WHAT ABOUT THE NEXT GENERATION?

Many years ago in Southern California, I had an interesting conversation with an agent colleague of mine who revealed he had systematically acquired five different single family homes as rental properties over the span of about six years.

“Impressive”, I said, “you’ve got yourself set up for an early retirement.”

“No,” he replied, “it’s not that.  I’ve got five kids under 14, and if we didn’t buy these now, by the time they’re old enough to need homes of their own there will be no hope for them here.”

That was an eye-opening conversation, and it has resonated with me for a long time.  It was one of the reasons we purchased rental properties in Fort Collins immediately after moving to Colorado almost a decade ago, but now I’m getting really worried about whether my kids will ever be able to afford a home of their own as Denver’s housing market continues spiraling to new heights.

Earlier this week, I wrote an offer on a $169,000 listing in Lakewood for an investor-client who has already purchased two rentals in the past few years.  We offered $13,500 over list price, as is, with some other candy thrown in to try and sweeten the offer.

Turns out we were one of 35 offers submitted on this property, and of course our paltry little $13,500 premium over list price failed to make the cut.  I asked the agent if we were in the top 10 offers, and she said she really didn’t know.  They looked at the cash offers first, picked their winner, and tossed everyone else aside. 

We could have been 5^th, 15^th, 25^th or 34^th.  I suppose it doesn’t really matter.

The era of sub-$200,000 housing in Denver is completely over.  Soon, the era of sub-$250,000 housing may be over.  The numbers I ran earlier this week out of the Denver MLS showed just 927 homes (attached or detached) on the market below $250,000.  Three years ago at this time, there were 4,561. 

The absorption rate for homes priced below $250,000 is currently 0.49 months.  A “normal” market, which would mean 2-3% appreciation and 60 to 90 days to sell your home, is 5 to 6 months of inventory. 

I have been keeping my own monthly inventory statistics from Denver MLS data dating back to 2007, and I kept similar numbers from Southern California MLS data for nearly a decade before that.  The 0.49 months of inventory is the lowest absorption rate I have ever seen at any price level in any market in my entire life.  And that absorption rate stands at 0.49 months despite the fact that most homes in this price range have already gone up 25% to 50% in value (sometimes more) in just the past three years. 

It’s unbelievable.

When you have this kind of total imbalance between buyers and sellers, prices can only go up.  There is widespread panic among many first-time buyers, who (thanks to new technology) now see new listings show up on their mobile apps Wednesday, only to be under contract on Thursday. 

I understand both sides of this.  I just listed an entry-level home in Wheat Ridge that drew 44 showings and 12 offers in five days.  I just listed another sub-$200k home that had 24 showings and 11 offers in three days (with a top offer $37,000 over list – I kid you not!).  

I do not know how long this can continue, but the panic among buyers below $250,000 is at a fevered pitch.  When does it end?  How much must prices rise before buyer demand cools off?

Now one thing to understand fully is that we still live in a tiered market. 

What that means is while the absorption rate below $250,000 is 0.49 months, between $250k - $400k it’s 0.92 months.  That’s still crazy hot, but there is at least a little bit more breathing room for buyers.  From $400k - $600k the absorption rate jumps to 2.51 months, still a seller’s market but getting closer to normal.  From $600k to $1 million, you have 4.63 months of inventory.  Now you are talking 2-3% appreciation and 60-90 days to sell your home.  Above $1 million, the absorption rate is 10.09 months… no appreciation at all to speak of there, with prices flat or even declining.  That’s the only price bracket where buyers have the upper hand. 

So now I am thinking about my kids again.  In 10 years, will Denver be totally out of the question for them?  Or will they live in a tiny little micro-apartment downtown?  Or perhaps a small condo along the light rail line? 

Will Denver be full of real estate “equity millionaires”, like San Francisco or Santa Barbara?  Or will all this settle down at some point? 

For all the good vibes around Denver real estate these days, I don’t like what’s happening.  I believe this boom is real, and it has legs.  But I don’t like what it means for the next generation of kids who have grown up here, who may need to leave for Omaha or Oklahoma City to find something resembling the life they will leave behind in Denver.