Sunday, October 23, 2011


The overall inventory of homes for sale currently stands at 15,533, a stunning 32% drop from one year ago, when we had almost 23,000 homes for sale in the Denver Metrolist MLS.

When you focus only on inventory priced below $250,000, the decline in inventory is a full 50%!  This is a sharp and dramatic disappearance of inventory which demands some explanation.

At this sub-$250k price point, there are just 1.43 homes on the market for sale to each one currently under contract. The absorption rate stands at 3.45 months, well below the 6 to 8 month supply economists refer to as a “balanced” market.

The numbers always tell a story, and because I study numbers and I've been at this for 17 years, I can see the trees clearly through the forest. In fact, what's happening right now is fairly obvious if you simply string the numbers together.

Historically speaking, first-time buyers make up about 40% of the buyer market. So-called “move up” buyers make up the next 40%, with the remaining 20% consisting of downsizers and investors.

In analyzing these numbers, the reality is clear: the move-up market has essentially disappeared.

What does this mean?

In short, it means the homeowner in a $250,000 home who historically would sell to buy one for $375,000… isn’t selling. He has neither the equity nor the confidence in the economy to take on such a move, and so he stays where he is.

The homeowner at $400,000 is even in worse shape. If he’s thinking of selling, it’s to get out from a large housepayment and either buy down or rent. He most certainly is not looking at $700,000 homes. And so it goes all the way up to the $1 million market, where you currently have 15 homes on the market to each one under contract (compared to 1.43 below $250,000).

If you think of it as a conveyor belt, the first leg of the belt, consisting of first-time buyers, is rolling at full speed. There is absolutely no shortage of first-time buyers looking to buy at discounted prices with rates in the 4’s. Any recovery that takes place in housing will most definitely be from the “bottom up” (again, that’s experience speaking), and so these folks who are buying homes at 2011 prices with 1940s interest rates really are in fantastic shape.

The challenge for these buyers today is not fear of the market, but simply a lack of inventory. Because first-time buyers (by definition) have avoided the housing troubles of the past five years, they arrive with clean credit, strong motivation and a better understanding of what mistakes others have made.

The second leg of the conveyor belt, which covers homes priced between $250,000 and $400,000 is running much slower. Buyer demand is not as strong here (although there is still demand). There are currently 3.15 homes on the market to each one under contract, with a functional 6.09 months of inventory.

From $400,000 to $600,000, the pain starts to really set in. Here, there are 4.93 homes on the market to each one under contract and 9.25 months of inventory. This is a surplus of inventory that shows clearly you have more sellers than buyers, and in that situation value loss is almost a certainty.

At $600,000 to $1 million, there are 8 homes on the market to each one under contract. That means that each new seller is competing with 8 other homes – hardly a favorable ratio. Inventory surges to 15.07 months at this price point.

Finally, at $1 million, you have a staggering 15 homes on the market to each one under contract and gruesome 29 months of inventory. Hopeless.

So where is the opportunity in today’s market? Clearly, it’s with first-time buyers and sub $400,000 buyers who have the patience to wait for a great deal.

With three-quarters of Colorado’s builders no longer around, there’s not going to be much new construction coming online any time soon. And because builders cannot build profitably at today’s prices, most will simply wait until there is significant recovery before getting back into the game.

That means first-time buyers today figure to be well-protected for the next several years. With 61% of all contracts coming from just 34% of all listings (the sub-$250k range), recovery starts here.

For first-time buyers today, the hardest part of this market is simply finding something to buy. Because with foreclosures down 50% from the peak and very few people selling entry level homes to move up, there’s hardly anything for sale.