It seems
people are always intrigued by housing market predictions.
And it’s understandable, because we all want to know how the market is
going to perform and whether we should buy, sell, invest or rent.
2014 is
going to be an interesting year, in large part because it will follow on the
heels of one of the most remarkable years for real estate in recent memory.
Assuming
there are no major economic or political disturbances (war, terrorism, global
banking failures, etc.), I think the first thing you have to do is dial back
your assumptions and realize that the re-calibration of our market in 2013 was
caused by a few unique one-time circumstances… specifically, that after seven years of
massive foreclosures we finally ran out of homes to foreclose on… at exactly
the moment some 83,000 households in the seven county Denver metro area that lost
homes to foreclosure between 2005 - 2008 began hitting eligibility to
get back into the market.
Those
factors, coupled with interest rates that were in the 3’s for much of the year,
unleahsed a surge in values and appreciation that was extra obvious below
$250,000, and which created enough equity for current owners of those
entry-level homes to sell and use their equity gains to move up.
How much did
values go up? According to Case-Shiller,
average home prices in the Denver metro area were up 10.1% over the past 12 months. Core Logic puts the number at 10.2%, and
Zillow says prices have increased an amazing 11.8% over the past year.
What does
that mean in real numbers? Over $21
billion in equity gains for homeowners in the metro area over the past 12
months!
So what
about 2014? What does the future hold
for real estate in Denver?
Again,
predictions are usually exercises in folly, because there are just too many
variables, but here’s what I am calling:
Below
$250,000: 6% appreciation
$250k -
$400k: 4% appreciation
$400k -
$600k: 2% appreciation
$600k - $1
million: Flat
Above $1
million: Minus 2%
Again, in my
view, there were a number of “one-time factors” that caused our market to
explode and essentially “recalibrate” to significantly higher values, especially at the lower price points.
The
incredible inventory plunge coupled with the surge caused by “boomerang buyers”
(foreclosure 1.0 buyers coming back into the market) really set the stage for
the frenzied conditions we saw much of the year.
Going
forward, buyers are going to be more cautious as rates and payments continue to
creep higher, and builders are going to play a larger role in actually holding value gains in check by building far more homes in 2014 than they did in 2013.
To me, the
magic number is somewhere around $325k, but that’s the price point where
builders can start selling homes at a profit.
Below this number, you simply aren’t going to see any new inventory, and
demand here will remain extremely strong.
Above $325k, however, new inventory will be a drag on the market because builders are once again
drinking the Kool Aid and building like there’s no
tomorrow. If and when rates rise, the
builders will be the first ones to feel it, and the higher end inventory that’s
hitting the market by the day will be the hardest to sell if times get tougher.
Below
$325,000, it’s hard to see many scenarios where values don’t hold. You continue to have large numbers of both
first-time buyers and boomerang buyers competing for finite inventory. Rents continue to go up and there’s still
value in the market when demand outstrips supply.
In my
opinion, 2013 was a “once in a generation” market where unique events caused
home prices to recalibrate quickly. But
the fact remains that higher rates, higher prices and higher payments are going
to slow the surge in 2014, with the lower end of the market being the safest
possible place and the higher end much more vulnerable to the instabilities of
a still-recovering economy.
