Sunday, February 19, 2012

A MAD SCRAMBLE FOR INVENTORY

The calendar says February of 2012, but it’s feeling a lot more like February of 2005 in the Denver metro area housing market.

Insatiable buyer demand for extremely limited inventory, especially at the lower price points, is resulting in multiple offers, sparking bidding wars and rapidly dropping days on market averages.  Buyers are scrambling to take advantage of low interest rates at a time when year-over-year inventory has dropped 42% overall, and by more than 60% for homes priced below $250,000.

Snapshots from the past week:

-  I searched all Broomfield listings below $160,000 for a north area client in search of a first home – there are 16 such properties in the MLS, and (amazingly) all 16 are under contract.
    -  My client then asked that I expand the search out to include Westminster.  There are 18 such properties in the MLS (including short sales), and 12 are under contract.
      Lump the two together and you have 34 properties on the market below $160,000, and 28 of them are under contract.  And most houses under $160,000 are not exactly turnkey opportunities!

      This dramatic decline in inventory, accompanied by demand that is essentially unchanged from a year ago, is sparking bidding wars and leaving many buyers utterly frustrated.  For single family homes priced below $200,000, there is appreciation happening right now in almost every part of town.

      (The condo market, as an aside, remains mostly stagnant due to ongoing financing restrictions and the fact that a majority of condo projects lost their FHA approvals at the end of last year.  Condos have also been hit harder by foreclosures, causing more homeowners to be “underwater”, which has depressed sales and caused more short sales, both of which are bad for values and further slow recovery.)

      Multiple posts in this blog over the past six months have discussed what happened to the inventory – namely, far fewer foreclosures and hardly any “move-up” buyer activity, due to a lack of equity and a lack of confidence in the economy. 

      However, the one group mostly unaffected by the economic downturn of the past four years is first-time buyers, who are looking at rates in the low 4’s, along with prices that had fallen 10% to 15% in most areas, although those prices are definitely recovering right now.

      Take a look at how radically things have changed in 12 months:

      - In February of 2011, there were 3.45 homes for sale under $250,000 to each one under contract.  That meant each seller was basically in competition with 3.45 other homes for the next buyer.
        - Today, that ratio is 0.95, meaning there are actually more homes under contract below $250,000 than there are homes on the market.  And that includes all the distressed short sale inventory, meth labs, and abandoned homes in total disrepair.  There is, frankly, hardly anything to choose from right now.
          These are not “seasonal” changes brought about by the warmer weather.  These are apples-to-apples, year-over-year comparisons that paint an entirely different picture than we saw in 2011.

          - In the $250,000 to $400,000 price range, the absorption rate one year ago was 7.11 months.
            - Today, it is 3.49 months.
              Even the higher end of the market has shown improvement, although things were so bad a year ago improvement was almost unavoidable:

              - For homes between $400,000 and $600,000, the absorption rate has fallen from 9.25 months to 4.86 months.
                - Between $600,000 and $1 million, the absorption rate has fallen from 15.13 months to 7.40 months.
                  The bottom line is that, after years of stagnation, our market is at a pivot point.  Recovery is starting at the bottom, as it always does.  The hope is that, eventually, rising entry-level prices will create enough equity to unlock the next level of “move-up” buyers, who simply are on the sidelines today.

                  Sellers, especially those with homes below $250,000, have more leverage today than at any time in the past five years.  Inventory is down to levels not seen in nearly a decade, while buyers (albeit mostly entry-level) are pouring into the market.

                  It’s a scramble out there, but it’s a healthy scramble, and one that should create positive ripple effects throughout our housing market and the Denver economy in 2012 and beyond.