January was an interesting month in the Denver real estate market. No listings, lots of political distractions and a sense of uncertainty about how higher interest rates and rapidly shifting government policies might impact the market.
The story is still unfolding, but here’s my take.
Active inventory in the metro area as of yesterday dipped below 5,000 homes for the first time in two years. We started the year with 5,111 homes for sale and closed the month with 4,992. January and February of 2015 were the only two months in the history of the Denver MLS - which dates back to 1985 - when we had fewer than 5,000 active listings on the market.
If it feels like there's nothing for sale, there's not.
The bidding wars are back.
In both 2015 and 2016, the market went from frenzied in the spring to strong during the summer to just okay during the fall. At no time has this market ever gotten close to being “soft” (the longest I have carried any of my listings in four years is 23 days), but the best window of opportunity for buyers to purchase without having to outbid the mob has been August through January.
Right around Labor Day, I actually went back to several buyer clients who had given up during the spring and encouraged them to re-engage during the fall. Some did – and bought homes. Some didn’t – and now they are talking about getting back into the market right as the crazy wheel starts spinning again. Sigh.
Higher interest rates are a big deal to me, but apparently many buyers are not as concerned as I am.
Maybe that’s because they believe (with justification) rates are heading even higher as more regulations are rolled back and Trump tries to drive the stock market to 25k. If that’s the thought process, then yes, it makes sense to get after it now.
My take on it has been that even if demand remains constant with the past few years (and demand has been through the roof), higher rates are going to end up impacting the rates of appreciation we have seen in recent years.
In other words, if rates were constant at 3.5% and prices went up 10% over the course of a year, payments on a 30-year mortgage at 90% LTV would go up about 10%.
If rates increase from 3.5% to 4.5% and prices are flat, payments still go up about 10%.
The logic here is that higher rates have the potential to significantly cut into the consistent price gains we have seen as demand has swamped supply.
Therefore, I think you need to be more cautious in your assumptions about where this market is headed. I think 5% appreciation (on average) is a reasonable baseline for 2017. I think a whole bunch of other people (and backslapping real estate agents) are still pounding the drum for 10%, and that’s just not going to happen.
The problem, though, is this market is still being driven by a lot of greed and a lot of emotion.
Quite frankly, you shouldn’t be doing the same things you were doing (or advising) last year because the market is different now. Higher rates mean less appreciation.
That doesn’t mean prices are going down, and that doesn’t mean you shouldn’t buy.
But it does mean you need to be more careful about overpaying for homes, and you need to willing to detach emotionally if you want a square deal.
Four weeks into the new year and I already have clients who are getting impatient with the lack of inventory and level of demand.
Yes, this market is frustrating as heck if you’re a buyer… but please don’t forget that patience isn’t a crime.
In the long run, logic always beats emotion. Be educated, be prepared, be cautious... but when something good shows up, be ready to swing like you mean it.