Home owner: “I am just going to wait for the prices to drop before I sell my house and buy another one.” I have heard this from my clients far too many times over the years.
Home owners looking to upgrade their house, yet waiting to sell their current house, are essentially pricing themselves out of the market. This is due to inflated house prices caused by a high demand from buyers with a shrinking inventory of homes for sale, coupled with potential increase in interest rates. Unfortunately, real estate prices aren’t dropping anytime soon.
Matt Metcalf of coloradobiz, explains why we are in for a long journey in the Denver real estate market.
Basic economics and real estate
With memory of the not-so-distant financial crisis and the large run-up in prices the last five years, many Denver residents are nervous about the future of home prices. Based on inventory levels of available homes for sale in the metro area from Boulder to Douglas County, no one should expect a drop anytime soon.
Supply and demand! The guiding principle of economic price theory centers around this simple assessment. The Denver area is experiencing a boom in population that is not expected to slow for quite some time. There are reasons for this including an international airport, mass transit, a bustling downtown, growing restaurant scene, lifestyle, recreation, weather and an educated workforce. Many tech firms and financial services companies are expanding or relocating in Denver and all indications show this is not the end.
Inventory by the numbers
From February 2016 to February 2017, Denver’s inventory of available homes for sale dropped more than 13 percent from 4,692 to 4,070 units.
So, what does that mean?
Most experts consider a six-month supply of homes to be a balanced market – neither a buyer’s, nor a seller’s market – just an overall healthy market. The last time Denver had six months of inventory was in April of 2012, with 21,540 units for sale. That means we would need to increase the available inventory five times to get back to what is considered a healthy market. And that doesn’t even account for the larger number needed due to the large population increase.
For perspective, the last time we had even three months of inventory was January 2014. What that means long term in Denver is there would have to be a series of major national and local shifts in economics or catastrophic events to have a major and swift impact on the health of our real estate market.
Caution is healthy; fear is not
The question is whether memory of the crisis and run-up in prices makes you afraid or cautious about moving or buying?
Caution means you are focused on buying the “right” home that makes sense as a place to live and as a long-term investment. Caution is wise, and understanding of market factors is warranted.
Fear means you are so worried about what might happen that you fail to act even when it makes sense for your situation. Fear comes from lack of understanding of the market and factors that affect your home value in the short- and long-term.
Patience and preparation pay off
Buying a home that will sell quickly in this market, but maybe not in a buyer’s market, is probably not the best decision. That can be difficult to determine, especially when so many homes in prices under $600,000 can get multiple offers in just a few days. The low inventory and speed of the market can lead to frustration and ultimately, a poor decision. Being patient enough to wait for the right home and prepared enough to know when to pounce is the key to success.
Price increases and interest rates
Interest rate increases will always have an effect on buyers. The question is how much? The low inventory is more likely to make demand for homes in lower price ranges even more ferocious. Luxury homes in Denver can still sell rapidly. If homeowners who have experienced the largest increase in value (less than $600,000 primarily) decide to buy their dream homes, luxury real estate may experience further tightening of inventory as well.
Real estate experts expect overall appreciation to slow as buyers have frequently become more cautious and larger seasonal shifts in demand have become more pronounced.
The overall recommendation?
Be informed and seek advice from someone with experience to guide you based on your long-term plans and goals. There is no guarantee in any market and markets can change quickly, but knowledge will increase your long-term success.