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BubbleAs a Realtor, out on the town I’m always asked, “How’s the market?” It’s the follow-up question where it really gets interesting.

The last seven years have seen a surge in the metro Denver real estate market as record numbers of buyers look for homes, which in turn has caused prices to jump. The strength in the market has been so pronounced that people are beginning to ask “Are we in another bubble?” It’s a reasonable question given the horrendous experience of the housing crisis, and while no one can ever predict the future with certainty, I see no evidence that we’re heading for a dramatic downturn in the real estate market any time soon. Here’s why:
1. Even with the continued increase in metro Denver home prices (up another 8 percent in the past 12 months) the average inflation adjusted PITI (Principle, Interest, Taxes, and Insurance) payment made in metro Denver is actually BELOW our 35-year average. This means that while prices have steadily risen, buyers are still able to afford their monthly payments, providing plenty of room for continued home price increases.
2. The number of transactions relative to the population of metro Denver is just about at the 25-year average. At the peak of the bubble in 2006 the number of home sales was about 20 percent above the historical average. When we see the number of closed transactions well above our historical average that’s an indication of an overheated market, as it was in 2006. The number of closed home sales is actually DOWN 12 percent in the past year due to the low inventory. No sign of a bubble here.
3. In 2006, many of the deals were closed with low or no documentation mortgages (“liar loans” or “no doc loans”). Today, mortgage underwriting standards are among the toughest they’ve been in decades. This prevents unqualified buyers from purchasing property, which mitigates the chance of the market overheating (fewer buyers means fewer purchases means less chance of the market frothing into bubble territory like it did in the past).
4. Because of relatively high home affordability it’s a lot cheaper to buy than rent in our market. This would not be true in a bubble. For housing price affordability to return to the average level that we saw in the years between 2000 and 2004 either home prices would have to increase an additional 35 percent or interest rates rise to 6.6 percent. Neither is going to happen any time soon.
5. The imbalance between buyers and sellers we’ve seen recently in our housing market (too many buyers/not enough homes for sale) is due to a lack of inventory, not illogical/unrealistic/unsustainable demand from buyers. “Much of the price increases we are seeing are the result of rising demand among investors and homebuyers for a still-limited supply of homes for sale,” said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a logical correction from years past when we had too FEW buyers in the market. This is how markets are supposed to work, always regressing to the mean over time.
6. Rising mortgage rates will help to temper the possibility of a bubble as well (they are still near 50-year lows but are expected to rise someday). “History shows that a rapid rise in interest rates tends to have little correlation with home prices. Rather, rising rates are more likely to contribute to a decrease in home purchase volume,” wrote Mark Palim in a Fannie Mae commentary. So the positive side of a rise in mortgage rates is that it will reduce the number of buyers and therefore lower the chance the market will rise out of control and end up collapsing in a bubble.
Click on the monthly market snapshot, the inventory of metro Denver homes for sale continues to fall; it’s down another 5 percent from a year ago. Since the inventory is still extremely low (about 5,520 homes on the market where about 18,000 is a balanced market) I am all but certain the demand will still exceed the supply for the next several years and prices will continue to rise for the foreseeable future. No bubble on the horizon yet… Stay tuned!
June 16 - Market Snapshot [5608]

Buyers
If you agree that we’re not headed for a bubble any time soon what does this mean for you as a buyer? I think it means you should consider buying a home IF it makes sense for you to do so. Are you running out of room at home? Expecting a baby? Have an awful commute? Want to live in a nicer neighborhood? Looking for a better school district for the kids? There are a lot of great reasons to move. But don’t buy a home to speculate on the market; buy because it’s time for a new home. Call me anytime to discuss what your options are and how I can help you find a wonderful place to live.
Sellers
We have been discussing the incredible strength in our housing market. If you’re looking to sell your home this should be very welcoming news! The inventory of homes on the market is at an all-time low and prices are up. Call me and I’ll be happy to run a complimentary Comparative Market Analysis on your home to let you know what it might be worth. It’s great information and costs you nothing.
Investors
The most recent “Metro Denver Area Residential Rent and Vacancy Survey” shows the great news continues for landlords. According to the report:
“The overall vacancy rate for the metro area for the fourth quarter of 2015 was 3.1 compared to 3.9 percent for the previous quarter, and 1.5 percent for the fourth quarter of 2014. It was 2.0 percent in the fourth quarter of 2013, 1.7 percent for the fourth quarter of 2012, 2.1 percent for the fourth quarter of 2011, 2.0 for the fourth quarter of 2010, 5.5 for the fourth quarter of 2009, and 4.9 percent for the fourth quarter of 2008.”
In the U.S., more millionaires owe their wealth to real estate investments than any other single source of income. Today’s market could not be better for long-term buy –and-hold investors. Call me to find out more.

Vacancy Rates
Adams 3.9%
Arapahoe 4.0%
Boulder/Broomfield 2.7%
Denver 3.1%
Douglas 1.7%
Jefferson 2.6%

Let’s talk about homeownership. Are you considering buying vs. renting?

May 16 - Market Snapshot2
Renters often ask me if it’s too late to buy a house: Are we heading for a big downturn? Are we too deep in the market cycle to buy? they wonder. Timing the real estate market perfectly is extremely difficult, perhaps impossible, and some of these potential buyers were the same renters that were sitting on the fence when the market was down, even once we’d passed the nadir. I believe that buying a home is less about the market and more about life; your life. So don’t try to time the market, take a look at your life, the low interest rates and time that!

1.) Are you getting married, starting a family, or tired of paying skyrocketing rent without having an asset to show for it? Would you like to have more space; a backyard for the dog, the kids, the BBQs, or the tomatoes? Do you like the idea of being part of a neighborhood, community? Perhaps you got a nice raise, job or promotion and you’d like to set down roots, do you plan on staying in one place for at least five years? Do you like the idea of investing in something that will build long-term wealth?

These are the types of questions you should be asking when you are considering homeownership.

Here’s another thing to keep in mind. In the U.S., the average total net worth of rental households is $5,800. Compare that with the average net worth of a home-owning household at $199,500 and you’ve got worth 34 times more than those who rent! There’s no doubt that over the long term, homeownership is a solid way to build wealth and financial security. I often advise my first-time buyers to get into something affordable now (not so easy in Denver these days, but doable) and then move up when life allows. If you can keep that first property as a rental, it’s a great way to invest in your financial future.

2. Interest rates remain at record lows but this can’t last forever. No one knows when they’re going to rise, but news this week gave hints of a rise as early as June. Though home prices have gone up the past several years, low interest rates continue to make homes relatively affordable— especially compared to renting. Once interest rates rise, the door to home affordability will begin to close for a lot of potential buyers, leaving them sorry they didn’t act when interest rates were at 50-year lows.

Let me break down the numbers. Assume you are purchasing a $210,000 condo with a 5 percent down payment. The Principle + Interest payment at 4% interest would be $952 per month (tax and insurance and HOA not included). An interest rate increase of one percent (5%) would take your payment of $1,070 per month—an increase of $1,416 a year. Now assume that rates tick up to 6 percent. That increase would result in a 21 percent increase in payments from $952 to $1,196. Where you really see the effect of these increases is when you hold the property for the full 30 years. On a $210,000, 30-year fixed-rate mortgage that increases from 4 to 5 percent, the borrower who obtains the 5 percent loan would pay an additional $42,772 in extra interest as opposed to the borrower who paid just 4 percent interest. Though most buyers consider their monthly payment as most important, when you look at the life of the loan you’re paying a lot more in the total loan amount. This is a great reason to make a “move-up” move right now. Say you’ve outgrown your place, it may be time to cash out and get your “forever home”, or like I mentioned, use your current home as an income property and let your renters pay off your mortgage.
The main reason the average home owner has so much more personal wealth than the average renter is that homes appreciate in value. Over the past 45 years, homes in metro Denver appreciated 6.3 percent per year. If you buy a $200,000 home, you can expect over the long term its value to rise about 6 percent every year. This means you’d make $12,000 in appreciation the first year, an additional $12,720 the second year, another $13,483 in the third year, and on and on. Contrary to popular belief, only 4 of the past 45 years did prices actually fall in metro Denver.
If you’re still wondering whether you’d be better off renting or buying, Trulia built a great Rent-vs-Buy tool. Answer a few simple questions and the system tells you whether it makes more financial sense over the next seven years to rent or purchase. I think it’s worth a couple minutes of your time to see what you can learn – you’ll really like it! buyers chart
Key Messages for May

Prices are up 8% in the prior 12 months vs historical 6%. Inventories are tighter than last year, especially for small, lower priced homes. In 2016, we expect 8-9% appreciation, flat unit sales volume increases, and continued tight inventories.

sunriseThere’s a lot of talk in Denver about this “crazy new real estate market”, how “everything’s different than it used to be”, and after six years of heartbreak, I say “thank god”. For those interested in real estate, and for those who might be considering buying or selling a property, understanding the big picture is critical. So here’s where it stands.
Most people think this tremendous seller’s market and that the super low inventory is something new, or that the market’s going to suddenly erupt overnight. Neither is true. Here’s the truth: we are FOUR YEARS PAST THE BOTTOM of our last real estate cycle. Just because the Denver Post is suddenly aware of the real estate market, or Zillow writes screeching articles about the tight market in order to sell ad space don’t be fooled. It’s not new. It is a logical continuation of a market that is reacting strongly to the over-selling we saw between 2007 and 2009 (which finally bottomed out in 2009). It’s doing exactly what real estate market cycles do. They rise and fall over long periods of time, but historically (and I mean over the past 40 years) residential real estate appreciation has averaged 6 percent per year and there is no reason to think that is going to change over the next 40 years.
We tend to think of market cycles in short-terms, spiking and crashing over short periods of time, but a quick look at the last market cycle clearly shows this is not how real estate works. Real estate cycles tend to move in much broader periods, 7-10 years are typical over the past 40 years. This is why predicting short-term market movements can be very difficult, whereas assuming the market will move in 7-10 cycles is a pretty good guess. During these past four years, as we continue the rise from our low, we have seen more of a seller’s market. Plummeting inventory and rising prices drove nervous buyers into multiple offer competitions with happy sellers getting the price they want. In fact, look at Chart Y and you’ll get a great perspective of how strong our market is. You see that the metro Denver 2013 Closed Dollar Volume of all residential sales hit a new high which translates into a record amount of money in the pockets of sellers. Good times for sellers!
Many of my buyers are understandably nervous. Rents are skyrocketing (up 8% this year) but news articles and TV reports claim the market is teetering on the brink of a crash, creating a “Fear of Buying”.
So let me be clear: no one can predict the real estate market with 100% accuracy. I can’t, the Federal Reserve can’t, the banks with all the money can’t (obviously!), no one can. But, understanding how market cycles work, and recognizing how low our current inventory is, I can say with confidence I do not see any impending weakness in the market over the next couple of years. We are four years into what will probably be a typical 7-10 year cycle of low inventory and rising prices. I can’t tell you what the Dow Jones will finish at next Monday. I can’t tell you if the Rockies will win their fifth game of the season. I can’t tell you what the weather will be on April 3rd. But I can say with confidence that real estate tends to move over predictable long-term trends, and this market cycle has a long way to go.

The Denver rental market is more than just healthy; it’s got a rosy glow. With vacancy rates low, prices for rental properties have risen and according to Poppy Harlow of CNN’s Early Start, Denver is one of the top five cities for rent increases, 10.9% over the past twelve months. That’s great news if you’re a landlord!
As the market fell and foreclosures soared, I have been focused on helping clients build wealth through investing in rental properties. Where are you going to move when you lose your home? A clean, safe, single-family home to rent where their lives and families can live and recover from the ordeal they’ve been through would be ideal. Many of these tenants would have had no problem paying their mortgages had they stayed at the pre-adjusted interest rates, or the troubles that befell them has passed. They are willing and able to pay good rent for a well-kept property that makes them feel back in balance. A recent survey on the rental market bears this out.
After surveying property managers, TransUnion found that increasing prices aren’t keeping tenants away. Overall, managers reported they are doing better than the year before and are having an easier time attracting in residents despite the increase in prices.
The credit bureau’s June survey included 1,248 property managers across the U.S. who represented a range of property sizes.
Read the Survey: Rental Market Attracting Residents Despite Price Increases. and let me know what you think.
There are some very attractive deals out there for those who want a good annual cash-on-cash return on their investment that owning real estate investment property provides, but the market is moving swiftly. I would recommend you do as well. “I don’t want to be a landlord” you say? I can help you with that through a few concise classes or introduce you to some affordable pros.

How do you get into the real estate investing game? One house at a time. Real estate investing, like the stock market, can be daunting for some, but the payoff is worth the learning curve. My client, Kevin, became a landlord in 2007 with the purchase of his first rental property, half of a duplex in the City Park neighborhood of Denver. With a $150,000 purchase price and some minor upgrades to suit his specifications, Kevin was able to create positive cash flow within a few months. Two years later, we looked for another property, scouring for a neighborhood where you could still find a bargain, yet prices were pitched to rise. We found a larger single family, bank-owned home between Park Hill and Stapleton and were able to close on it for $136,000. The rehab was more inclusive, but with Kevin’s skill and good taste he created a very desirable rental which drew a very happy tenant. More cash flow. Today, we closed on his third rental property, in the heart of Park Hill. The $107,000 purchase price gives you an idea of what the market has done over the past few years and why Kevin is a happily building wealth through real estate. With a low down-payment, a well-planned fix-up budget and great interest rate, Kevin will be putting a total of $1,000 a month in his pocket this summer from his three investment properties. When you add in the tax benefits and property appreciation that comes with buying now and holding a long-term investment, Kevin is coming out way ahead.
Buying rental property is a great way for creative people to build long-term, sustainable wealth. For Kevin, this is the perfect blend of creativity and commerce and we’ll be following his journey through the fix-up process. Do you think this might be a good path for you? Call, text or email me, I’d be glad to show you successful strategies for building wealth through real estate. Till then, THRIVE BABY!