THE TWO NUMBERS I WILL BE WATCHING IN 2015

I have always thought of myself as a contrarian, someone who thinks “summer all winter” and “winter all summer”.

With that in mind, and given how hot our real estate market has been for the past 36 months, it's wise to begin looking for signs of change. 

Truth is, almost of the important indicators – employment, migration, inventory, demographics – are in alignment and in amazingly good shape for continued growth and appreciation.  But no cycle can last forever.  Change has to happen, eventually. 

So the real question is not if, but when, things will start to turn.   And when things turn, what will that look like?

If the market turns in 2016, then buying in 2015 may not be a wise decision.  But if the next market turns in 2018 or 2019, and prices are 20% or 30% higher than they are today, then jumping in now with rock bottom interest rates still makes a lot of sense.

Hindsight is always 20/20, and that’s the problem.  We all know today what we should have been doing yesterday.  It’s a lot harder when you peer into the future, and that’s why it’s critically important to get good help.

As many of you know, in the fall of 2004 I began to see things happening in the Southern California real estate market that were “pattern breakers”.  Specifically, I saw marginally-qualified subprime buyers (a new dynamic) entering the market at a time when inventory was trending flat (instead of dropping off, as it usually did during the fall and winter months).  The change was subtle to most, but discernible to those who were paying close attention to the numbers.   

This one-two punch of previously-excluded buyers coming into a slower moving market signaled to me that the end was near… and so within six months I sold my home, packed up and started a new phase of my life in Denver, just months before the California market imploded.

My eyes are wide open again, because what we have seen in Denver since the start of 2012 has been historic.  Specifically, we have seen appreciation of between 20% and 50% in just three years (with lower-priced homes scoring the biggest gains), while inventory has plunged to an all-time low.  The median-priced Denver home has seen $60,000 or more of gain in 36 months, a potentially scary scenario for buyers entering the market today.

Zillow reports metro Denver real estate gained $26 billion of value in 2014, after roughly $21 billion of gains in 2013.  If you own a home, the wealth effect of all this newfound equity not only allows you to sleep well at night, it’s starting to finance a lot of new stuff, like cars, boats and European vacations… just as it did in California back in 2005.  

Meantime, rents are also soaring, which is interesting because the rental market usually flattens out when the housing market gets hot (as people transition from renters to owners).  This time, rents and prices appear to be moving in tandem, which is in large part due to the fact we had virtually no new construction between 2008 and 2013 and our statewide population growth has been so strong over the past few years, with a surge in educated and immediately-employable Millennials leading the way. 

So what signs will I be watching for that might signal change in the months to come? 

When you cut through all of it, I believe there are two key numbers to watch:  inventory and unemployment.

Let’s start with inventory… as of today, there are 5,600 homes for sale in the Denver metro area.  That’s down from 18,000 homes in 2011, 23,000 in 2010 and more than 31,000 homes for sale in 2007.  In fact, the December inventory has reached an all-time low for the Denver MLS, which dates to 1985, when the population was less than half of what it is today. 

Remember that I study numbers, and have done so for 20 years.  What’s going on right now is so breathtaking there are hardly words to describe it.  For comparative purposes, in a “normal” market (60 to 90 days to sell a well-priced home, 3% to 4% annual appreciation) you would typically have about twice as many homes for sale as you have under contract at any point in time.

With 6,458 homes currently under contract in the Denver MLS, you would need approximately 13,000 homes for sale to hit market equilibrium.  That means that even if the current inventory doubled, with no increase in the number of contracts, you would still have a seller’s market! 

So the first number to watch is inventory, although we are so inventory-starved there appears to be no problem heading into the new year.

The second number to watch is the unemployment rate.  In virtually every housing recovery, housing growth and job growth have gone hand in hand, with job growth leading the way.  Today, the unemployment rate in Denver is a ridiculous 3.6%, and in Colorado it’s just 4.1%.

Anything below 5.0% is a strong job market, with wage growth a near certainty.  The government considers an unemployment rate of 6.0% to be full employment.  California, by contrast (an overpriced housing market once again falling into stagnation), is struggling under the weight of a 7.3% unemployment rate, with many of those unable to find jobs now leaving for stronger employment markets like Denver.

I also believe you should be watching for changes in underwriting guidelines, as the credit-integrity of today's buyers provides the foundation for tomorrow's market.

There are many other factors that can influence a housing market (interest rates, vacancy rates, fuel prices, etc.) but I believe the two numbers that best encapsulate what’s going on with all of the others are inventory and employment.

Watch them, because where they go, the housing market is sure to follow.