Regardless of all the talk of a recession, soft landing, or something in between. Many…
I hope everyone is doing well. I wanted to share a bit of irony. The “call before your dig” line in Colorado was recently out of operation as someone ironically didn’t call before they dug and hit all the lines going into the operation center. On to the news… Pending home sales dropped 39% in April and Condos/townhomes dropped almost 50% across the state of Colorado. At the same time new listings plummeted almost 35%. What is happening in the market? Will these trends continue? What should you do now? Is this good news for the market?
What was in the data?
To no surprise the number of Colorado home sales dropped substantially further exacerbated by the lack of inventory as new listing plummeted by 35%. At the same time pending home sales dropped 39% and condos/townhomes dropped 50%. Median sales price increased 5% while percent of list price was almost 100%. The large drop in inventory led to a feeding frenzy for the remaining properties placing a floor under prices. What caused the huge inventory decline?
The inventory problem:
Even before the virus, inventory was running at historic lows. Inventory in December declined 12 percent year over year – or by 155,000 listings, according to new data from Realtor.com. That’s the largest year over year decline in almost three years. The number of homes for sale hit the lowest level since January 2018. This is even more profound in “hot markets” with Denver metro inventory declining 30%. Along with less inventory there is also a big “mismatch” of properties available at the desired prices. Inventory of properties priced under $200,000 was down 18.1 percent in December, while the number of available homes for sale priced between $200,000 and $750,000 declined 10.2 percent.
What caused the inventory issues?
There are long term structural issues that have caused inventory dilemma. This has been years in the making and is unlikely to resolve anytime soon for four primary reasons
- Conglomeration in hot markets: New high paying jobs are beginning to focus on the top 30 or so markets in the United States. These same markets are leading the charge in new residents including Atlanta, Denver, Seattle, Dallas, etc… The same cities continue coming up and this is where the shortage of housing is so profound.
- Rising land costs: With demand in the top 30 markets increasing, land is becoming scarcer and as a result more expensive further driving up development costs.
- Rising building requirements: As we learn more about better building technologies from more efficient insulation, to LED lights, to better ventilation and sealing of houses. All these items increase the costs to produce a home. These costs are passed on to the buyer further distorting the mismatch of desired home versus what is being built.
- Rising Labor costs: The number of available skilled laborers has declined since the last recession making it increasingly difficult to hire skilled labor. Furthermore skilled labor is becoming increasingly expensive further adding to the price pressures on housing.
What happened in February when the virus hit?
2020 was already slated to be tough for real estate, then the pandemic hit in March further exacerbating an already tight inventory market. New listings became nonexistent and new construction basically ground to a halt. Banks have pulled back from new construction and builders have decided to sit on the sidelines to wait out the crisis. Many in the industry learned a stark lesson in 2008 and do not want to be caught with much if any unsold inventory. Even when the virus comes under control, it will take months if not years for construction activity to ramp back up. Furthermore, with talks of a recession, many property owners will not trade up further crimping supply.
What happens to Colorado real estate in 2020?
Due to the long-term structural issues regarding inventory, 2020 inventory should remain very tight in most parts of Colorado. With large inventory constraints prices should remain about flat for the year with the number of transactions plummeting as buyers and sellers wait to see how the market adapts to the pandemic.
What should you do now?
If you were in the market to sell, now is likely a good time. With the constrained levels of inventory sellers are getting their asking price. Unfortunately if you ae a buyer, the selection of properties is at historic lows so it might be difficult to find what you are looking for.
2020 by all accounts was supposed to be a continuation of 2019 with record low unemployment and a healthy economy. The Coronavirus changed everything on a dime. Unemployment has hit the highest levels since the great depression, the stock market has tanked, and predictions for a swift rebound have cratered. Fortunately, through all the turmoil, Colorado real estate appears to be weathering the storm quite well with inventory declining and prices growing/flat. Although 2020 will be economically challenging, Colorado real estate should remain about flat for the year. With everything going on in the world, prices being flat is a huge win.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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