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Way Under
The Nation’s real estate market is significantly under-supplied.According to the most recent research from Freddie Mac, the United States has a housing supply deficit of 3.8 million units.The available inventory today is lower than it has ever been in the last 40 years and is 3.5x lower than the peak of 2008.The reason why available inventory is so low, is the low amount of new home starts that have occurred over the last 15 years.Builders have faced many obstacles trying to keep up with housing demand including supply chain issues, labor supply, land availability, water availability, and stricter approval processes.Fewer new homes were built in the decade ending 2018 than any other decade since the 1960’s.The reality is, the obstacles builders face are unlikely to change significantly in the foreseeable future.Low inventory is likely to persist.An under-supplied market is a key reason leading economists do not expect home prices to crash even while the market cools off.
Big Jump
We are seeing a big jump in properties for sale as measured by months of inventory.
As a reminder, a market is considered balanced when there is between 4 and 6 months of inventory on the market. Meaning, at the current pace of sales, it would take 4 to 6 months to sell all of the properties currently for sale.
Inventory one year ago at this time was:
- 1 month in Northern Colorado
- 0.7 months in Metro Denver (3 weeks)
Today the inventory is:
- 2.3 months in Northern Colorado
- 2.3 months in Metro Denver
This represents a:
- 164% increase in Northern Colorado
- 245% increase in Metro Denver
Toward Balance
Our market is moving toward a balanced market, but it is still unbalanced.
By definition, a balanced market has between 4 and 6 months of inventory for sale.
Today there is essentially two months. One year ago, there was only 3 weeks of inventory.
It has actually been 16 years since the market has been in balance.
So, while we still have a ways to go before it is balanced, it is moving that way.
The Big News
The big news this week is obviously the rise in interest rates.
Average 30-year fixed mortgage rates are now at 6.7% which is the highest they have been since July 2007.
So, how is this affecting the market? Here is what we notice…
There are fewer buyers in the market. Sales activity, measured by closed and pending sales, is down 30% compared to last year.
Prices, however, continue to rise. Average prices are roughly 11% higher than last year. This is driven by the market being under-supplied.
Inventory levels, as measured by months of supply, tells us we still have a Seller’s market. There is 2 month’s of supply currently for sale.
Ultimately, we expect the rise in interest rates to slow the pace of price appreciation. We believe the market will return to its long-term average of 6% per year.
Like 1993
Here’s a trivia question…
The number of new, single-family homes completed in 2022 will most closely resemble which prior year?
If you guessed 1993, you are correct.
Yes, the number of homes built and completed this year is no more than the number from 30 years ago.
In 2022, there will be just over 1 million single family homes constructed in the U.S. which is the same as 1993.
This is much more than the bottom of construction in 2011 which saw just under 500,000 new homes built.
But it is also much less than the top of 2006 which had almost 1.7 million.
Limited new home construction today is preventing anything close to a glut of inventory on the market which, in turn, insulates us from any sort of major price correction.
Weeks to Months
For the first time in almost two years, there is more than a month’s worth of inventory on the market.
This means that at the current pace of sales, it would take more than a month to sell all of the homes currently for sale.
This is certainly welcome news for buyers who have been craving a less frenzied market.
Since the market took off in the summer of 2020, inventory levels have been measured in terms of weeks.
Two to three weeks of inventory was the typical measurement for the last two years.
Today, inventory levels look like this:
- Larimer County = 1.1 months
- Weld County = 1.2 months
- Metro Denver = 1.2 months
Still Behind
Single family new housing starts in 2022 will show an increase versus last year, will be the most since 2007, and will still be well behind the peak of 2006.
This year, experts predict that a total of 1.1 million single family homes will be started. In 2021 there were 970 thousand new home starts.
The peak occurred in 2006, when 1.65 new homes were started.
So, this year will finish 33% behind the peak.
When we are asked why today’s market is different from the ‘bubble years’ of 2004 to 2007, the difference in new home starts is one reason we cite.
Even though the market is cooling, we remain significantly undersupplied which insulates prices from any kind of dramatic downturn.
The Best News
The best news in a long time has finally arrived for buyers.
Inventory is up, frenzy is down.
Buyers who were frustrated, confused and disappointed by the market a few months ago are now coming back to find a much more reasonable environment.
Demand is still high for sure. However, the intense, frenzied competition has subsided.
There is now room to breathe because there is more selection.
Here is how inventory has increased along the Front Range versus the same time a year ago:
Larimer County = 28%
Weld County = 19%
Metro Denver = 35%
These are significant increases and a trend we expect to continue.
What We Notice
Here is what we notice about the market right now:
- Listings are receiving fewer offers compared to 60 days ago – instead of 10 offers, a listing might have 2.
- There are now several instances of a listing only having one offer.
- Sellers who were overly-aggressive with their list price have to quickly reduce in order to generate activity.
- Inventory is up and in some areas significantly, giving buyers more options and flexibility.
- Home buyers who are under contract with a new home waiting for that new home to be built have been negatively impacted by rising rates.
- More buyers are considering 7 and 10-year mortgage products in order to have a lower interest rate.
- The pendulum is swinging away from the drastic seller’s market we have seen for the last 18 months.
Inventory Bottom
In Front Range markets, the number of homes for sale has just hit bottom or is about to hit bottom.
This is terrific news for home buyers who have been waiting for more homes to choose from.
The market is shifting, there is no doubt about that.
Prices are still increasing and we expect them to increase, just not at the pace they have been.
The inventory of homes for sale, which has been significantly down for two years, is finally starting to show signs of change.
We have been accustomed to inventory levels being down 30% to 50% compared to the prior year.
That is not the case anymore.
Inventory in Larimer and Weld County is now only down roughly 5% year over year.
Inventory in Metro Denver is now up 13.5% compared to this time in 2021.
We believe this is a legitimate shift in the market, not just a short-term anomaly.
No need to worry about prices crashing or a housing bubble. There is still too little supply and too much demand for that to happen.
However, the pace of price of appreciation will certainly get back to more normal levels of 5% to 6% per year instead of 20% to 25% per year.
Bottom line, this market shift has been a long time coming and is very good news for buyers.
