We're 29 days into the new year and the verdict for 2015 is already in... higher prices, again.
The Denver market has started off 2015 every bit as hot as it was at any time during 2014. That in itself is amazing, because prices have already risen 20% or more in most parts of town and buyers have been engaged in savage bidding wars since the spring of 2012.
While all segments of the market shy of $1 million are doing well, the fact remains that the entry-level is at a level of frenzy we’ve never really seen before. Check out these current absorption rates at different price points in the metro area:
0-$250k: 0.53 months of inventory
$250k-$400k: 1.13 months of inventory
$400k-$600k: 3.36 months of inventory
$600k-$1M: 5.39 months of inventory
$1M and up: 15.30 months of inventory
Five months of inventory is considered the benchmark for a balanced market. Less than this, you have a seller’s market. Above this point, buyers have the upper hand.
You can see how tiered our market is, with intense completion below $400k, solid demand up to $600k, and then steady deterioration going up from there.
Because of this, over the past several months consultations with first-time buyers have become more and more of a challenge. Yesterday, for example, I met with a terrific young couple looking to buy a starter home in Littleton for less than $300,000. They’re well-qualified, realistic, motivated… everything you want in a buyer.
But what about the market? That’s where the water gets deep, and depressing, quickly.
Right now, in Littleton, there are 73 detached homes in the MLS under $300,000. Great. Problem is, 68 of the 73 are under contract! That’s 93% of the listed inventory!
I’ve been doing this for 20 years, and I’ve seen all kinds of markets in both Colorado and California. Good and bad, hot and cold. But never anything like this.
So I stretched out the search and decided to look at detached homes in some other cities under $300k:
Arvada – 7 homes on the market under $300k, 86 under contract (92%)
Golden – 3 homes on the market under $300k, 6 under contract (67%)
Wheat Ridge – 3 homes on the market under $300k, 12 under contract (80%)
Westminster – 17 homes on the market under $300k, 77 under contract (82%)
Broomfield – 5 homes on the market under $300k, 26 under contract (84%)
Highlands Ranch – 4 homes on the market, 12 under contract (75%)
Adding Littleton into the mix, that’s a total of 44 homes on the market under $300k and 287 under contract! 87% percent!
Let me parse that for you… in a “normal” market (and this is so far from a “normal” market I’m not sure we’ll ever see “normal” again), you’ll generally see about twice as many homes for sale as you have under contract.
A 2 to 1 ratio of homes on the market versus homes under contract usually equates to five months of inventory, 60-90 days to sell a reasonably priced property and 3-4% annual appreciation.
Okay, let’s run the current numbers both ways:
If there are 44 homes on the market, in a “normal” market 22 would be under contract… we have 287!
If 287 homes are under contract, in a “normal” market there would be 574 homes for sale… we have 44!
Do you see how insane this is?
Per the “old” rules, 33% of our inventory should be under contract. But for these cities I’ve just listed below $300,000, it’s 87% of the inventory.
Here’s what this means… if you are selling a home at a lower price point, lucky you! You will never see a market this strong or easy to navigate again. Buyers are lined up, down the street, waiting to see your home and write an amazing offer.
Prepare for appraisal challenges, lots of emotion and possible attempts by the buyer to re-negotiate down during the contract period. This is what happens when you have multiple offers and a market where emotion supplants logic, and where contract prices often cannot be justified by past sales.
If you are buyer, however… buckle up. There are going to be huge challenges here, especially if you have a smaller down payment.
Getting something under contract is challenging enough… but getting that house to appraise is almost as difficult. So do you have the means to deal with a low appraisal? Are you financially strong enough to waive your appraisal contingency altogether?
Do you have the ability to take a home “as is”, with no repairs? Do you have the ability to let some of your earnest money go “hard” upon acceptance? What else can you do to make your offer stand out in a supercharged and hyper-competitive environment?
These are serious and hard subjects, but the fact is, in a crowded marketplace, courage is mandatory.
If you aren’t ready to deal with this type of competition, then maybe buying an entry-level home just isn’t in the cards for you in 2015.
Whether you buy, sell, or sit on the sidelines, one thing is crystal clear as the first month of 2015 comes to a close… prices are going up, again. The numbers allow for no other interpretation.