Tuesday, December 23, 2014

Irrational Exuberance Returns

by Osman Parvez

Years ago, I was working as an analyst for an investment bank. The bull market was coming to an end and the VIX was reaching astronomic levels. Economic news was all over the place and suddenly, our entire research universe was volatile.  

I remember my boss saying, "Osman, all of our companies are now rated Day Trade." He was joking, of course but it also marked the beginning of a financial market roller coaster ride.

Fast forward to today. I'm not advising institutional investors on trading strategies. I advise buyers and sellers of residential real estate in Boulder and surrounding areas. It's a value added benefit of choosing me as your Realtor.   

My #1 piece of advice? Be judicious. Understand the market before plunging ahead.  

I'm witnessing absurd market activity but there is no VIX to track, no P/E ratio to obsess over.       


Cash is king but not an ace in a bidding war
Here's the broad market: Sales volume for the last twelve months was down 6.8% from the previous year but not because of reduced buyer demand. As of this writing, 45% of available inventory in Boulder is under contract. This is normally the slowest time of the year for real estate. The problem is limited supply.

It's clear. Far too much cash is chasing far too little inventory. Would be homeowners are getting shut out.  Prices are rising rapidly. There is little transparency for who wins the deal and who doesn't. In the week before Christmas, I've personally engaged in three bidding wars. One offered clear communication on the transaction, the other was murky as a muddy stream. The third is pending. 

Fact:  rent is rising rapidly and out of town investors are buying large developments.     

The whisper: rents are going even higher. A couple of weeks ago, a property manager told me that he just signed CU student tenants on the Hill for $900 a bedroom. He said the property wasn't anything special, it's your typical run-down student rental. It seemed like yesterday that $700/bedroom was the norm for the Hill.    


Unlike the stock market, Boulder real estate can't rapidly increase supply to match buyer appetite. We don't have available land, nor do the vast majority of Boulder residents want to see our population increase. There is no political will for expansion of Boulder, zero chance that the four story height limit will go away. Practically the same zero odds for a reprieve of the 3 unrelated person occupancy limit.  


East Pearl, Canyons of Renters
See all those big construction projects? They took long periods to approve (high regulatory risk) and they're almost entirely rentals. Supposedly developers are concerned with construction defect litigation but more likely because the returns for being a landlord are so high.    

It's an interesting time to be a real estate investor in Boulder. To play, you absolutely must have skin in the game and invest your time in understanding the market. You must see inventory firsthand and closely track sales comparable to your intended acquisition or sale. Only then will you understand intrinsic value and avoid overpaying in a bidding frenzy for second rate asset. Only then will you know whether it's a good time to dump a marginal property and acquire something better.  

If you're smart about it, Boulder real estate can be a wise deployment of capital - whether it's for your personal residence or an asset in your portfolio. Choose your adviser carefully. Otherwise, you're rolling the dice. 

What did Greenspan say? Beware irrational exuberance.   


p.s. We'll discuss best strategies for bidding wars in next month's Boulder Real Estate Meetup.   Sign up HERE
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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image credit:  401K Calculator

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