THE FRENZY CONTINUES

As I stated in a recent post, the two numbers I plan to watch closely in 2015 are the unemployment rate and the inventory of homes for sale.

Unemployment is crazy low – currently just 3.6% in Denver.  And inventory is crazy low – as of this morning, there are just 4,535 homes for sale in the Denver MLS, another all-time low dating back to the creation of the Denver MLS in 1985. 

Hopefully, unemployment remains low.  If it remains below 4%, this is going to be another lid-lifting year for housing in Denver.  Even if it rises to 5%, we’ll still have a highly functional market.  Lower is better, but our employment market is so strong right now that we are a long way from any serious concern.

With inventory, the picture is a little different.  Inventory is going to rise this spring – it has to.  But how much must it rise to make a difference?

The magic formula, as I have described before, is lining up the number of homes under contract at any point in time and comparing that to the active inventory.  A 2 to 1 active to under contract ratio is normal, which means 60 to 90 days to sell your home, 3-4% appreciation and a nice, calm orderly life for real estate professionals.

This market (nor the life of full-time real estate professionals) hasn’t resembled normal in over three years!

As of this morning, there 5,681 homes under contract in the Denver MLS, compared to the active inventory mentioned above of 4,535.  Under the 2 to 1 theory, we would need 11,362 homes on the market to hit equilibrium.  We are at 39% of that number. 

Which means inventory could DOUBLE and it would still be a seller’s market!

Having said that, I still think the numbers will tell the story of where we are headed in 2015.

My working theory about this market is that when it calms down – and it has to calm down at some point – many people will be caught off guard.  That’s because there are thousands and thousands of sellers on the sidelines who are just sitting tight, biding their time and enjoying their accumulating piles of equity.

When things start to slow down – or more accurately, when the media starts to report a slowdown (which, in fact, will be several weeks or even months after insiders see the changes occurring) – inventory will shoot up quickly as everyone tries to get out at the top of the market. 

That’s exactly what happened in California at the end of 2005, as I was on my way out the door, and it will happen here.  Sellers will wait too long, market conditions will change, and suddenly the whole universe of "market timers" will all list at once.  

Will that cause values to fall?  I seriously doubt it.  You simply have too many high quality employed buyers with real down payments and solid credit scores.   They’re not going to bail out at the first sign of change the way subprime buyers did almost a decade ago.

But the insanity of multiple offers, bidding wars, over-list price offers and contingency waiving will eventually go away... sellers will have to work, wait and negotiate to get their homes sold.  Just like in the old days (which means, pre-2013).  

Selling a home is not supposed to be this easy, and one day down the road, it won’t be.  But for now, sellers are experiencing the greatest market conditions in at least 30 years.  Enjoy them while they last, because one day, you won't have the unbelievable leverage that you do today.