Realism returns to real estate

If you’re sick of hearing about the poor economy and downturn in the real estate market, you’re not alone. Most of the economic antagonists (many of them journalists) love to talk about the sky falling when in fact all that financial rain is producing some substantial growth and not just from artificial means like government stimulus, which is really the financial equivalent of pigs eating sausage – definitely not sustainable.

Investment in new businesses, construction and capital investment in existing business is very much on the rise. While the current economic figures don’t yet show it, they most certainly will by the end of the summer.

A brief glance around your neighborhood – or most any other neighborhood along the Front Range – and you’ll notice plenty of new construction. The question is where did the money for these projects come from and why is it showing up now?

“I think the money has always been there; it has just been on the sidelines,” said Greg Smith, managing broker at ReMax Alliance Boulder. “Banks are lending a little more easily, but also consumers know what to expect from banks and have realistic expectations. They know they need a decent credit score and a down payment.”

It turns out there are plenty of people out there who fit this model. While the realistic expectation is a much more modest home, few want to live in a ramshackle shanty abandoned to foreclosure by the previous owner. This has recreated the business of buying distressed homes, either from the courthouse steps or the bank and rehabbing them into something first-time homebuyers can be proud to own.

There’s a pent up demand, Smith said. “Now homebuilders are coming back in the market to fill the new demand.”

Sales statistics for the Boulder area show sales of 3,009 single family homes in 2010 and 3,005 homes in 2011 – almost identical. But the important statistic is the number of new listings coming on the market. In 2010 there were 1,353 listings, and in 2011 there were 1,121 – a 17 percent decrease, and this drop in the available homes for sale will eventually drive up prices.

“Price is a lagging indicator to sales,” Smith said. It is about two years behind the trend, so looking in a crystal ball we’ll see two more years of lower prices, but by this summer we’ll start to see the first signs of rising prices.

Already demand for distressed “fix-up” property is extremely hot. Bank-owned properties are getting multiple offers in a matter of days, and even homes in need of significant work are selling above the asking price.

“It’s very frustrating,” said Jeff Davis, investor and owner of Complete Development in Boulder. “You’d think it would be easy to find (an investment property) right now, but I’ve been looking for months and have made several offers but keep getting beat out by someone willing to pay more.”

In addition to the rehab market, investors are also diverting income from traditional stock portfolios in search of brick-and-mortar deals that offer more predictable returns through rental income or at least a way to create value with sweat and skills collected over the years.

“I wanted to get a bit of diversification because of concerns about the stock market. This was diversification that I could understand,” said Doug McKnight, who recently purchased and rehabbed a single-family home that is now rented. “It was a way to leverage that investment in tools and experience.”

McKnight, who purchased the property in the summer of 2011, added that a single-family home gives him the flexibility of doing an addition or bigger remodel in the future and realizing a larger return when it’s time to sell.

This growing demand has construction trades adding jobs and scrambling to keep up with the work.

“We’ve had a lot of work – almost too much, said Charlie Clinton, superintendent with Horizon Drywall in Denver. “These days it’s tons of remodels and scrapes and additions.”

Clinton added that before the housing collapse, most of their work came from tract home builders with row after row of new homes that were all the same, making the jobs faster and easier to bid and complete.

“That work is gone and most people are doing remodels,” he said. “It’s a sign of the times, I guess.”

The remodel work is more difficult, and where once a less skilled worker could hang and tape miles of drywall, it now takes highly skilled finishers to take on many of the remodel jobs. These people are harder to come by and can demand more pay, which, of course, drives up the cost. This often comes as a surprise to remodelers who think the sagging economy means cheap labor.

The market has come full circle. The days of throwing together a huge house and selling it for a fortune are over. The new real estate market is one resurrected from the past with modest homes selling for realistic prices and a housing stock that is leaning toward rehabilitation rather than demolition and replacement.
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