Will the golden handcuffs of low rates save Denver real estate in this cycle? November paints an interesting picture of what the future holds.
The prevailing theory is that this real estate cycle will be considerably better than others…
Sales of homes worth 1 million or more fell 44.4% between August and September and sales of homes over $500,000 dropped 33 percent during the same period. Overall sales in September of 2018 are down 21.4% from September 2017 (Denver Metro Association of Realtors). What is happening? Is the sky falling? Is a “crash coming”? Why the sudden cool down? Is this a blip or a trend? What are 6 possible explanations of the drop
Just a blip?
I think it is hard to write off the recent drop in sales as just a blip. The reduction is too large to just be a minor bump. There is clearly something more going on in the front range that is driving the drastic reduction in sales above 500k and more profoundly above 1m. Below are six prospective causes of decline that I put in rank order.
What caused the decline:
For the first time since 2010, it’s now easier to build wealth over an eight-year period by renting a home and investing in stocks and bonds, rather than by buying and accumulating equity, according to a national rent-versus-buy index of 23 cities produced by Florida Atlantic University and Florida International University faculty. That’s because home prices are high and rising mortgage rates are adding to the cost of homeownership.
That could be bad for sellers, especially in markets like Dallas and Denver, where renting is now so much more favorable than buying, according to Ken Johnson, a real estate economist at Florida Atlantic University, a co-creator of the Beracha, Hardin & Johnson Buy vs. Rent Index. (Bloomberg)
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 of 08? First 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. Prices have gotten ahead of wages and rates have substantially increased; the eligible pool of buyers has decreased as a result. 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 the downward pressure on prices above $500k in the near term. 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.
Will we fall off a cliff?
Although there are a number of factors driving volumes lower, I don’t see a return to 2008 where prices tumbled. There is limited new supply in the metro area while Denver remains an attractive place for employers to hire (well-educated young work force). This should insulate Denver from a precipitous plunge like the last cycle. I see Denver “leveling off” for now. Ultimately in the long-term prices will increase again due to attractiveness of the city. Denver real estate seems to follow a “step pattern” where you see fast appreciation, then a step where appreciation levels off until the next cycle. Denver is currently entering the bottom of a “step” in the pattern. How long this step lasts is a mystery.
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. 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.
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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 the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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