Much is being made of our current inventory drought here in Denver. A severe shortage of homes for sale is inspiring multiple offers, bidding wars and near double-digit price appreciation (especially at the lower price brackets) once again in 2014.
So what's up? Is this the new reality for home shoppers in Denver?
I believe it is.
And here's why. As I have chronicled extensively on this blog, low inventory is the result of no more foreclosures, virtually no new construction under $350k, huge population growth, an improving economy and the "turnstile effect" of having more than 100,000 first generation foreclosure owners cycling back into the market.
Couple that with low rates, and you have a tsunami of demand sweeping over a tiny island of supply. But here's the new twist...
When the Fed began systematically undercutting the mortgage market through Quantitative Easing (QE) in 2009, ushering in an era of record low interest rates which extended into the second half of 2013, the goal was to breathe life into a lifeless housing market and put more disposable income into the pockets of refinancing homeowners.
All well and good, but now here comes the boomerang. Fast forward a few years, and those homeowners who refi'd into rates in the 3's are suddenly pretty addicted to those low payments.
When you pair that with the steep price increases across the board we have seen over the past two years, the cost of picking up an extra bedroom or a larger yard is inducing pretty severe sticker shock.
Follow this scenario:
- Homeowners Bob and Jane have two kids and own a three bedroom home at the start of 2012 that is worth $250,000. Refinancing their loan at 3.25% at an 80% LTV gives them a monthly principal and interest payment of $870, an almost ridiculously low amount, which is fixed for the next 30 years.
- Two years later, Bob and Jane learn they are expecting child number three. Thinking that a fourth bedroom would serve them well, they start exploring their options.
- Immediately, there are two problems. While their existing home has increased in value and is now worth $300,000 (giving them more equity), the home they are hoping to buy has also gone up in value. Available for $300,000 just two years ago, today those sellers are looking for something upwards of $350,000.
- The second shock is with interest rates. That 3.25% mortgage of two years ago is gone. The new number is 4.50%. So even with a 20% down payment on their $350,000 replacement home, the new loan is $280,000. And with rates at 4.50% instead of 3.25%, the reality is that their new payment will increase from $870 to $1,419, a 61% increase in housing payment.
All for one extra bedroom.
And that's not the end of it. Say what you will about "subprime financing", but ten years ago, if a homeowner wanted to move from their exiting home to a new home in one shot, they could do it by taking out a "bridge loan" that would allow them to purchase home number two before home number one even went on the market.
Buy home number two, move, and then go back and sell home number one. That was easier, less disruptive to the kids and it allowed them to both buy from a position of strength (non-contingent) and sell from a position of strength (with a vacant or properly staged, turnkey ready home).
Those days are over. Now, if a homeowner wants to sell and can't carry two mortgages, they must either sell home number one and attempt to purchase home number two "contingent" upon the successful sale of home number one (a heavy layer of risk in a hot market that greatly reduces the likelihood of any sane upleg seller agreeing to it)... or sell their home and ask the buyer for a rentback period (generally limited to 45 days in financed transactions) during which they hope to secure and close on a replacement home (again, darn near impossible in a zero-inventory market).
Neither of these options has a high probability for success.
The third option is to sell home number one, sign a lease and move into an apartment for six months while your belongings sit in storage. This is actually the preferred option, in my mind, because it provides the time and flexibility to be selective with your new home, and when the time comes to write an offer, you are non-contingent and ready to go.
But who actually wants to do all that for one extra bedroom?
People are addicted to their low payments, and that's not a bad thing. But it has the effect of freezing people in place, which means the upward mobility that was a hallmark of previous hot markets isn't showing up the same way here.
That means slim pickings, bidding wars and ongoing price aggression as a huge and growing pool of buyers compete in a continuing zero inventory environment.
For many sellers, the pain and discomfort of moving, both financially and emotionally, is greater that the pain of simply staying put.