It looks like Black Friday is coming to Denver front range real estate with the luxury market (above 1m) officially entering a buyers’ market and on sale! According to the November report by the Denver Metro Association of Realtors, active listings are up 47% from last year and condo listings are up 61%. What is causing the huge jump in inventory? Should you panic? How will this impact prices? Has Denver hit a peak?
Before talking about the causes, one number in the report jumped out. The number total number of sales at all price points dropped by 17% which could somewhat be explained by seasonality. As I dug deeper into the numbers, sales of luxury homes (>1m) dropped by 33%. The number of sales in the high-end market dropped by almost double the rest of the market. The drop in luxury sales is the real story in the latest market report.
Importance of Luxury/High end market
The luxury market is an important indicator of the health of the market. Luxury buyers have substantial net worth and will only make a luxury home purchase when they feel“confident” in the economy. With a drop of 33% in number of luxury homes sold, luxury home buyers are showing with their feet that they no longer are confident in this economy. This is interesting as every major survey shows consumer confidence is the highest it has been in 10 years, but luxury buyers are painting a radically different picture.
If we look at the last cycle, we saw that at higher price points the real estate pullback started well before the rest of the country. We are seeing the same trends in today’s market with luxury sales cooling before the rest of the market. In the recent realtor survey, the number of homes sold under 200k increased by8.3% while luxury sales dropped 33%. Along with a slowdown in sales, the luxury market prices will also decline as inventory continues to outweigh demand. What is driving this large slowdown in sales in the luxury market?
Three factors driving the luxury slowdown:
- Market Volatility: Luxury buyers have substantial wealth tied to the stock market. There is considerable uncertainty on whether there is a correction today or when it will occur. Furthermore, the gyrations in the stock market on a daily basis are not helping increase confidence in the market direction
- Global Uncertainty: There is considerable uncertainty on the global economy. From Brexit to China nobody really knows what the impact will be to the US economy, but most economists agree that the current risks are to the downside.
- Self fulfilling prophecy: Market sentiment has shifted recently with many trying to predict “when” the next recession will occur as opposed to the sentiment only a few months ago of “if” a recession will occur. As the market sentiment has shifted to trying to predict the recession, luxury buyers are becoming less confident about the future.
Are we at the tail end of a cycle?
Based on the recent drop in sales does this signify the end of the “boom times” and secondly if it is the end will we have a repeat of08? To address the first part of the question, are the good times in real estate over? I think we have reached a peak in the Denver market especially at the high end. Market volatility, global uncertainty, and the talk of recession have impacted current sales and will continue to weigh on the market. Furthermore,as more high-end luxury apartments have come online, prospective buyers can now rent for less than they could buy. All these factors will continue to increase inventory in the luxury market and ultimately result in the downward pressure on prices. Although nobody can accurately predict a peak until after the fact, it sure looks like the market is close to a high for this economic cycle.
To answer the second part of the question, will we enter a period like 2008? There will be some pain coming, but I don’t think that we are going to drop off a cliff like08. In our current economic cycle, new inventory has not gotten too far out of line with demand and banks have not been as loose with their underwriting standards as in the past. This should limit the correction to 10 or 15%as opposed to 30-50% in the last cycle in many markets.
What should you do?
I wouldn’t panic at this point in the cycle. There is no need to “dump” a property today to try to lock in appreciation but sellers’ expectations will need to reset to the new market. If you think you will need to sell in the next few years, it would be prudent to sell now as the market is not going to get any better. Furthermore, properties will need to be priced realistically and sellers will have to be patient with their timing of a sale. The market in Denver along with the weather is cooling. Now is the time to grab a jacket and relax by the fire until the chill wears off which could be many years in the future.
Watch the high-end
As the ultra-wealthy pull back their spending on luxury properties and other discretionary purchases it will ultimately trickle down through the rest of the economy. For example, if buyers are pulling back from the luxury housing market, are they also slowing other discretionary spending (cars, boats, ski vacations, etc…)? The nosedive in sales in the luxury market is undoubtedly a precursor of things to come for the general economy. The only question is when this will this“trickle” through the rest of the economy and how badly will it end.
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