This chart separates non-distress and distress unit sales volume over time.

Note how until recently the two graphs have had distinct characteristics, or patterns.

Non-distress sales have followed the same seasonality pattern over the years but at different levels. The different levels are a result of the average number of units falling, year-on-year.

The distress volume trends have been steadily increasing without seasonaity.

In September non-distress sales volume demonstrated a break in the pattern with an uptick, followed by the same thing in October. In November the sales volume of non-distress properties tanked. Beginning in September we had:

Distress properties sales volume growth, which had been steady for years, stopped in April and has remained flat, although with considerable variation.  In July the volumes began to look like the non-distress property cycle.

Conclusions:

Normal, stable processes have been changed by special causes that came from outside the processes. We have a pretty good idea of what happened. What we don’t know is if the volume of bank listings on MLS has dropped. We also do not know what is causing the distress properties graph to look like the non-distress properties graph. Understanding what is going on here may help investors make the right decisions.

Are banks holding inventory while they wait to see what will happen with the TARP funds? Perhaps the Fed and the FDIC will force the issue on inventory since they do not like for banks to hold houses as inventory on their balance sheets. Their assets need to be loans and their liabilities deposits. I doubt that these regulators will allow the banks to accumulate house inventory for long.

Stay tuned. I believe this is a volatile situation and that rapid dramatic changes will soon be upon us.

My prediction? There will be a huge influx of new inventory for investors to buy in the Denver metropolitan market by March 1st.�

Denver’s Mayfair Neighborhood Market Analysis

We recently completed an analysis for a client in the Mayfair neighborhood of Denver, Colorado to help them understand what price they might achieve and how long it might take to sell their property.

All cities are complex, living organisms that are constantly changing.  The real estate market is just one of many that is driven by local conditions. Local, in this context, means neighborhood and perhaps even sub-neighborhoods, or segments within neighborhoods.

In any neighborhood there are sales dynamics that help buyers and sellers understand when to sell, buy, and at what price. These dynamics, or drivers, are based upon the historical sales data. Often these data are not easy to interpret and require slicing and dicing to get at the truth and the real story.

In doing a comparison, it is important to understand the differences within a neighborhood and compare the most similar in age, architectural style and size.

We selected similar houses in Mayfair within a 6-block radius of our client’s property.

In this segment in the Mayfair neighborhood over the last 6 months there were 31 sales, or 5 per month. There were 17 new listings during that period. 31 houses went out of inventory and only 17 came in which, in effect, is an inventory reduction of 14 houses.

The days-on-market (DOM) have been steadily increasing with greater variation in the time it takes to sell a home. Days-on-market have increased 22% since July, traditionally the hottest month of sales. This is a leading indicator of a reduction in prices to come. Smart buyers will recognize this trend and will offer prices that reflect the future price.

Since July inventory has dropped 17% to only 5 months of inventory,  This is a good sign for sellers. The existing inventory has been absorbed by sales occurring at a faster pace than new inventory entering the market. For sellers, this is exactly what is needed. Lower supply means higher prices. However, it also reflects the sellers’ uncertainty about the market. If they don’t have to sell they are holding off.

The basic driver behind price, Price Per Square Foot (PSF) has also declined since July (by 17%). In addition, the active listings are showing a 14% average PSF reduction from the prior 6-months.

Diminishing inventory, increasing DOM, decreasing prices: what do they mean?

Both buy and sell activity have diminished significantly in Mayfair. Increasing DOM is producing lower prices. Fewer buyers are looking. Mr. Seller, hold your property until the DOM begins to drop and the inventory levels drop even further. Then sell.

The real estate industry in the Denver market might be a case study through which interested folks might learn about the opportunity presented by the real estate crisis.

 Perhaps the government should just let the private sector move us out of this crisis. It seems to be proceeding nicely and with great aplomb in Denver.  Despite the positive impact investors are having in the revitalization of neighborhoods with a high percentage of foreclosures, the Federal Government, through HUD’s Neighborhood Revitalization Program, has offered the City and County of Denver $6 million to do exactly what the private sector is doing.

 Your Castle Real Estate has used GIS software to map real estate transactions by the ~450 neighborhoods in the Denver Metropolitan area. We have then used some analytics to determine where there is a high foreclosure rate, whether it is increasing or decreasing, what prices are doing, the correlation among those factors and with days-on-market, which our analysis shows is a leading indicator of price changes.

 We then looked at all transactions over the last 36 months and filtered them by those homes that had sold twice within any 12-month period. We filtered further by those with a difference between the first and second sale of greater than $25,000, the gross margin. There were roughly 3600 transactions that met our criteria. Our thesis was that those houses would be fix and flips. To test the theory, we took a random sample of 100 and checked the descriptions for both transactions. What we found for 99 out of the 100 were descriptions of the first transactions that typically looked like this: “Bank sale. Sold as is. Bring your tool belt. Needs TLC.” For the second transaction we typically found descriptions that described the house as “A complete remodel. Slab granite, travertine tile, cherry kitchen cabinets. Bring your pickiest buyers.”

 Our conclusions?

·      The low-end neighborhoods that historically have had high foreclosure rates today have a significantly lower percentage of bank sales and more remodeled sales.

·      It is becoming more and more difficult to buy properties in these neighborhoods at bargain prices.

·      Really good deals attract multiple offers and contracts are written within days of the listing, with premiums being paid over the asking prices.

·      The gross margins for fix and flips (the difference between the first sales price and the second sales price) are steadily increasing and for all of Denver now average more than $80,000.

·      Using our data analyses it is possible to identify which neighborhoods have considerable price decline still to pass through, which ones are at the bottom, and which ones are on the rise.

·      Below sales price of $325,000 is a seller’s market, above it is a buyer’s market.

 The City and County of Denver’s Office of Economic Development that is charged with developing a plan to use the $6 million mentioned earlier.

 The neighborhoods where they had planned to spend the monies were some of the neighborhoods with the greatest fix and flip activity, where the bottom had been reached and where prices were on the rise. Their plan was to compete with the private sector. In effect, they would take the private sector’s money to do a chore not needed and in so doing, compete with the private sector, driving up prices further and making housing more unaffordable for those who need affordable housing the most.

 Further conclusions:

·      Not all low-end homebuyers have bad credit. There is significant pent up demand that can be met by competent fix and flip activity.

·      Real estate investors are not all ravenous heartless pigs. There are many who are providing a needed service to their communities: making nice, ready-to-move-in properties available to the first-time homebuyer.

·      The Office of Economic Development of the City and County of Denver has a $6 million pile of cash burning a hole in its pocket and it does not know where to invest it. Can they give it back?

 Our point is this. The private sector can fix this problem. Keep the government out of it. If there is an opportunity to buy low (first year of business school) and to sell high (second year) the private sector will find it.

 Your mission, dear reader, if you chose to accept it, is to inform the world that there are opportunities in the real estate market that we have not seen since the great depression. If you have moved cash into your 401K, move to investing in real estate.