Over the
past nine years and 484 posts on this blog, I have tried to do one thing… accurately
represent what is happening inside the Denver real estate market.
Four hundred
and eighty four posts are not to be taken lightly. That’s close to 1,000 hours of writing, which
equates to six solid months of 40 hour workweeks at a keyboard. Plus hundreds of more hours thinking,
researching, formulating theories and running the numbers.
My goal
through all of this has been to create clarity, first for my readers, but also
for myself. Being challenged to study
the numbers, investigate the rumors, research the claims of others… all of it
has helped me to evolve to a place where I have strong confidence about
everything I write, and a firm conviction that internalizing what you read
here puts you months ahead of what most people will eventually figure out about the Denver real estate market.
I have been
documenting for the past year how the market we have in Denver today is unlike
any I have seen in 20 years. I stand by
that statement 100 percent.
Here are a few
facts:
- The current inventory of homes for sale - 4,420 - is the lowest number ever recorded since the Denver MLS was created in 1985;
- For the first time in history, the overall absorption rate for all inventory is less than one month;
- The active-to-under contract ratio stands at 0.67, meaning that there are 50% more homes under contract (6,640) than on the market (4,420) right now.
Let’s talk
about what these number mean in more detail.
First, the
current inventory.
At 4,420
homes for sale, we are 15% below where we were 12 months ago (which happened to
be a record low at the time). The historical
blended average of homes on the market for the Denver MLS over the past 10 years is 16,000. Four years ago, there were 18,000 homes on
the market. Five years ago there were
23,000 homes for sale. And in 2007, in the middle of the crash, we
peaked at more than 31,000 homes for sale in the Denver MLS.
Regarding
absorption rate… real estate economists consider five months of inventory to be
a “balanced” market. The absorption rate
is a hypothetical calculation which computes, at the current pace of sales, how
long it would take to deplete all inventory on the market if there were no new
listings.
With five
months of inventory, you can expect it to take 60 – 90 days to sell a
reasonably priced home, with annualized appreciation of 3-4%. Has such a market ever existed in
Denver? Of course.
As recently
as January of 2012, the overall absorption rate in the Denver MLS was 5.88
months. At the beginning of 2011, it was a shaky, stammering 11.21 months. Today, it is 0.95 months!
That, my
friends, is how you become the fastest appreciating real estate market in the
United States.
The
active-to-under contract ratio shows sellers how much competition they are up
against when listing their homes for sale.
In a “normal” market, the ratio is about 2 to 1, meaning you have twice
as many homes for sale as you have under contract.
Today, there
are 6,640 homes under contract and 4,420 on the market… a ratio of 0.67.
But that’s
if you’re looking at the entire market.
If you are looking for a home under $250,000, the ratio is 0.24! Between $250k and $400k, it’s 0.37. In fact, at all prices points below $600k,
there are more homes under contract than on the market. Those ratios are simply unprecedented.
Applying the 2 to 1 theory to our current market, with 6,640 homes under contract, you could literally triple the amount of active inventory (4,420 x 3 = 13,260) without one new buyer showing up and have a stable market.
What does
that mean? It means for the foreseeable
future, prices are undeniably, indisputably going to continue their upward trajectory.
Based on
historical norms, a “balanced” market in Denver would have 16,000 homes for
sale, five months of inventory and a 2 to 1 active-to-under contract ratio.
Those
numbers are currently 4,420 / 0.95 / 0.67.
At the start of 2011, by contrast, they were 19,135 / 11.21 / 4.51.
At the start of 2011, by contrast, they were 19,135 / 11.21 / 4.51.
While I have
written extensively about why these conditions exist, they are still difficult to
comprehend, largely because I have never seen them before.
It is hard
to believe that we will ever see another real estate market do what the Denver
market is doing, and has done, over the past 48 months.
