Appreciation Watch: Phase One

Real-Life Stories of the Real Estate Professional. I’m out previewing on Monday, looking in N/E at two bank-owned properties that match the needs of two separate buyers, both ready to buy, now. Both seem exceptionally under-priced, one on Downhill at $139,000 with a four bedrooms and a two-car garage, and another on Bridle near the Garden Ranch Y at $111,000. When setting up the Downhill showing, I’m told there are two other showings during my requested showing window, and wanting no part of that, I re-arrange my afternoon to go by when there is less likely another looker. No such luck. I swung by around 4 pm, and standing in the doorway of the house was a nose-tackle-sized man, literally snarling at an approaching agent leaving his Audi with buyers in tow. It appeared that the man in the doorway was resorting to menacing looks of nastiness to scare away other suitors on his repo-dream. Since I was driving by representing both buyers three and four, when I notice a Yukon also parked in front with another set of buyers, I realize that’s buyer five. At 4 pm in the afternoon, there are five buyers looking at the same property. Supply and Demand at work.

I headed over to Bridle. A roofing truck was leaving that place, there was a guy walking around the front yard aimlessly with an MLS sheet, and two of Hannah’s clients were standing outside their car waiting for Hannah. Dumb luck, I’m unknowingly showing what Hannah is showing, at the same time. Since I was driving a borrowed vehicle, I decided to have some fun at Hannah’s expense. Her buyers had not looked at houses in awhile and were awestruck by the circus-like atmosphere at this house with buyers coming and going everywhere. I pop out, said hi, and asked, “you know I’m looking at this too, and I have the combo. Do you want to join me?” They seized the chance, and I timed it perfectly so that I was just inside leading them through the door when Hannah pulled up. Sensing an agent out prowling the bank-owned’s looking to steal her buyers, Hannah leapt out of her car ready to scrap. She still about punched me when she found it was me pulling one over on her.

This is the world of inexpensive, bank-owned properties in Colorado Springs. They all have multiple offers, they all have lovely features like no 220 for a dryer or planked-over patio door because the entire deck is ripped off… and they all end up selling, way, way over asking price.

The reason is that supply is non-existant under $200,000 and there are almost as many buyers this year as there were in the tax-credit fueled season of 2010. That season was fueled by the false motivator of the $8000 tax-credit; it had a window of time before it expired, and the market went sour immediately after it expired. This season is fueled by the buyer’s perception that the market is appreciating. Re-read that statement: the perception (by buyers) that the market is appreciating. Now why do buyers believe this?

1. There is nothing to buy. 3300 active single-family listings sounds like a lot, but inventory now is 27% lower than the same time 12 months ago.
2. With scarcity comes panic. With panic comes emotional buying.
3. With emotional buying comes a loss of negotiating power. Fear of loss says, “don’t mess around, buy the house.”
4. As more and more houses sell and are removed from the market, buyers inevitably raise their  buying price. When sellers don’t have to discount, and buyers move up to find them, appreciation happens.

This condition describes between 65 and 75% of the homes that sell each month, and 40% to 50% of the active listings for sale. Note, those are not the same numbers. Note, that is not the entire market. What is extra bizarre about April 2012, is that while parts of the real estate market finally return to sustainable appreciation, other parts of the market remain in decline: the over $500,000 market for the most part remains in over-supply and for the most part, is still experiencing depreciation.

Here is a graph from the April Stat Pack . This graph shows the crazy dysfunction at work, where within these popular MLS areas, there are up to four different markets at work:

• An Appreciating Seller’s Market with less than 4 months of inventory based on March sales rate (which is likely going to be dwarfed by the April sales rate, with 1723 pending and under contracts at the end of March, 2012)
• A Seller’s Market where the likelihood is high that the seller will sell and probably won’t have to make a price adjustment in order to sell, but it’s not appreciating yet because the months of inventory is between four and six months.
• A Buyer’s Market where there is six to nine months of supply, decent selection to choose from, and buyers have both the ability to negotiate a better price and sellers have the responsibility to continue to drop price until the find buyers. Note, these markets might be primed to convert over to A Seller’s Market later in the year as inventory diminishes from the lower price ranges and relocating buyer sales close.
• A Super Buyer’s Market where there is a genuine over-supply of listings for the scarcity of buyers. Sellers might have to reduce price just to get showings (usually 9+ months of inventory). Buyers might be tempted to avoid these areas as there is no promise of   “a deal” because the bottom has not yet clearly been reached.

This creates some enormous opportunities for a seller in Briargate say, who has a nice home worth $285,000, but wants a larger home, or a home in the trees. They have scarce competition for their home, and if they want to move to Flying Horse or Bent Tree, they can utilize 4.00% interest rates and buy into a market that still has excess inventory and competitive pressure for price improvements. As long as they have the proceeds they want from their home sale, they’re probably selling, with a good selection to choose from and good negotiating power when they buy.

A buyer relocating from Nashville asked me today, “Ben, is the market just that much better in Colorado than it is here?” I had just video’ed a home for him that had listed the previous day, and told him that it might sell before the weekend was up. The buyer didn’t doubt my assessment, he had seen with his own eyes appealing homes list one day and go under contract the next, and seen this repeatedly. My explanation was that the market is a mess for those looking under $200,000, and if you consider than 81% of all sales year to date were less than $300,000, a big part of the market is looking at scant inventory. But the other problem is that there just aren’t that many great properties out there. That’s different than low inventory. It’s one thing if there is low inventory, but say you want N/W under $350,000 and you want a traditional two story home with about 3500 square feet and some updating. Well technically, you have a lot to choose from. But you don’t want a multi-level or split. You don’t want linoleum floors in the dining room or kitchen. You don’t want old windows. You’d like the deck to be serviceable for oh, I don’t know, three to five years. Well you my friend have ZERO homes to look at that fit that bill today. None. If you can stretch to $355,000 you find your first bogey on Oak Hills, and that’s a bit high for the area, but it is remodeled and they added stucco. While they’re probably over-priced, they’re probably selling soon, too because they have no competition. That’s how appreciation happens. It’s not so much that the cycle of supply and demand got reversed, and we went from over-supply to under-supply and under-demand to over-demand. We went to under-supply and even-demand, and among that supply are a mess of homes that are out-dated floorplans or exhibiting features no one wants. Many sellers still haven’t caught onto this. Another example: My wife and I were brushing our teeth last night, joking about if we sold our home, and Amy said “just price as it is and let someone do it the way they want.” I was stunned. My wife was speaking seller. I pointed at our lovely, faux-marble pink and taupe swirled counters, with integrated sinks with expanding cracks at the bottom, and said sarcastically, “Babe… they just don’t make these anymore. This is the kind of quality people line up for”. No one wants flippin’ pink swirl bath vanities, even if your shower and soaking tub match (that’s some extra sarcasm for those who can’t read sarcasm). You can be on the market, but if you offer what people don’t want, you might as well be off the market.

As the market heals, a necessary step is appreciation. Appreciation IS HAPPENING, it is just active under $200,000 (about 50% of all market sales). That market is moving up. Meanwhile, the average price on the market is also moving up, because the expensive, half million and up market remains sitting while the cheap, under $200,000 market flies off the shelf. In order to sell, this expensive stuff still has to come down in price. So overall, the average price of everything selling is barely showing any change, as it takes five appreciating home sales under $200,000 to cancel out the drop of two depreciating home sales over $500,000. When you further consider that last month there were 394 sales under $200,000 and all of 22 over $500,000, there isn’t much to fuel much of a leap in average price. In fact, average price can actually go down while prices are going up; it’s just not a good measure of what is actually selling.

If you want to see the new and improved Stat Pack, please visit www.COSRealEstate.com. (guess what? We renamed the Stat Pack, “The Stat Pack“. We are pretentious snobs at the Switzerland known as Selley Group, and are now emphasizing the “The”. Another report locally is using a very similar name, but they’ve only been cranking them out for 15 months, not 6 years, and we’re sticking with our permission-asset. We have dibs)