It is no secret that rent in Denver and throughout the state has increased. …
According to the Colorado Association of Realtors, Denver real estate inventory fell 29% in December, number of sales increased 17% and sold price increased 5%. Breckenridge and Steamboat also saw listings decline by almost 30% with prices increasing modestly. What is going on with the market? Why is inventory declining? What is the good news in the data?
What does the data say?
December was an interesting month in the Denver metro area and the Colorado Mountain Resort Communities. Below are some of the highlights from the Colorado Association of Realtors:
- Real estate inventory fell 29% for detached single family
- Number of sales increased 16.8% from last December, up 6.8% for the year
- Average sales price basically flat at 3% year over year
- Single family days on market up 13% year over year
- You are seeing similar statistics in the resort markets, for example in Breckenridge inventory declined 27% while prices increased 4.6%
The data above is interesting as it is not what I would expect. As real estate inventory declines sharply, typically prices increase sharply as well, but in this case prices stayed flat/slight increase. Which leads to the question of what is driving the listing declines and prices to flatten.
What is causing the decline in listings
- Nowhere to go: As prices have increased throughout the metro and resort communities it has become challenging for homeowners to trade up. With the lack of inventory many buyers are thinking that their best bet is to stay put as there is nothing better out there. I think this is also one of the primary drivers of the decline in inventory
- Don’t have to sell: I think this is the primary reason. There is no huge driver forcing a sale. For example, during the recession, people had to sell due to job changes/loss, high payments, etc… None of that is occurring today as people are just opting not to sell which means the market will remain constrained regarding inventory.
- Building is too expensive: There are considerably less homes coming on the market via new construction than historically as land, labor, and materials have all increased in price making it very difficult to bring new supply on the market at the right price points.
- Weather/Seasonality: This past October/November was historically cold and snowy in Denver. This likely led to a decline in the listings as sellers decided to wait until better weather in the spring.
- Rise of instant offers: Listing data comes from recolorado.com, this is the online MLS for the Denver metro association of realtors. Instant offers are not counted in the listings. For example, if someone gets an offer from Zillow, this does not show up in the data. There a many players in Denver now competing in instant offers (Zillow, redfin, etc…). The volume of this new real estate model is unknown but is likely impacting the listing number as sellers opt to instantly sell.
- I don’t see any of these factors changing anytime soon. If anything real estate inventory will continue to remain constrained due to the demand from new residents and lack of new product coming on the market.
How are prices flat/ slight increase?
The biggest driver of the flat/ slight increase in prices is the federal reserve. By dropping interest rates, the federal reserve has made mortgages on commercial and residential properties cheaper (i.e. interest rates have dropped) which has led to real estate becoming “effectively cheaper”. The reason I say “effectively cheaper” is that the price of real estate in most markets is flat this year, but actual payments made to buy the real estate enables buyers to spend more for the same dollars.
For example, assume a buyer was purchasing a $400,000 house in Denver on a 30 year mortgage with 20% down which is a loan of 320,000. The payment for the house assuming a 4.9% rate (this is when rates peaked last November) this would be a payment of $1,698 per month. Now as the federal reserve has dropped rates, the 30 year mortgage is closer to 3.5%, using the same example as above, the new payment would be 1436.94. Because of the lower payments a buyer can afford a more expensive house or buy the same house with a smaller payment. Furthermore, with the lower rates many renters might move to buyers as the mortgage payment is at or less than a rent payment.
With payments dropping substantially a “floor” has been created meaning real estate values have remained stable. The value of homes in most markets have remained relatively stable as the federal reserve has cut the federal funds rates and mortgage rates have dropped substantially which has increased consumers buying power spurring demand for real estate.
Is this good news or bad news?
Whether the data coming out in December is good news or bad depends on if you are purchasing or selling.
- Good news for sellers: The data coming out in October is positive for Sellers. Basically, prices have stabilized and there is no rush of inventory coming online (no panicked selling). This trend will continue through the remainder of 2019 and early 2020
- Bad news for buyers: Unfortunately, the good news for sellers is not so welcome for buyers. Inventory remains tight which will lead to prices continuing to stay high. I don’t see this trend reversing anytime soon. There is one silver lining. There could be opportunity in condos as days on the market has increased significantly.
The recent December sales numbers shows the market will remain healthy as real estate inventory remains constrained. This is about what I had expected where we have reached a peak in real estate and seem to be continuing to hold steady. With the recent moves by the federal reserve to aggressively lower rates, this trend will likely continue for the foreseeable future which is good news for sellers and bad news for buyers.
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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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