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.
