The Truth about Denver's Home Inventory

Michael V Welk

October 15th, 2008

If you have not heard already, the inventory of home on the market in Denver has been declining. This is not true in many regions of the county. Your clients, who often only see national headlines, might not be aware of this favorable news. Our market has some unusual factors at work. Let's explore them, so you can better help your clients.

If you look at the first chart (MOI 1), you'll see the MOI (months of inventory) for Denver's suburbs on the bottom axis and the average sales price in that suburb on the axis on the left side. Denver metro currently has about six months of inventory (a balanced market, on average), but you can see there is a lot of variety from one city to the next. Lower cost areas, such as Thornton, are seeing inventory move fast. Sellers (mainly banks) don't have to wait long for offers. Thornton's average price in the last year was around $250,000 and the average MOI was about 3 months. Greenwood Village, on the other end of the scale, had about 13 MOI and an average price of about $1.4 million. Sellers are suffering there. The city of Denver is about in the middle.

If you look at the second chart (MOI 2), you'll see the MOI information sorted by the price of the home. In some cases, this might be more useful when you meet with clients. The city of Denver, for example, has many neighborhoods with homes under $100,000, and they are selling fast. On the other hand, upscale neighborhoods like Cherry Creek and Hilltop have significant levels of inventory and it's taking a long time to get homes sold, especially over the $1 million price barrier.

The left part of the chart show what percent of the active listings are REO (in red) and which are regular sellers (in green). For homes priced between $0 and $100K, regular (e.g.,, non-bank) sellers are 17% of the active inventory, but only 12% of the sales in the last twelve months. You can see on the left that since they are not getting their "fair share" of the sales, the MOI for the regular sellers under $100K is 2.7 months. For REO under $100K, it's a blazing 1.9 months. This probably isn't a surprise to any Realtor that has written an offer for a low priced REO and the listing agent has told them their buyer is competing with ten other offers. It's a strong seller's market at this price point!

Compare the homes from $480K to $1MM. Here, MOI is around 14 months - a very slow market. Your seller's experience with marketing time depends greatly on their price. I hope this information will help you demystify our market for your clients.

Spotlight on Wheat Ridge Colorado
Michael V Welk
October 13, 2008

Last week the Jefferson County Association of Realtors (JCAR) put on a seminar spotlighting Wheat Ridge Colorado. I was fortunate enough for them to allow me to speak upon the current real estate trends for the city. My broker Lon Welsh at Your Castle Real Estate provides us with enormous amounts of data which allows us to be a trusted source of real estate trends throughout the entire Denver metro area. After breaking down the specific information for Wheat Ridge here is what I discovered.

• The average home price has changed a positive 6% from 2007 vs 2008 compared to neighboring cities of Arvada (-9%) and Lakewood (-4%).

• The absorption rate is relatively balanced, with 4.6 months of inventory, which according to NAR would make this a sellers market.

• The average home price is $274,000.

• At the time of this presentation there were 163 residential properties listed as active with 32 being under contract.

• Home ownership of 54.6% vs Colorado at 67.3%.

What does all this mean? In my opinion I feel that Wheat Ridge is heading in the right direction and it is nice to finally see some of the metro area cities starting to rebound. I feel that Wheat Ridge is being somewhat insulated. With a lower percentage of the higher $500k + homes, which have a current absorption rate of over 30 months (yes months) in the Denver market, they are able to stay on the seller's side of the market. They also have a lower home ownership percentage, which also agrees to a stronger rental market.

Not having a large number of higher priced homes is only one small indicator. A major factor in their success is a strong city government who has the proper vision and also Wheat Ridge 2020, which is a new community-based, non-profit development corporation created to facilitate and partner in neighborhood and commercial projects that implement the Neighborhood Revitalization Strategy (NRS) adopted by Wheat Ridge City Council.

Reviewing the map below you may notice that some of the neighborhoods were combined to accommodate enough data to report on. Please feel free to comment on the map. We have access to this data for the majority of the Denver Metro area.

Lenders can take so long to approve a mortgage that buyers just fade away. Margaret Jackson

The Denver Post Article Last Updated: 10/04/2008 09:15:22 AM MDT

http://www.denverpost.com/search/ci_10634554

Catherine Bacchus has had a frustrating nine months trying to unload her Strasburg home in a short sale.

Three times she's had buyers accepted by the lender. And three times the sale has fallen through.

A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.

"We are on our fourth actual buyer that the lender accepted," said Laura Lomba-Berg, a broker with Your Castle Real Estate who is listing the four-bedroom, two-bath house. "The biggest problem is how long (the lenders) take to evaluate things."

In the first three cases, the bank took so long that the buyers were no longer qualified for a loan for which they had already been approved. In two of the cases, market conditions changed and in the third, a health problem prevented the buyer from getting the mortgage.

"The banks are not living in a very logical realm," Lomba-Berg said. "Part of it is the unrealistic information they are basing their decisions on. They're sitting in another part of the world and pulling up desktop comparables."

Comparing real estate sales in a given neighborhood is a standard way of establishing home values. Comparables are often found through computer databases, such as www.zillow.com and www.trulia.com.

In new developments like the Wolf Creek Run neighborhood where Bacchus' home is, the builders are still trying to sell homes and are able to slash prices.

Bacchus, who hasn't made a mortgage payment since July 2007, bought the 1,500-square-foot house for $207,000 in December 2005. She put it on the market Jan. 1 for $138,000.

"Her house was competing with a brand new house, fully furnished for $155,000," Lomba-Berg said. "People are going to gravitate toward that new house with all that furniture."

But often, it's just that the banks are so busy they've had to create special divisions to deal with the properties they own, said mortgage banker Jim Smith of American Guaranty Mortgage.

"If your offer and the way it's structured isn't complete and it isn't packaged correctly, you're going to have some hiccups and it's going to be a rough road," Smith said.

The key, he said, is to be fully preapproved and underwritten before the real estate agent even puts an offer in.

"It's a waste of time otherwise," he said. "You need to show the bank that you're qualified and ready to buy."

Mortgage broker Mike Oswald of American Home Funding said banks have become less flexible in providing loans to homebuyers, so it's a good idea to get the loan first.

"It's always been get a Realtor, find a house, go get a loan," Oswald said. "Now it's the opposite. Now, it's get a loan, get a house."

Will Berry of Foreclosure Brokers LLC said often real estate agents are more harmful than helpful.

"They believe they're going to protect their buyer at all costs because they believe it's a buyers' market," said Berry, whose team helps homeowners and real estate agents in closing pre-foreclosure and short sale transactions. "But when it comes to short sales, it's not a buyers' market."

One reason is that the seller often has not paid - and is unable to pay - the property taxes or homeowners association fees, and the lender isn't willing to pay.

"We've seen buyers walk away from transactions after we have worked for months to get the offer approved because they're refusing to come up with an extra $600 at closing," Berry said.

Margaret Jackson: 303-954-1473 or mjackson@denverpost.com

Financial liquidity, oversight sought
By Margaret Jackson
The Denver Post

http://www.denverpost.com/business/ci_10541407

Article Last Updated: 09/23/2008 10:56:59 PM MDT

Most folks in the real-estate industry agree that banks need help from the federal government, but they're concerned that the bailout plan is being rushed through Congress too quickly.

It's critical to get liquidity back into the financial system, said Ed Boxer, principal of Essex Financial Group, which is having a tough time finding lenders to finance commercial projects.

"No one knows how to price a loan today," Boxer said. "The whole financial system is just constipated. It needs a major laxative."

That laxative is coming in the form of a $700 billion bailout from the federal government, a move Boxer said is necessary.

"I have concerns that there needs to be some oversight," he said. "The secretary of the Treasury wants total discretion, and that concerns me."

That's a sentiment echoed by David Zucker, a Denver condominium developer who thinks the plan is being rushed through too quickly.

"There will be many unintended consequences, not the least of which is making the guys rich who got us into this mess," he said. "We're building the plane in midair. We don't know whether we're going to get a fighter or a bomber or a glider that doesn't have the power to go in for a smooth landing."

Developer Buz Koelbel said the government needs to support the financial and real-estate markets but is concerned that the plan is not well thought out.

"Whether it's commercial or residential, this will affect every sector of the real-estate industry for many years to come. Collectively, we are the largest industry in the country," he said.

Mike Welk, a broker with Your Castle Real Estate, said the plan doesn't help enough people or get to the root of the problem, which is financial irresponsibility.

Lenders were too quick to finance unqualified buyers, and unsophisticated buyers didn't understand the terms of their loans, he said.

"These corporations are asking for as much help as their homeowner customers are," Welk said. "The government is giving the money to help bail them (corporations) out, but they're not extending the same to their own clients."

Margaret Jackson: 303-954-1473 or mjackson@denverpost.com

Investors often ask me what types of real estate investments are available on the market. Here's what we tell them.

This is the first of several postings on the topic.

Please offer comments - positive or negative!

Assignments. If you don't have much equity to work with, and/or if your credit power is limited, assignments can be a way to get started in real estate investing. You will need to have a strong "sales" personality to succeed at it, though.

Rental Condo or Rental Home. Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term. This is how most new landlords get started. You can hire out all of the property management functions, but in many cases you will do many of them on your own. There are smaller down payment requirements than for larger rental buildings. The purchase process and financing process is very similar to what you experienced buying the home you live in now. It's a great way for beginners to get started.

Small (2-4 units) Apartment Building. Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms. Usually what the rental home / condo landlords graduate to. In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month. Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket. Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units. The financing process is only slightly more involved than a residential loan. Relatively small down payment requirements make it affordable. The purchase process is also very similar to purchasing a home. It's a good way for beginners to get started.

Large (5+ unit) Apartment Building. Still targeting tenants for 6-12 months at a time, buildings with more than five units are considered "commercial" property. The loans are more difficult to qualify for, and usually a larger down payment is needed. Uncommon for the new investor; this is usually what landlords with several years of experience "trade up" to. Cash flows on larger buildings are more stable than for smaller buildings, and the economies of scale make it practical (and desirable) to hire a property manager to take over most the work for you. This reduces the hassle factor of the landlord process.

Lease Options. Again you are seeking a tenant for a property, but usually for a slightly longer term (12-18 months) and frequently (though not always) with the goal that the tenant purchase the property from you at the end of the lease. If you purchase the property, then it's an easier process; if you find a highly motivated seller to let you re-lease the property to another tenant, it can be a lot of work to set up. However, the re-lease method doesn't require any cash out of pocket and does not rely on your credit score, so it is appealing to many investors. Great for beginners with the right skills and attitude.

Fix and Flips. Purchasing a home that needs work. The scope can range from the basic "paint and carpet" to extensive overhauls to scraping a decrepit property and completely starting over. Usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible. Great for beginners with the right skill sets or the willingness to learn.

Conversion of Apartments into Condos. A synthesis of the fix and flip and rental operations - purchasing an apartment building in a neighborhood dominated by owner occupants, then converting the building from apartment building to condominium. Often requires renovation of the units to meet the expectations of owner-occupant buyers in that area. Complex and time consuming, but has wonderful tax advantages compares to fix and flips and often has superior returns to all other asset classes. Ideally suited for the sophisticated investor with extensive experience.

Scrapes, Pops and New Construction. Purchasing a small home in an expensive neighborhood that may or may not need work. The home is bulldozed and a new home or duplex is put on the lot. Alternatively, the existing home is renovated and more square footage is added on. A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).

(c) Copyright 2008 Your Castle Real Estate

Contact me at mikewelk@gmail.com or 303-263-3217 for more info.