Year-End Reflections and Predictions
It’s been quite a year, and the next one looks no less exciting. Here's a chance to look back on a few of the more interesting events, along with a few suggestions as we look forward to the coming new year.
According to Case-Shiller, the average single-family residential home in the Denver Metropolitan area increased by 21.2% and is forecast to increase again next year by double digits. This would continue the multi-year outperformance by Denver when comparing to the national average. And of course, that’s an average, so some areas increased much more, and others increased by less, but the rising tide did indeed seem to float all boats. Regardless, back-to-back increases of that magnitude are unprecedented for as long as that data has been gathered.
Certainly, the monetary stimulus had something to do with it, and that is tapering. And certainly, the presence of iBuyers and other institutional buyers helped push prices higher. Even with Zillow rather spectacularly imploding, there seems to be quite a few institutional buyers to fill in the void. In the second half of the year, financial purchasers appear to be more common than individuals that are purchasing the home for personal use. The IMN Conference last month was all about people buying (and building) for rent, rather than looking to purchase and rehab, or build, with the intent to sell.
Home prices were not the only prices to rise sharply, with commodity and labor costs also rising sharply. Commodity prices are likely to continue to be volatile, and likely to stay at these higher levels. And even at the high prices, it still has been occasionally difficult to get specific materials, although that pressure seems to be lessening. When comparing rehabbed homes to new builds, rehabbed homes have a lower percentage of costs that are exposed to these higher input costs, so while concerning, it is still supportive of our industry.
Next year, we see a few changes coming. We expect prices to continue increasing, but at a slower rate than last year. The underlying dynamics of not enough homes, and those that are currently built needing maintenance and updated aesthetics, means a strong need for homes to be purchased and rehabbed. In fact, the market has changed so much that we don’t think calling it ‘fix and flip’ really reflects what is going on in the market. Commercial developers (and re-developers) have long referred to this type of activity as ‘value-added’. In their terms, these are properties with ‘good bones,’ in desirable areas, that need improvements to be commercially desirable to tenants. This is the same dynamic that we see our borrowers following and think there’s no reason to refer to it any differently when applying this activity to a residential property instead of a commercial property. To reflect the change, we’ll be referring to the market as ‘value-added’ in the new year and see if it catches on.
There’s no reason to expect a change in the strong seasonal nature of the residential market. It may be slowing a bit now, although we’re quite busy, but spring of 2022 should be strong again, and it’s a good time to prepare now. You can use this slower time to make sure your subs are happy and can be counted on in the new year. Reach out to realtors and wholesalers to make sure you have a supply of homes to work on. Drive and familiarize yourself with a few new areas and anything else you can think of that may have caused issues in the past year. While certainly less exciting, a review of your budgeting and accounting policies and procedures may be helpful as well. Using this slower time productively now will make sure you are good to go and can keep up when it starts getting really busy again.