make a difference in the lives of others.  Now is the time to be salt and light. 

Happy Mother’s Day, Happy Graduation and Happy “Safer at Home” to you all!

Let’s hope this is the beginning of a series of victories for our state and for our nation. 

With gratitude,

Dale Becker, CRS

RE/MAX Alliance

(303) 416-0087

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.