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.
