With fewer than 1,900 active listings on the market and more than 6,200 homes currently under contract in the metro area, this is the most inventory-starved, one-sided market in the history of Denver.
And it's not even close.
Each of the past four months has represented an all-time low for active listing inventory. Our current number of 1,878 active listings is down 27% from one month ago, down 55% from three months ago, down 72% from one year ago and down 80% from when the market re-opened last May.
The reasons for this have been discussed here before - Covid-19 fears, eviction and foreclosure moratoriums, concerns about whether jobs will return (or be retained) after the pandemic ends, and the Fed's incendiary low rate policies that have created the mother of all frenzies among the buyer class.
So what could happen in the coming months to change this? Certainly, it has to change at some point, but what key drivers could make this happen sooner rather than later?
Here are five potential game changers:
TAX POLICY FOR INVESTORS - Whether it's changing tax rates on investment gains from capital gains to personal income (already proposed), capping or eliminating depreciation (it's been talked about) or eliminating 1031 exchanges altogether (unlikely since so many lawmakers are real estate land barons), landlords and investors are likely going to get whacked hard in whatever tax bill is coming out of Congress in the next few weeks. If these changes are made effective January 1, 2022, it would give landlords time (and massive incentive) to get out of their rental portfolios this year. If changes are made retroactively to January 1, 2021, then investors and landlords would have no exit strategy and it would make the inventory problems worse since they would never sell. If you're going to do tax reform in an effort to free up more entry-level housing, there's a right way and a wrong way to do it. I'll let you decide what the odds are of Congress doing this the right way versus completely blowing it.
PRIMARY RESIDENCE EXEMPTION - Under current tax law, owner-occupants who have lived in a home just two of the past five years are generally able to sell their principal residence with a tax-free capital gain. This truly is one of the most generous provisions of the tax code and it has created massive windfalls for many homeowners, especially in historically hot markets like Denver. In 2017, the GOP tax bill proposed changing the qualification for this exemption from "two of the past five" years to "five of the past eight" years. You may see another attempt to take some of the sugar out of this very sweet tax break in the coming months. Just as with our tax policy discussion above, there's a right way and and a wrong to do this if the goal is free up more housing. Making it effective January 1, 2022 would create urgency and incentive. Making it retroactive would have the opposite effect.
FORECLOSURE AND EVICTION MORATORIUMS - Again, we are living through a complete manipulation of the markets due to emergency government and Federal Reserve interventions. Just this morning, the Biden Administration extended (again) foreclosure and eviction moratoriums until the end of June. In simplest terms, what this means is anyone with a mortgage owned by Fannie Mae or Freddie Mac (the two government-sponsored enterprises that own about two-thirds of all mortgages) is exempt from even the initiation of foreclosure proceedings until at least June 30, 2021. If the moratorium is not extended (and at this point, who knows if delinquent homeowners will ever need to make another payment?), then banks could send out foreclosure notices effective July 1, 2021. If that happened, delinquent homeowners would have 90 days to bring their mortgages current or work out an agreeable repayment plan, or the banks would have the right to foreclosure. Let's be clear, we're not going to see foreclosures because the inventory constraints brought about by government policies around Covid have driven prices even higher into the stratosphere. Owners struggling with making payments would have to sell to avoid losing their properties to the bank, but virtually no one is actually going to make it to the point of facing foreclosure when selling would result in such significant gains.
A RISE IN INTEREST RATES - This is the scenario no one wants to see, because when it happens, it's going to have severe consequences. Home buyers are now addicted to 2.5% mortgage rates and our market is totally dependent on this cheap money for its continued viability. When rates go up, and it will happen at some point, the buyer pool will thin with each corresponding uptick in rates. When rates get to 3%, you're going to price a certain portion of the buyer pool out. When rates get to 3.5%, even more will disappear. And if we get to 4%, I think demand will be significantly impacted in the short term unless the government comes up with another creative and unprecedented way (50 year mortgages? Mortgage portability? Negative bond yields?) to keep the market liquid.
ANOTHER BLACK SWAN EVENT - Let's face it, we're tired of talking about Covid. Economically, the pandemic has had a bruising impact on the economy and we are staggered, to say the least. The Fed has shifted into money printing mode (the Treasury technically prints the money, but Fed Policy dictates it) and there are serious inflationary concerns on the backside of this Black Swan event. But what another Black Swan like a terrorist attack, military conflict or even an extreme weather event? It takes confidence in the future to buy a home, and with the discount rate at 0.25% and mortgages in the 2's, the Fed has dragged borrowing rates to the lowest point possible without negative rates, which could be a thing if we hit any more calamity. The buyer pool is fueled by cheap money and some degree of confidence in the future. If either of those is called into doubt, you'll see more inventory and fewer buyers.
The reality today is that we are all bracing for significant change in the near future that is going to reshape the landscape for both current and future homeowners. The policy prescriptions coming over the next few months are going to have huge consequences for the future of real estate and at this point, most of us are simply guessing at what that future will look like.
Right now, we have an overload of buyers and zero inventory. There are several scenarios where that could change fairly quickly.
