THE OTHER SIDE OF THE CRAMDOWN COIN

I'm old enough to remember the summer of 2019, when the following things happened:

- Mortgage rates went to 4.5%

- The inventory of homes for sale rose to more than 11,000

- Good listings began sitting on the market for weeks with little or no interest

- Prices flattened and the market appeared to be, at long last, running on empty

Then, as you know, the pandemic hit.  And with it, rates went to the mid 2's.  Inventory disappeared and bidding wars began.  Bidding wars intensified and we then went to frenzy mode.  Overall active inventory fell from more than 9,200 listings in April of 2020 to 1,878 by the end of the year.  Prices went up 20%.  Everyone lost their minds.  Buyers (correctly) felt (and continue to feel) hopeless.  Sellers (correctly) felt (and continue to feel) emboldened.

And with that sea change in sentiment, the cramdowns began.

No need to get definitionally fancy here.  A cramdown is simply one side imposing its will on the other, with little regard for real or perceived fairness, mercy or ethical balance in a transaction.  

Where it shows up most is with inspections and appraisals.  Sellers aren't fixing much and if it doesn't appraise (which it probably won't), then tough.  Also, the sellers would like a free 60 day rentback, earnest money "hard" (non-refundable) early in the process and if you're even going to bother asking for an inspection (which might just cause them to toss your offer in the trash right off the bat), don't forget to turn the lights out when you leave.  

Market conditions dictate negotiations, and with artificially low rates driving a 90 mph tailwind, home prices are soaring into the stratosphere.  Buyers courageous enough to brave these conditions are expected to show up, smile and take their beatings like good little soldiers.  

For now.

It's a wildly unhealthy climate and it comes with risks.  We are engaged in the biggest money-printing binge in history (hello Modern Monetary Theory) with mortgage rates artificially dragged down to less than half the rate of inflation, which is totally illogical and makes no fiscal sense in any sane universe.

Ah, but I said "sane" - that's the catch.

We are living in insane times with monetary policy that reflects the insanity.  

If the Federal Reserve was following its longtime mandate of keeping inflation at 2%, mortgage rates would be 5% or higher right now and the so-called market would be flat on its back.  

The only way to kill inflation is with higher interest rates, which nobody wants to do because we have this little issue of $29 trillion (and counting) in federally financed debt, and if you raise rates, the country basically goes bankrupt and defaults on its debt.  

So we keep pretending that 3% mortgages and endless money printing will work great forever, which is dubious policy at best and reckless endangerment of our entire economic system at worst.  Inflating your way out of unsustainable debt is not a strategy - it's a conspiracy, and it certainly appears that the Fed is all in on printing money for as long as it takes to mitigate the impact of US debt.  

(And, alternatively, if you know that endless money printing is likely to continue and rates will stay low until the whole systems breaks, those crafty Fed bankers get to move their own investments into assets that are inflation-protected hedges like gold, silver, and real estate)

You can only drive 90 mph for so long until you encounter a sharp turn, and at that point it will be interesting to see if the Fed can successfully navigate the hairpin or if we go blasting through the guardrail, over a cliff and land in Venezuela.  

But I digress.  

The original intent of this post was to talk about cramdowns, and if you're selling a home or thinking about it in the coming months, remember this.  

It won't always be this easy.

When this market stresses or breaks, with prices that are so far beyond wage growth and incomes as to make inquiring minds like mine woozy with overwhelm... this whole notion of cramming down ridiculous terms on buyers will flip.  

And while I think prices will hold most of their gains because of money printing and the fact we simply can't build affordable homes anymore, what will change is that buyers won't simply roll over and take it when the furnace is 20 years old, the roof is splattered with hail damage or there's a 30 foot belly in the sewer line.  

When the pendulum finally swings, I expect buyers to be relentless and without mercy in their demands of sellers to provide homes in a condition that matches the over-the-moon valuations of 2021.  

If you have something to sell, I would look seriously at selling it - sooner rather than later.  And double down on that if it's a home that is less than perfect.  

When this market eventually slows, you may not see huge price reductions, but you will see a very different world in terms of inspections, appraisals, reasonableness and leverage.  

So enjoy your season of cramdowns, sellers.  

While it lasts.  

FIVE WAYS WE COULD SEE MORE LISTING INVENTORY IN 2021

With fewer than 1,900 active listings on the market and more than 6,200 homes currently under contract in the metro area, this is the most inventory-starved, one-sided market in the history of Denver.  

And it's not even close.

Each of the past four months has represented an all-time low for active listing inventory.  Our current number of 1,878 active listings is down 27% from one month ago, down 55% from three months ago, down 72% from one year ago and down 80% from when the market re-opened last May.

It's also down 56% from our previous all-time low of 4,203 active listings, which happened in December of 2017.

The reasons for this have been discussed here before - Covid-19 fears, eviction and foreclosure moratoriums, concerns about whether jobs will return (or be retained) after the pandemic ends, and the Fed's incendiary low rate policies that have created the mother of all frenzies among the buyer class. 

So what could happen in the coming months to change this?  Certainly, it has to change at some point, but what key drivers could make this happen sooner rather than later?

Here are five potential game changers:

TAX POLICY FOR INVESTORS - Whether it's changing tax rates on investment gains from capital gains to personal income (already proposed), capping or eliminating depreciation (it's been talked about) or eliminating 1031 exchanges altogether (unlikely since so many lawmakers are real estate land barons), landlords and investors are likely going to get whacked hard in whatever tax bill is coming out of Congress in the next few weeks.  If these changes are made effective January 1, 2022, it would give landlords time (and massive incentive) to get out of their rental portfolios this year.  If changes are made retroactively to January 1, 2021, then investors and landlords would have no exit strategy and it would make the inventory problems worse since they would never sell.  If you're going to do tax reform in an effort to free up more entry-level housing, there's a right way and a wrong way to do it.  I'll let you decide what the odds are of Congress doing this the right way versus completely blowing it.

PRIMARY RESIDENCE EXEMPTION - Under current tax law, owner-occupants who have lived in a home just two of the past five years are generally able to sell their principal residence with a tax-free capital gain.  This truly is one of the most generous provisions of the tax code and it has created massive windfalls for many homeowners, especially in historically hot markets like Denver.  In 2017, the GOP tax bill proposed changing the qualification for this exemption from "two of the past five" years to "five of the past eight" years.  You may see another attempt to take some of the sugar out of this very sweet tax break in the coming months.  Just as with our tax policy discussion above, there's a right way and and a wrong to do this if the goal is free up more housing.  Making it effective January 1, 2022 would create urgency and incentive.  Making it retroactive would have the opposite effect.

FORECLOSURE AND EVICTION MORATORIUMS - Again, we are living through a complete manipulation of the markets due to emergency government and Federal Reserve interventions.  Just this morning, the Biden Administration extended (again) foreclosure and eviction moratoriums until the end of June.  In simplest terms, what this means is anyone with a mortgage owned by Fannie Mae or Freddie Mac (the two government-sponsored enterprises that own about two-thirds of all mortgages) is exempt from even the initiation of foreclosure proceedings until at least June 30, 2021.  If the moratorium is not extended (and at this point, who knows if delinquent homeowners will ever need to make another payment?), then banks could send out foreclosure notices effective July 1, 2021.  If that happened, delinquent homeowners would have 90 days to bring their mortgages current or work out an agreeable repayment plan, or the banks would have the right to foreclosure.  Let's be clear, we're not going to see foreclosures because the inventory constraints brought about by government policies around Covid have driven prices even higher into the stratosphere.  Owners struggling with making payments would have to sell to avoid losing their properties to the bank, but virtually no one is actually going to make it to the point of facing foreclosure when selling would result in such significant gains.  

A RISE IN INTEREST RATES - This is the scenario no one wants to see, because when it happens, it's going to have severe consequences.  Home buyers are now addicted to 2.5% mortgage rates and our market is totally dependent on this cheap money for its continued viability.  When rates go up, and it will happen at some point, the buyer pool will thin with each corresponding uptick in rates.  When rates get to 3%, you're going to price a certain portion of the buyer pool out.  When rates get to 3.5%, even more will disappear.  And if we get to 4%, I think demand will be significantly impacted in the short term unless the government comes up with another creative and unprecedented way (50 year mortgages? Mortgage portability? Negative bond yields?) to keep the market liquid.  

ANOTHER BLACK SWAN EVENT - Let's face it, we're tired of talking about Covid.  Economically, the pandemic has had a bruising impact on the economy and we are staggered, to say the least.  The Fed has shifted into money printing mode (the Treasury technically prints the money, but Fed Policy dictates it) and there are serious inflationary concerns on the backside of this Black Swan event.  But what another Black Swan like a terrorist attack, military conflict or even an extreme weather event?  It takes confidence in the future to buy a home, and with the discount rate at 0.25% and mortgages in the 2's, the Fed has dragged borrowing rates to the lowest point possible without negative rates, which could be a thing if we hit any more calamity.  The buyer pool is fueled by cheap money and some degree of confidence in the future.  If either of those is called into doubt, you'll see more inventory and fewer buyers.  

The reality today is that we are all bracing for significant change in the near future that is going to reshape the landscape for both current and future homeowners.  The policy prescriptions coming over the next few months are going to have huge consequences for the future of real estate and at this point, most of us are simply guessing at what that future will look like.  

Right now, we have an overload of buyers and zero inventory.  There are several scenarios where that could change fairly quickly.  

LIKE A "HURRICANE KATRINA" MOMENT FOR THE DENVER HOUSING MARKET

Want to buy a home in Denver right now?  Good luck!

After every record for housing was smashed last month, the frenzy simply continued in November with numbers so out of alignment with all historical norms this can only be called a "Hurricane Katrina" moment for the Denver housing market.

- Lowest Number of Active Listings for Sale:  3,145 (all-time record low)

- Previous All-Time Low:  4,103 (December 2017)

- Next All-Time Low:  4,187 (November 2020)

- Lowest Absorption Rate:  0.72 (all-time record low)

- Previous All-Time-Low:  0.78 (November 2020)

- Next All-Time Low:  0.87 (May 2017)

- Lowest Active to Under Contract Ratio:  0.50 (all-time record low)

- Previous All-Time Low:  0.55 (November 2020)

- Next All-Time Low:  0.60 (May 2015)  

To provide some context on the catastrophic inventory drought, the number of active listings has fallen by more than half - from 6,317 to 3,134 - in just the past 60 days.  In the hottest sectors of the market - the $250k to $400k bracket and the $400k - $600k bracket - there have been more than twice as many homes to go under contract in the past 30 days as active listings on the market.  

To put this visually, here is what this looks like with actual numbers:  

$250,000 - $400,000:

- Current Active Listings - 625

- Number of Listings to go Under Contract in Past 30 Days:  1,297

$400,000 - $600,000:

- Current Active Listings - 837

- Number of Listings to go Under Contract in Past 30 Days:  1,732

As you can see from these figures, demand is literally swamping supply and bidding wars are to be expected for almost any listing priced anywhere close to reasonably.  

This past weekend, I listed a $419k detached home in Lakewood that attracted 57 showings and 12 offers.  While I cannot reveal actual terms until the deal eventually closes, I will say that half of the 12 offers came in at $440,000 or higher.  

In an environment like this, it really comes down to appraisal guarantees and buyer qualifications.  

If you are trying to buy into one of these blazing hot sectors of the market, and you comfortable writing an offer strong enough to compete, you're almost certainly going to have to pledge to pay some amount over the appraised value.  

These so-called "appraisal guarantees" often range from $5,000 to $30,000 over list price, but occasionally you will see "uncapped" appraisal guarantees and "uncapped" escalation clauses (buyers willing to agree to pay any amount to beat out the competition and willing to pay any amount over the appraised value just to get a home under contract).  

While great for sellers, this type of market is totally demoralizing for many buyers and, frankly, I've been demoralized by it as well.  To see this kind of frenzy in the midst of a pandemic, with unemployment near 7% in Colorado, is really hard to process.  

As I write this, I must confess that it has now been over five months since I have put any buyer clients under contract, by far the longest drought I have experienced in the 15 years I have been selling real estate in Colorado.  Since the pandemic began, I have shifted virtually all of my energy to the listing side of the market, because the value of a good listing has simply never been higher.  

My last nine clients have all been sellers, as have 12 of my last 15 transactions.  

In an illustrative bit of irony, one of the offers we skipped over this past weekend was from a buyer who had written an offer on one of my listings at a similar price point back in August, meaning that this agent/buyer team are now going on four-plus months of swings and misses.  

How long will it last?  Nobody knows, of course, and I've never seen anything like this in 26 years as a real estate broker.  Eventually, there has to be some reckoning with the unemployment situation.  Many of these jobs that have been lost simply aren't coming back. 

As of now, federal eviction moratoriums are scheduled to last through the end of December and the federal foreclosure moratorium has been extended until January 31, 2021 (it will likely be extended further, in my opinion, simply because there seems to be no cap on what unilateral actions the government will take during this season of chaos and turmoil).  

But one day - one day - executive orders will end and the market will return.  Landlords with non-paying tenants will want to sell and those homeowners who have lost jobs (but have plenty of equity) will need to sell.  

Will this set off collapsing prices and countless foreclosures?  Nope.  But it will increase the number of homes for sale, substantially, and at that point buyers should not have to chop off body parts and toss them into a bonfire just to compete.  

There is no part of this market that's fun, healthy or good for those who don't already own.  If you're a prospective buyer, it's up to you to decide if you want to venture out into this hurricane, or batten down the hatches and wait for the storm to pass.  

It can't and won't always be this way.  The question is whether or not you're willing to wait it out.  

EVERY OCTOBER RECORD, SMASHED

October was yet another record-destroying month for the Denver housing market.  At this point, the numbers pretty much speak for themselves:

- Lowest October Active Inventory of Homes for Sale - 4,187

- Previous October Record - 6,325 (2017)

- Lowest October Absorption Rate - 0.78 months of inventory

- Previous October Record - 1.42 months of inventory (2014)

- Lowest Active to Under Contract Ratio - 0.55 (all-time record low)

- Previous October Record - 0.92 (2014)

- Previous Low for Any Month - 0.60 (May 2015)

- Lowest October Median Days on Market - 6

- Previous October Record - 10 (2015)

In summary, we have the fewest number of homes for sale, the fastest absorption rate for that inventory, the lowest number of active listings relative to homes under contract, and the fastest market velocity ever recorded for the month of October in the 32 year history of the Denver MLS, which dates to 1988.

Just in the past few months, I've had listings which drew 64 showings and 16 offers, 39 showings and 16 offers, and 29 showings and six offers.  Those homes sold $46k over list price, $40k over list price and $11k over list price, an all-time high for any home in that particular neighborhood.  

Trying to buy in this market is like trying to sprint across 10 lanes of I-25 at high noon.  Good luck with that.  On the listing side, it's about managing a huge number of showings, a high number of offers and an extreme amount of emotion. 

And then not blowing it once you go under contract.  

I always tell my sellers that until you sign a purchase contract, you are in control of the process.  You get to define the terms of engagement, decide what terms you want to counter, and figure out how much higher you can squeeze your top line number without breaking the will of desperate buyers.  

But once you sign the contract, control shifts to the buyers.  

In 2020, what that means is that you are much more likely to get torpedoed during inspections (no matter what they wrote in Additional Provisions or how many times the buyer's agent told you on the phone they would take the home "as is").  

Buyers who are paying all-time high prices and who are having to climb over the figurative cold, dead, bodies of six or 12 or 15 competing buyers just to get under contract are going to more likely than not come calling for that pound of flesh during inspections.  I call this process the "clawback", and while my sellers don't like hearing it, it's what is happening.  

Extreme price aggression by sellers will lead to extreme vengeance during inspections by buyers, and it's just the nature of this market in 2020.  

What you don't want, as a seller, is to overplay your hand to the point where you lose your first buyer, because the wave of emotion that led to an over-the-moon offer is very likely gone for good when you come back on the market.  You'll get your home sold, eventually - there's no worry about that.  But the bidding war and competition that results in all those offers is fueled by emotion, and when your home randomly re-appears on the market 12 days after it went under contract, all those buyers who were willing to chop off body parts to be considered first time around are often not so charitable on the second go of it.

The art of representing a successfully representing a seller in this market is get the best terms and price you can, coupled with a identifying a competent agent on the other side of the deal who has coached and schooled their buyers about the realities of this market, plus a local lender with some accountability.  

Buyers' remorse is far more common among buyers who don't feel well represented by their agents or abandoned by their (out of state) lenders.  Now more than ever, this is a professionals' market, and what professionals do much better than their newbie counterparts is to set and manage expectations.  

How much longer will this market allow sellers to run roughshod over buyers? 

That's the $64,000 question.  It won't be this way forever, or even much longer, in my opinion.  Next year, when foreclosure and eviction moratoriums are lifted and the reality of our broken economy sets in, there will be more sellers.  

But for now, sellers are in complete charge of this market.  Which means it's a great time to sell a home.    

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