Coronavirus Update #2 - April 18, 2020

Dear Friends,

Three weeks ago, I sent out some initial thoughts about the Coronavirus and how it was impacting our housing market here in Denver.

Since then, there have been many new developments and we remain in a very fluid situation. In fact, as I write this on Saturday morning, the Governor’s first “stay at home” order is set to expire in eight days. My personal opinion is that the order is more likely to be modified than lifted, but I do think we will start taking steps to re-start the Colorado economy soon.

On the front lines, we’ve had nurses, doctors and first responders acting heroically. But we’ve also seen a different kind of heroism from shelf stockers, truck drivers and cashiers. It takes courage to get up and face the public every day when we’re being told the world is full of carriers, both symptomatic and asymptomatic, and that we’re one sneeze or cough away from catching a virus with no effective treatment and no known cure. Over the past few weeks, I have never said “thank you for your service” to strangers with such frequency and sincerity.

In the housing world, it’s also been a strange and different season… to say the least.

On March 26, the Governor’s first mandatory “stay at home” order appeared to exempt real estate as a critical business. But the vagaries of the hastily-constructed order, which declared “real estate transactions” as a critical function of the state’s economy, created more questions than it answered.

When does a “real estate transaction” begin? When a buyer is under contract on a home? When a seller lists his or her home for sale? When a buyer signs an exclusive agency agreement with an agent? Many agents chose to go about their business as if nothing had changed, which led to a flurry of complaints to the Attorney General and the Real Estate Commission from sheltering-in-place Coloradans who would look across the street at their neighbor’s listed home and watch countless strangers and agents rolling through seemingly oblivious to the reality of a public health crisis.

Complaint. Complaint. Complaint. Response.

A few days later, the Governor and the Attorney General clarified the “critical business” exemption in the executive order by specifically limiting real estate services to homes already under contract. For existing listings, there were to be no more public showings nor any more open houses until the order is lifted.

But even then, many agents continued meeting clients, listing houses and taking showings, despite the fact that willfully violating the Governor’s order is a criminal offense. As complaints from the public continued to roll in, on April 8 the Attorney General dropped the hammer on the real estate industry and declared that the ONLY permitted activity related to real estate would be real estate closings. No in-person showings, no open houses, no inspections, no appraisals, no nothing except for the actual act of closing a real estate transaction.

With that, the Colorado Association of Realtors (CAR) and affiliated trade groups blew a gasket, as contractually… a buyer who is under contract has a legal RIGHT to do a home inspection… the lender will REQUIRE a home appraisal before funding a loan… and section 19.4 of the purchase contract guarantees the buyer the RIGHT to do a final walkthrough prior to closing. In effect, the new order blew up contract law and eliminated due diligence and due process, leaving thousands of Colorado home buyers stuck in their contracts unable to move forward while putting their earnest money deposits at risk of forfeiture. It was a completely unworkable legal position.

Under intense lobbying pressure from CAR, mortgage lenders and title insurers, 24 hours later the Attorney General’s office reversed course again and re-authorized inspections, appraisals and walk-throughs for homes under contract, but only with strict social-distancing protocols in place. Today, some agents continue trying to list homes, relying on virtual tours, Zoom calls or Facetime showings to get around the ban on in-person showings and public open houses. Others are encouraging buyers to write purchase offers on active listings sight-unseen, with minimal earnest money and a contingency which allows the buyer 48 – 72 hours after acceptance to physically view (“inspect”) the home as a back-door way around the Governor’s order. It’s all gimmicky and violates the intent of the order, which is to protect public health.

Why would you list a home under these circumstances? Well, sometimes there are compelling reasons and you just can’t wait, but as I said to a prospective seller on a call this week, listing your home in this environment is like setting up a lemonade stand on a street corner at 3 o’clock in the morning and hoping a thirsty stranger comes by. It would make far more sense to wait until the stay-at-home order is lifted and the surge of buyers return. Right now trying to sell a home in this environment is like grasping at straws.

So, where does all of this craziness leave us?

The chart below compares showing activity in 2020 to last year. As you can see, showings began to nosedive in mid-March, then cratered after the “stay at home” order was issued by Governor Polis:

The consequences of this are obvious and severe. With showing activity down almost 90% from the start of the year, there will be very few closings in May and that drought could extend into June. No closings not only means no income for real estate agents and brokerages, but also no revenue for title companies and no purchase loans for mortgage lenders (who have been saved by the deluge of refinance activity, but are nonetheless impacted by the sales crash). Several title companies have already initiated layoffs and furloughs and most real estate brokerages are cutting staff. Redfin has let go of 41% of its agents nationwide and Zillow, Open Door and other “iBuyers” have all closed up shop on those operations. Appraisers, inspectors, contractors and the even home improvement chains will also suffer mightily as the number of real estate transactions continues to spiral down.

We’re all dealing with challenges – that’s the most obvious thing I will say today. And I have great empathy for everyone whose business or job has changed or been eliminated in the past 30 days.

But for a few moments, I want to focus on the future. Because there is an “other side” to this, whether that’s 30 days from now or 14 months from now. And there are a lot of things to be thinking about as it relates to the housing market.

WHEN WE RESTART THE MARKET

One way to look at the housing market right now is as if it’s been placed into a medically-induced coma. As I’ve said during several client calls recently, there’s going to be an insane amount of activity straight out of the gate when restrictions are lifted and the real estate market snaps back to life. There are still buyers in this market, plenty of them. In fact, you could argue that this temporary halt is like constructing a dam in front of a fast-moving river. When the dam is opened, there is going to be an immediate flood of activity.

But once that initial surge is over, sellers are going to find a very different landscape. As of right now, there are still more than 8,700 active listings on the Denver MLS, which is up nearly 30% from a year ago. It’s not that there were tons of listings when all this craziness started… in fact, the spring market had been very strong and inventory was extremely low. The main reason inventory is up 30% is that virtually nothing can go under contract during this temporary time-out. Most active listings are just sitting.

So while all of this buyer demand is walling up behind a temporary dam, so is listing inventory.

In addition to the 8,700 active listings on the market, another 1,200 homes were withdrawn (temporarily placed on hold) from the market in the past 30 days while an additional 1,100 listing contracts were terminated altogether. So if you add the 8,700 active listings and the 1,200 withdrawn listings, plus account for the hundreds and hundreds of properties that would have been listed in March and April that never got to market… within a few days of the restart we will probably have the highest inventory levels for homes we have seen in a decade, at the same time thousands of buyers come pouring back into the market.

Add it all up, and it’s going to be… bonkers.

But once you’re past that initial surge and the most motivated buyers have come through, the narrative is going to change rather quickly. With unemployment likely to be near 15% at the start of summer, in the macro the buyer pool is going to be thinner. But for reasons I’ll get to in a moment, I think the listing inventory is likely to just keep climbing as we get closer to Labor Day and election season.

As we already know, the travel and leisure sectors of our economy are taking a direct hit from Covid-19. Traffic at DIA is down more than 90% while major hotels like the Gaylord have completely shuttered operations. This is also going to have profoundly negative impacts on our mountain communities, which rely heavily on tourism, and the Air B’nb market in Denver, which was flourishing prior to the outbreak of the virus.

In fact, earlier this morning I ran searches on Air B’nb for homes in Denver offered for rent during the July 4 holiday week. Searching in tight pricing increments so I could precisely count the number of listings, I tallied up 1,340 available properties (just in Denver) during what should be one of the busiest weeks of the summer travel season.

Unlike the airline and hotel industries, which received massive government bailouts, no such help is coming for the Air B’nb industry, which is comprised largely of sole proprietors and “mom and pop” operations.

Most of the Air B’nb owners I know have mortgages and are highly dependent on rental income to stay in business. Right now, that income is pretty much zero. And even when travel starts to happen again and we slowly regain traction, it may be a year or more before occupancy rates get back to where they were before our world was turned upside down in March.

So what does that mean? Most likely, it means you will see a much higher than normal percentage of these units hit the market over the next few months, along with rental properties that have suddenly become a lot less appealing as the dynamics of our market change and the depth of the financial hit becomes apparent. The Denver Apartment Association reported that 31% of renters had not made full rent payments on April 1, although the Denver Post reported this morning that as of this week (after arrival of the first stimulus checks) the number of renters not making April payments had dropped to 9%. Come May 1, I would expect delinquencies to surge again as savings are depleted and the unemployment situation becomes more dire.

WHAT COMES NEXT

In the short term, we’re going into a season that is going to be very painful for a lot of people. But it will only be for a season. By this fall we may see short sales and foreclosures if people can’t keep up with their mortgages and can’t find gainful employment over the summer. But for those who are employed, interest rates are likely to stay in the 3% range for the foreseeable future and I am anticipating more inventory for sale this summer/fall than we have seen since the Great Recession. That means choices, value and lower payments. Whether you are a first-time buyer or someone looking to invest in real estate, the numbers later this year will likely be more attractive than they have been in a long time.

But because state health officials anticipate this virus will run its course and be neutralized in 12 – 18 months (or sooner with a vaccine or effective treatment), there is plenty to suggest there will be a strong recovery on the other side of this. At the onset of the pandemic, unemployment in Colorado was a record low of 2.5%. Nationally, unemployment was just 3.5%. One way to look at this is that at the onset of the pandemic, Colorado’s economy was exceptionally healthy. And our healthy economy has a much better chance of fighting off the economic impact of the virus than a sputtering economy. States that had higher unemployment rates to start the year like New Jersey (4.8%), Louisiana (5.1%) and Wyoming (5.8%) will have a much harder time regaining footing when this is all over.

So if you can hold on… you should try to hold on. But if you own something you simply can’t afford and don’t have the reserves to handle several bad months of cashflow… then you might need to weigh your options.

(Side note: You may also be able to defer or forbear mortgage payments for a few months if you are having trouble keeping up – you should reach out to your servicer ASAP if you are in this situation. Please note there is a BIG difference between forbearance and deferment. In forbearance, your payments are rolled 3 – 4 months into the future, when they are all due at once – like a balloon payment. This option will not work for most people. What is far preferable is deferment, where payments due over the next few months are skipped and then tacked on to the back end of your mortgage 15 – 30 years down the road. Deferment can get you through this, forbearance is just kicking the can down the road. Please seek proper legal advisement if you are offered either of these alternatives as this letter is not to be construed as legal advice.)

If you are in a situation where you need to sell, I would recommend you do it sooner rather than later, both to capitalize on the large surge of buyers we will likely see straight out of the gate (May/June) but also to get out of your negative cash flow as soon as you can. In the fall, I expect market times to lag and buyers to have more leverage. For many, selling this fall will not be an enjoyable experience.

None of this is pleasant and, like you, I wish we could just go back to February or December or October or any other month before our lives were turned upside down by this insidious virus.

In writing this letter, I am not attempting to capitalize on or make light of anyone’s misfortune. My heart breaks for everyone whose world has been rocked by this terrible circumstance. Like many of you, I know people who have contracted the virus and I know people who have died from it. I know healthcare workers who are serving valiantly and families that are grieving. I know countless friends and clients who have lost jobs or taken terrible hits in the stock market. We’re all adjusting to a new set of realities, and we need to do our best to support one another during this unprecedented season.

If I can be a resource for you – and I’m not merely talking real estate – please do not hesitate to reach out. This is a moment where all of us have the ability to impact others through our actions. It’s a moment to rise up and be the best version of ourselves.

One last note, which hopefully will provide a small dose of joy in a difficult season. Four weeks ago today, our family decided we would take the plunge and get a “Quarantine Puppy”. We purchased her from a breeder in Pueblo and named her after one of favorite Colorado mountain towns. This is “Miss Frisco”, a chocolate lab who is 12 weeks old today. She has been a welcome diversion and a burst of energy (and a lot of work)… but we’ve found our hearts have grown almost as much as she has over the past 28 days. While she is struggling with social distancing (puppies love all humans) and has yet to master the art of going on a walk (which we often refer to as “going for a drag”), she’s also making great progress and is already an indispensable member of our family. Not sure how soon before she’ll be riding shotgun on showing appointments, but I could see it happening as soon as Victoria and Elizabeth go back to college. As of now, the plan is for Frisco to begin studying for her real estate license in the fall ; )