Its a Tough Market Out There. The Denver market is in better shape than most. The main reason for this is that our market started to slow almost 4 years ago. Other parts of the country didn't slow down until a couple of years ago. As the market approached a more normal state, those who bought when the market was overheated found that they couldn't sell the properties for what they paid for them. Complicating the situation is the fact that people bought with little or no down payment so instead of seeing their equity decrease to a smaller number they found that it decreased to a negative number. In other words, they owed more than the property was worth. If they bought a house that could be rented for the payment amount, they could afford to wait. If not, they were looking at taking money out of pocket each month to do repairs and make payments and there was no end in sight. As if the initial negative cash flow wasn't bad enough, many buyers had sub-prime mortgages that escalated drastically after one or two years. Despite "stimulus packages" and interest rate cuts, foreclosures are still high and many builders have inventory they absolutely have to sell. These make formidable competition for the average home seller. In some subdivisions builders are selling existing inventory for considerably less than current home owners paid for their properties two years ago. This situation exists in the Denver area as well as other parts of the country.
So why is the Denver market is in better shape than most? As I posted two weeks ago, the current inventory of resale properties, especially townhomes, has finally started to decline after several years of increases. This means that the supply is shrinking to be more in line with existing demand. Another factor is that builders are producing fewer new properties. During the first 11 months of 2006, there were 10,478 single-family building permits issued. This dropped to 6917 during the first 11 months of 2007, a decrease of 34%. Over this same period, condo/townhome permits decreased from 4922 to 4510, a decrease of 8%. While the decrease in townhome permits is not as dramatic, bear in mind that the decrease in building permits has been occurring for several years. Last year's level of townhome permits was already 50% lower than in the early 2000's.
So How Do You Sell Your Existing Home in This Market? The first thing that comes to mind is don't. Those who hang on will almost certainly get a better price in the future than they will now. If you plan to sell and move up to a bigger house, it is not as important to get top dollar for your present home since you are buying another home in the same market and what you lose on your old home will be compensated for by a better price on the bigger property. If you are an investor with a rental unit, your first move should probably be to try to maximize your cash flow from that property. This doesn't mean you go to the tenants and tell them you have to have more money because your negative cash flow is too high. They don't care what your cash flow is. On the other hand, if you are renting at a below market rate, you can raise the rent to the market level or slightly below with little danger of losing the tenant. If you do, you should have little trouble getting a new one. Rental rates are a function of supply and demand for rental units, not your need for additional cash flow. You can also look at improving your property to get higher rents. Those properties that are in top condition will always attract more tenants or buyers than marginal units. It never ceases to amaze me how many owners will put their properties on the market in sub-standard condition. Buyers will always pay for quality. Trying to rent properties in sub-standard condition will face an additional risk in that they will get tenants who are willing to accept the situation because they have no pride in where they live. As a result, they will almost always vacate the property in worse shape than at the beginning of the rental period. It has been said that the most important three factors in real estate are, "location, location, location." While this may be true for raw land, I believe the most important factors for rental real estate are, condition, condition, condition.
There is Always Risk in Investments. We are holding more cash in our own portfolios and those of our clients to temper market risk; however, we are well aware that holding cash is not without risk. For example, if you invested $500,000 in cash at 5% a year or so ago, you could receive a $25,000 annual return. Next year when that CD matures, you will only get $15,000, Good luck if you need this money to fund your living expenses. Over the long run, a well-constructed portfolio of real estate and financial assets will almost always outperform cash by a wide margin. Next year will be particularly difficult but there are bargains to be had in the marketplace. It is much better to be a buyer of assets at this time than a seller.
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