Thursday, September 15, 2011


There is a fairly dramatic and ongoing trend in the Denver real estate market today, and it is a lack of inventory.

I’ve been talking about this with clients for the past few months, but it’s gone from an interesting observation to a dominant reality that will affect both prices and expectations for some buyers and sellers in the coming months.

As of September 10, the inventory of single family homes for sale in the Denver MLS is down a stunning 28% from one year ago. That is almost a seismic shift, but it’s even more dramatic than that at the entry level.

Let’s compare available inventory right now to one year ago, breaking it down by price point:

Price Point         Sept 2010          Sept 2011          Decline
$0-$250k               10,409               5,533               - 46.9%
$250k-$400k           7,250               4,795               - 33.9%
$400k-$600k           3,727               2,775               - 25.6%
$600k-$1M              2,428              1,870               - 23.0%
$1M and up             1,435              1,089               - 24.2%

Below $250,000, where most of today’s buyers are looking, inventory is down a remarkable 46.9%. For all homes below $400,000, there are 41.6% fewer homes on the market than 12 months ago.

Why the disappearance of homes for sale?

Historically, there are two main drivers in the housing market: first-time buyers, who traditionally make up 40% to 45% of the market, and move-up buyers, who traditionally make up about 40% (downsizing buyers make up the balance).

So here’s the deal: foreclosure are down 50% from the peak in Colorado, and the move-up market is dead because buyers simply don’t have the confidence to sell $250,000 homes to purchase $400,000 homes in today’s economy.

So when the supply of foreclosures dries up on first-time buyers, and existing owners (many of whom have little or no equity) in the $250k to $400k range don’t want to sell for economic reasons, you suddenly don’t have any homes for sale.

What we’re seeing right now is historic, and if the trend continues, it’s going to mean higher prices at the entry level.

I have several buyers right now who are quite frustrated by this total lack of supply. And, to be fair, many buyers are still under the increasingly untrue assumption that they hold all the cards in today’s market.

When inventory falls 46.9% at the entry-level, one of two things has to happen: buyers either start paying more, or they must be willing to accept a few more defects in a property because sellers are done cutting on price.

From an aerial perspective, the drop in inventory is actually an indicator of healing in our market, although I will say yet again that any improvement is going to be mostly concentrated below $400,000, because the move-up market simply isn’t generating enough buyers to absorb the higher end inventory.

But if you own a home under $200,000, you are looking at the first significant opportunity to see appreciation in at least five years. It’s going to take time – it always does – because buyers and sellers are almost always behind the market when it comes to perceptions.

Buyers still think that finding a great home for cheap is easy – it’s not. For a long time, sellers refused to acknowledge the reality of falling home prices, and as a result, the market was littered with overpriced, unsalable inventory for years.

Now, at last, it appears the pendulum is starting to swing.

With no new inventory coming online, interest rates at historic lows, rents rising rapidly and vacancy rates near zero, there are simply more buyers than sellers below $250,000.

Buying a home is still a sweet deal for most folks today, but it is hard and sometimes frustrating work.

And over time, buyers are going to have to adjust their expectations about what’s out there, how much it is worth and how quickly they will need to take action to secure a contract. It’s a totally different market than the one we knew 12 months ago, and it will be interesting to see how much lower inventory falls before more sellers start wratcheting up their expectations after several dry years with little or no appreciation.