Chicken Little and the Real Estate Crisis

"The sky is falling, the sky is falling!
I must run to tell the king!"

These are the headline "acorns" that bounced off of Chicken Little's head:

• Existing-home prices, sales fall in January, but so does inventory
• Metro home sales are down 13.7%
• Sales of existing homes are down across the nation

Journalists are great at creating headlines and getting you to read on. But they are not so skilled at drilling down into the data to determine what is really happening. A headline I like to write is:

You Can Drown in a Lake that Averages 6 Inches in Depth!

Averages can be dangerous...

What would be your conclusion if you were to read the following quotes about a neighborhood?

"The percentage of real estate sales that are bank foreclosures is 83%"

"Average price decline over the last 12 months has been 46%"

You might think that this is a good neighborhood to stay away from, right? Or, you might rejoice that your house is not located there.

Would you be right or wrong? You would be both! The first conclusion is wrong; the second one is right. How can this be? It is because the misfortunes of others often bring windfalls to the opportunistic. When any market is in turbulence, it often spells opportunity and disaster. Which one you end up with depends upon how you react.

Is the real estate market a disaster?

Well, it depends. How should you react? Are you prepared to avoid the disaster and take advantage of the opportunity? Neighborhoods are individual markets with forces driving supply and demand that are unique to each.

We have identified the neighborhoods and what drives supply and demand and, consequently, price appreciation or depreciation, inventory levels, the time it takes to sell a house, and the dynamics of infill development.

There are many great neighborhoods with wonderful fundamentals. Washington Park is one. People want to live there and 10 families per month are buying, average prices are rising, and the homes sell quicker than in the rest of Denver. Why is this so?

The chart below shows the distribution of asking prices of current listings in Washington Park. Notice the high concentration of prices over $1M.

There are other neighborhoods where there's opportunity to buy, remodel, rent and hold...

These will provide you with strong positive cash flow and price appreciation. Take a look at southwest Denver where prices have depreciated over 50% from 2-years ago and rents are rising and vacancy rates are down. Want to be a landlord and buy investment property? This might be a good place to look.

There are others that provide an opportunity to take advantage of exogenous factors that are driving investment; ride the crest of the investment wave in Hoffman Heights or the Burns neighborhood in Aurora north. Is this area at the bottom of the curve and on its way back up? Who knows! I don't have a crystal ball but I like what I see:

• Inventory levels at 4.5 months
• Days-on-market below the metropolitan average
• Price decline has stopped
• More bank-owned properties are being sold than are entering the market
• And a $2.8 billion investment in the Fitzsimons project

And a few neighborhoods benefit by the logic of their location: Whittier, Cole, Five Points, City Park, Skyland.

Whittier is an intriguing spot. It is a short walk to downtown. It has a Light Rail stop at 40th and Downing. It is zoned primarily R-2 and yet has single family detached as well as duplexes. The homes were built between 1890 and 1910 and there is a flood of remodeling underway. Finally, the bank sales appear to be on the downward slide. Is it time to buy there? Maybe. The chart below depicts the price per square foot of homes sold by individuals in Whittier over the last 6 months. It is stable. Is that a good signal?

Yet bank sales show a different PSF profile:

As you can see the neighborhoods are different and often areas within neighborhoods are different. So it is wise to do the analysis that is going to securely guide you to where to buy and at which price point.