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Local Nuances
“All markets are local” is a commonly used phrase in real estate.
This adage is proving to be true as we notice slight changes recently in the market.
Bottom line, the market, in some locations, is not behaving exactly like it did even 30 days ago. Properties that perhaps would have received 10 or more offers last month, are now receiving only one.
It is as important as ever to examine not only the general market area, but also hyper-local markets in order to understand the nuances that exist in specific locations.
A common activity we perform with our clients is to research the months of supply in their own neighborhood. We will frequently find that this stat varies considerably from the market as a whole.
To illustrate how ‘all markets are local,’ take a look at the days of inventory statistic for the following markets:
Larimer County = 18 days
Fort Collins = 15 days
80521 Zip Code = 24 days
80525 Zip Code = 9 days
While data on the overall market clarifies overall trends, it is the hyper-local research that is incredibly valuable when pricing property.
Words Matter
A common phrase that is being used right now to describe the market is ‘no inventory.’
‘There’s no inventory’ is said frequently among those inside and outside of the real estate industry.
The problem with this phrase is that it is untrue.
There is inventory. Meaning, there are a significant number of new listings hitting the market.
However, there is low standing inventory. Meaning, the listings that do hit the market don’t stick around for very long before they are purchased.
Standing inventory, which is the number of active properties on the market, is down roughly 70% along the Front Range.
However, the number of new listings coming on the market is essentially:
- Double compared to December 2020
- Only 20% to 25% less than this time of year in 2017, 2018, and 2019
So, there is inventory available, it just sells quickly because demand is historically high right now.
Calculated Risk
The economic research blog called “Calculated Risk” just completed a fascinating study on home prices.
Specifically, they looked at the correlation between home price growth and inventory.
They used price data from the Case-Shiller Home Price Index and inventory data from the National Association of Realtors.
No surprise, they found that the lower the inventory the higher the home price growth. Also no surprise, as inventory goes up, price growth slows down.
This all correlates with simple economic rules of supply and demand.
The interesting part of their research is this: at a certain level of inventory, prices have the potential to go down.
That level, according to their research, is six months of inventory.
That means, prices don’t have a chance of decreasing in a market until there is at least 6 months of inventory available for sale.
To put that in perspective, today there is two weeks of inventory on the market along the Front Range.
So, there would need to be 12 times the amount of homes for sale on the market for prices to even have a chance to go down.
Drastically Different
Recently it seems there are many attempted comparisons being made between today’s real estate market and the 2006-2007 market.
It seems that people fear a repeat of what happened to the market in 2008 and 2009.
Buyers, understandably, want to make smart decisions and don’t want to buy in advance of any downturn.
The reality is this. There are some similarities between now and the pre-bubble market of 15 years ago. Namely, prices are appreciating quickly.
However, there is one massive difference.
The inventory of homes for sale right now is drastically different than 15 years ago.
The rules of economics tell us that, in order for prices to crash, demand needs to diminish, supply needs to swell, or some combination of the two.
Here’s the deal. Supply today is a fraction of what is was 15 years ago.
Homes for sale today:
- Larimer County = 238
- Weld County = 226
- Metro Denver = 2,594
Homes for sale 15 years ago:
- Larimer County = 2,998
- Weld County = 1,113
- Metro Denver = 29,045
The reason why prices flattened and decreased slightly along the Front Range in 2009 is because the National economy had a meltdown and there was a glut of supply.
We do not have anything similar to those same dynamics today.
We are watching the market closely every single day. While we don’t expect the current pace of appreciation to keep up, we believe inventory levels keep us insulated from any kind of crash.
107 Straight
According to research from the National Association of Realtors, home prices have appreciated for 107 straight months.
The median price in the U.S. is now $309,000.
The U.S. region with the highest median price is the West at $461,800. The lowest is in the South at $263,300.
All regions showed double-digit price appreciation from one year ago.
While prices are going up all across the U.S., inventory is going down. The number of properties for sale has declined for 20 straight months.
Low inventory and high demand are causing properties to sell quickly. It now takes an average of 21 days for a property to go under contract compared to 43 days one year ago.
So, the dynamics we notice locally are also occurring nationally.
Days of Inventory
In the residential real estate industry, inventory is typically measured in months.
For example, the definition of a “sellers’ market” is when there is less than 4 months of inventory on the market. Meaning, at the current pace of sales, it would take less than four months to sell all the homes currently for sale.
Today it makes more sense to measure inventory in days instead of months.
Here is the number of residential properties currently listed for sale in each market:
- Larimer County = 255
- Weld County = 261
- Metro Denver = 1,645
Here is the current pace of sales in each market:
- Larimer County = 10/day
- Weld County = 10/day
- Metro Denver = 112/day
So, at the current pace of sales, this is how long it would take to sell all the residential properties currently for sale in each market:
- Larimer County = 26 days
- Weld County = 27 days
Metro Denver = 15 days
Double Lumber
The price of lumber has doubled in three months.
Lumber is just one of several examples of skyrocketing materials costs which are impacting both home builders and home buyers.
The cost of lumber is now at a record-level $1000 per 1000 board feet.
These rising costs not only add to the sales price of a home but also add to the inventory shortage issue. Some large, publicly-traded home building companies are slowing production in hopes of building costs dropping over the next few months.
Many people expected lumber prices to drop, or at least level off, when the tariff on Canadian lumber changed in December.
However, because demand has been so high from both building and remodeling, lumber costs continue to climb.
Yes is the Answer
It turns out that ‘yes’ is the answer to the most common questions we hear right now about the market…
Do you think more properties will come on the market this Spring? Yes, the normal pattern in our market is for new listings to be 40% to 70% higher in April versus January. The peak month for new listings is typically June.
Do you think buyer demand will grow even more as time goes on? Yes, for two main reasons. Buyer activity, just like listing activity, increases significantly in the Spring and Summer. Plus, we expect the economy to open up even more as the COVID vaccine gets rolled out over the course of the year.
Do you think interest rates will go up? Yes, all of the trusted forecasters and economists expect rates to be slightly higher by the end of the year. Our own Chief Economist sees rates at 3.07% by year-end.
Do you think prices will keep rising? Yes, because of the simple economic forces of supply and demand. Supply is at historic lows. The number of properties for sale today is roughly 80% below the average. Demand is being fueled not only by the low-interest rates, but also a rebounding local job market that is poised to rebound even more. Plus, the new work-from-home dynamic positions the Front Range as a sought after place to live.
A Little Perspective
Here’s a little perspective on the inventory of homes for sale in today’s market…
First we’ll look at Metro Denver:
- The average number of residential listings for sale at this time of year is 15,577
- The highest-ever for this time of year is 29,722 which occurred in 2006
- The number of listings right now is 4,821
- So, inventory in Metro Denver is roughly one-third of the average and 25,000 fewer than the highest-ever.
- DMAR is the source of the stats listed above
Now, Northern Colorado:
- Larimer County has 802 active listings today
- Based on 10 years of data, this is the lowest it has ever been
- The high in Larimer County occurred in 2010 with 2608 listings so today’s inventory is one-third of what it was 10 years ago.
- Inventory today in Weld County is 727 which isn’t the lowest-ever.
- The lowest during the last 10 years was 2017.
The highest was 2010 with 1791 properties so today there are roughly 1,000 fewer properties to choose from.
New Home Surge
Sales of new homes have jumped to their highest levels in 14 years.
The annualized rate of single-family new construction homes is now at 901,000 according to the new Census Bureau report.
This means that across the U.S., at the current pace of sales, there will be almost 1,000,000 new homes built and sold over the next 12 months.
This pace is 36% higher than one year ago and the highest it has been since the end of 2006.
Given the low inventory levels of previously-owned homes that most of the Country is experiencing, this uptick in new home activity is welcome news.
