Tuesday, February 15, 2011

THE FEBRUARY BOUNCE

The Denver housing market saw some sharp and abrupt changes during January, and these shifts bode well for most buyers and sellers going into the spring market.

At every price point, we saw substantial and dramatic drops in the absorption rate, which is the hypothetical calculation which projects how long it would take to sell all homes on the market at the current pace of sales.

December's overall absorption rate, which I pegged at 11.20 months, was the worst reading I have seen since I began tracking these numbers in the Denver market in 2005.  The previous high mark was 10.45 months in September of last year, when the market was still recalibrating and going through a severe post tax-credit hangover.

Real estate economists will tell you that a six month inventory represents a balanced market.

Now the good news:  in January, the overall absorption rate for the seven-county metro Denver area dropped all the way to 7.19 months, a four month reduction of inventory in a single 30 day cycle.  Despite the fact the December market is always slow, that bounceback in January is neither small nor insignificant, because it shows we had buyers entering the market in fairly large numbers compared to the number of homes for sale.

Additionally, while the number of homes for sale in January of 2010 increased by about 1,000 from December of 2009, last month we saw almost 400 fewer homes for sale than we had in December.   

One factor driving buyers off the fence is the rapidly rising interest rate environment we have seen since the first of the year.  The average interest rate on a 30-year fixed payment mortgage has increased by nearly a full percent in the last month, now pushing 5.25%.  After months and months of predicting a signficant jump in rates, improvement in the overall economy is turning those forecasts into reality, and buyers are scrambling so as to not be left behind.

The most improved segment of the market?  It's the $250-400k range, traditionally the primary move-up market.  The inventory of homes here fell from 11.83 months to 7.11 months, and there are just 4.43 homes for sale in this price range to each one under contract.  In January of 2010, by comparison, the absorption rate for homes in this price range was 9.98 months and there were 5.16 homes on the market to each one under contract.  (And that was with two highly attractive tax credits in play)

So what does it mean?  We're still living in a very segmented housing market, with very different realities for folks buying a first home compared to those trying to sell a luxury estate.  The entry level of the market (below $250k) remains balanced and competitive; the move up market ($250-400k) is improving; the upscale market ($400-600k) is stagnating; the high end ($600k-$1M) is losing value; and no one can say where the bottom is for the luxury market ($1M and up), where there is currently 35 months of inventory and there are 16 homes on the market for each one under contract.

With 85% of the sales in our market taking place at $400k and below, for most buyers and sellers the market is looking more stable than it has in three or four years.  I'm not afraid of this sector of the market, and with rates still attractive and competitively priced homes, there is good value to be found here.

From $400-600k it's dicey, and I think most homes in this price range are probably just treading water or gradually drifting downward in value.  Until our economy starts producing jobs and growing again, there just aren't enough confident buyers to offset the number of people looking to get out from under pricier homes.

Above that, it's flat out risky, and I don't see improvement in the luxury market any time soon, despite the cheerleading you hear from certain members of the real estate community and brokerages around town.

Colorado has always been a seasonal market, and spring is historically the busiest time of the year.  Last year the inventory of homes for sale increased from 17,000 in January to 23,000 in July, and we'll see another surge of inventory here shortly. 

The way the numbers are looking to start the year, however, it might be a better idea for sellers to list early than to wait for the traditional spring surge, because there are buyers in the market right now.