Tuesday, June 7, 2016

WHAT WOULD HAVE TO HAPPEN FOR PRICES TO STOP APPRECIATING IN DENVER

The market in Denver has been frantic for so long, it's hard to remember what "normal" looks like. 

But there is a baseline for normal, and to provide some context into what that looks like and what things look like today, it's worth a few minutes of analysis.

Over the past 10 years, the average springtime inventory of homes for sale in the Denver MLS has been just over 15,000.  The high water mark was 2007, when there were more than 31,000 active listings, and the low was in 2015, when there were 6,302 homes for sale at this time of year.  

Today, the active inventory stands at 7,122 homes, which includes both attached and detached homes.

In a "normal" market, well-priced homes take 45-60 days to sell, sellers average three to five showings a week and values go up 1% to 3% per year.  It's slow, boring and deliberative.

Today, as everyone knows, any reasonably-priced listing in the Denver metro area under $400k will sell in a weekend with 20 to 40 showings, and values have been going up in excess of 10% per year for almost four solid years.  It is not uncommon for good listings to draw five to 15 offers with serious buyers often waiving inspection, appraisal and/or financing contingencies to secure a contract.

It is high stress, high risk (if waiving or modifying contingencies) and high drama in a market that is increasingly driven by fear, desperation and greed.

So with all of this emotion sweeping over the market, are we setting ourselves up for a fall?

For equilibrium to exist in a market... that point where prices stop appreciating and the market flattens out... there will be about twice as many homes for sale as there are under contract.  The turning point in this market really traces back to January of 2012, which was the last month where we technically had a "buyers' market".  At that time, there were 10,333 homes on the market and 4,831 under contract, a ratio of 2.14 to 1.

Today, we have 7,122 homes on the market and 9,747 under contract, a ratio of 0.73 to 1 (more homes under contract than on the market).  To hit equilibrium, where prices level off and appreciation stalls, we would need more than 19,000 active listings.

There is no way that is happening any time soon.

Let's dig a bit deeper.  Using the 2 to 1 theory of a balanced market, at any point in time about 33% of the total inventory would be under contract.  If you look at homes prices under $300,000 in the entire Denver metro area, 81% of listed inventory is currently under contract.  As such, the likelihood of higher prices is essentially 100%.

In the $300k-$500k price range, 67% of the listed inventory is under contract.  This is not as high a percentage as you see in the sub-$300k market, so reasonably speaking, appreciation will continue here but not be as strong as at the entry level.

In the $500k-$800k bracket, 48% of the listed inventory is under contract.  This suggests much more mild appreciation, probably in the 4% to 5% range.

And when you go above $800,000, only 31% of the listed inventory is under contract, which means luxury homes may not be appreciating at all.  Buyers here need to be very selective and pay extra attention to location, which is the biggest driver when it comes to holding value on higher priced homes.

The market has always functioned in "tiers", and because there is always more demand for entry-level housing (which builders can't and won't build because it simply isn't profitable), your greatest appreciation will continue to be at the lower price points.

If you're a first time buyer, unfortunately, it also means that competition is going to remain extremely intense for a long, long time.  And prices are likely to go a lot higher before they even start the process of leveling off.