Monday, September 3, 2012


I was going through some old files over Labor Day weekend when I found a copy of a letter I sent to many of my clients just about one year ago.

That letter, which was actually a three page discussion about the significant changes taking shape in the market last fall, was entitled "UNDERSTANDING A CHANGING MARKET."

Today, nearly 12 months later, I thought it would be worthwhile to revisit some of those comments I made last year and provide some updates with what is happening now, as the “Denver Recovery” remains the focus of much discussion around the country today.

First, let’s start with a look at where things stand in terms of inventory.  As of this writing, the overall number of homes for sale in the Denver MLS stands at 10,827, a 38% decline from the 17,583 homes on the market one year ago and a 54% decline from 2010, when we had nearly 24,000 homes for sale. 

Less housing inventory is almost always a stabilizing factor when it comes to prices, and when you have steady demand and falling inventory, prices almost always rise.

So what’s happening with demand?

Last month, there were 4,181 homes that went under contract, up 19% from the 3,386 that went under contract during the same period one year ago.  The number of contracts written last month increased at every price point, including a strong surge in the $250,000 to $400,000 price range, which is great news for a segment of the market that has really just been treading water for the past few years.

Below $250,000 (undeniably the hottest sector of the market), there are just 3,115 homes for sale, compared to 5,875 at this time last year.  That is a 47% drop in inventory in the most sought-after price range!  Contracts here are up 14% from a year ago, although I am confident that the increase would be even higher if there were simply more desirable homes on the market.

As I said last year, the decline in inventory is basically attributable to two factors.

First, foreclosures are down roughly 75% from Colorado’s worst year, 2007,  In the Denver metro area, we are on track for about 8,000 completed foreclosures this year, a huge decline from the 27,000 we had just five years ago.

Second, our economy is functional, but hardly robust.  Historically speaking, first-time buyers make up about 40% of the market.  So-called move up buyers make up the next 40%, with the remaining 20% consisting of downsizers and investors.

In analyzing the numbers, we have plenty of first-time buyers and lots of people trying to downsize, plus a large contingent of investors who are picking off rental properties with once-in-a-lifetime cash flow potential.  The missing link remains clear – the move-up market remains far, far below historical levels.

What does this mean?

In short, it means the homeowner in a $250,000 home who normally would sell to buy one for $375,000… isn’t selling.  He has neither the equity (yet) or the confidence in the economy to take on such a move, and so he stays where he is. 

That lack of entry-level inventory, coupled with the disappearance of foreclosures (80% of which affected homes priced below $250,000), explains why there is hardly anything for sale.

Short sales and foreclosures, which made up 45% of the inventory in the Denver MLS in January of 2011, are just 14% of our inventory today.  Distressed inventory, which undermined prices and destroyed neighborhoods, has pretty much vanished. 

That is great news for homeowners, neighborhoods and prices.

Absorption rate is a statistic real estate economists use to assess the overall health of a real estate market.  In general, six months of inventory is considered to be a “balanced” market.  Less than six months of inventory indicates a shortage of homes, and over six months represents a buyer’s market.

Look at this incredible change between August of 2011 and August of 2012, by price point:

PRICE                                  AUG 2011                            AUG 2012
0 - $250k                              3.64 months                       1.70 months
$250k - $400k                      6.11 months                       2.51 months
$400k - $600k                      8.60 months                       3.73 months
$600k - $1 million             15.84 months                      7.71 months
$1 million and up             37.60 months                     18.09 months

At every price point, absorption rates have fallen by more than 50%.  The Denver market is actually very healthy all the way up to about $600,000, although there is still much more demand for a $200,000 home than a $400,000 or $600,000 home. 

One last figure I track closely is what is known as the “Active to Under Contract” ratio.  In short, this ratio shows how many homes are on the market and still looking for a buyer compared to each one currently under contract.

Economists will tell you that a 2 to 1 ratio (2.00) is healthy.  This would mean there are approximately 2 homes for sale to each one under contract. 

At the start of 2009, this ratio (marketwide) was 4.75 to 1.  One year ago, it was 2.77.  Today, it is 1.39, meaning there are just 1.39 homes on the market for each one that has a contract on it.  That is much tighter than the 2 to 1 ratio economists describe as “balanced”. 

The one-year change in the ratios speaks for itself:

PRICE                              AUG 2011                     AUG 2012
0 - $250k                             1.58                                 0.73
$250k - $400k                      3.34                                 1.44
$400k - $600k                      4.87                                 2.24
$600k - $1 million               8.93                                 4.02
$1 million and up              16.59                                7.85

You can clearly see how tight the market is today below $400,000… how it softens up to $600,000… and then how it breaks down after that.  Still better than a year ago, but the obvious takeaway is the dramatic shortage of inventory below $400,000.