The Current Market from a Buyer's Perspective
If you take a look at the stats presented in this section of the web site, you’ll see that housing inventories, and the speed with which houses are selling, is like nothing we’ve seen in the past. As we’ve noted elsewhere, inventories have been as low as 30-40% of normal in some markets and we’re seeing 70%-90% of homes going under contract within 2 weeks of listing.
Behind these quantitative changes in the market, we’ve seen some dramatic qualitative shifts in how buyers have had to operate within it. Some notes on that:
- Offer Deadlines. In 2013 and 2014, because properties were going under contract so quickly, we had to scramble to get offers in within a day or two of listing. In early 2015, we began to see listings where sellers and their agents assumed they’d receive multiple offers within a few days of listing, so the listings noted a due date and a review date for offers: “Showings start Friday, with offers due Monday and reviewed Tuesday afternoon.” This was standard practice by March of 2015 and has been through 2016.
- Multiple Offers. Especially between January and June 2015-2016, most properties have had multiple offers. Based on feedback from listing agents, most attractive properties…the best 50% or so…have had 5-10 offers, and many have had 15-25.
- Offer Price. Since 2013, offers at or below asking price have generally not been competitive. During the spring in particular, offers less than 5-10% over asking price have generally been beat out by better offers on good quality, well priced, properties.
- Offer Contingencies. In 2015 and 2016, we’ve found ourselves having to compete not only on price, but on modifying standard contingencies in the Colorado purchase contract form to limit the buyer’s rights. Competing against cash offers that deleted the loan contingency, the inspection contingency, and the appraisal contingency, we found ourselves having to counsel buyers on how to limit their rights to terminate in connection with the loan, appraisal and/or inspection in many cases.
Despite these challenges, most of our clients have succeeded in buying good properties in these markets. For some, we’ve managed to sidestep the craziness of the market by locating homes not yet listed in an MLS system. For others, we’ve helped them contract on homes being built in new subdivisions. About 25% of our closings in 2015 were unlisted properties…and about 13% were new construction. And for those battling to go under contract in the resale MLS market, we’ve helped them find relatively low risk means of making their offers more attractive than the competition, by completing inspections before the seller reviewed offers for example.
There times and places where the craziness of the listing market is mitigated a bit. For example, we’ve helped a couple of clients contract on houses subject to leases, and buy out the tenant…either before or after closing…saving significant money when compared to competing with buyers of “move-in ready” homes. And as we’ve noted elsewhere, the frenzied nature of the market has tended to level off a bit July to December when compared to January to June.
But the bottom line is that this is a tough market for buyers. You need to understand what’s happening in the market and think about how to make yourself a more competitive buyer.
The Problem? Lots of Buyers, but Not Many Homes for Sale.
This highly competitive market for buyers stems has somewhat complex origins, but they are all reflected in the drop we’ve seen in the number of homes on the market. For more comprehensive data, look at our section called Number of Homes on the Market, but a quick glace at either of these two charts will give you a quick read on the nature of the problem:
In each of these charts, you’ll see that the number of homes on the market varies by time of year, peaking in the summer and dropping to a low toward the end of the year. You’ll also see, that what we consider to be the “normal” inventories of 2004 to 2007 dropped dramatically during the recession of 2008-2011, and then continued to fall further once the market started to recover in 2012. For some communities and property types, these inventory levels have continued to drop each year since 2012 (e.g., condos in Boulder). For others, like houses in Arvada, there are some hints of improvement in the 2015 and 2016 data. The bottom line, however, is that housing inventories are down 50% to 70% from the normal levels of 2004 to 2007.
Now, decreasing inventories can either be a function of fewer homes being listed for sale or the homes that are being listed being bought and pulled off the market more quickly. Both are happening in this market.
On the supply side, we have two problems:
- Resale Homes. If you look at our historical data on the number of homes that seller are listing each month, you’ll see that these data look a lot like the inventory data discussed above. For both condos and houses, new listings dropped 30-50% during the recession years, and then continued to drop as the market picked up, so that new listings are now down 40-80% relative to a normal market.
- New Home Construction. During the recession, the number of new homes being built in the area dropped dramatically. In the five counties in our immediate area, permits to build new homes dropped from 25,000 to 30,000 a year prior to the recession to a low of just over 500 per year in 2010…popping up to about 7,000 a year in 2013 and 2014. Since then, builders appear to be falling further behind, as they are building only about 25% of the new homes required to house the number of people taking new jobs being in the area.
Why have the number of new listings dropped? Several factors:
- Recent price increases have been matched by rent increases, so more home owners are opting to hold onto properties they own and rent them, partly because they are getting positive cash flow on the rental and partly because they’re anticipating the values of their properties will increase further over the next few years.
- Many sellers have been “trapped” in their properties by the market. Unless they can afford to buy a new home without selling their current home, they are hesitant to put their home up for sale, because they know they may not be able to find a good replacement property in our tight market.
And why has new construction failed to keep up demand? Again, a complicated picture, but:
- It typically take developers and builders several years to locate land, negotiate with the local government, obtain financing and install infrastructure, so very little new construction was possible between 2008 and 2014.
- As builders began to try to increase construction after the recession, they found that many of the laborers and trades people who had been involved in construction pre-recession had moved on to other areas or occupations. Virtually all builders are reporting labor shortages.
And where is the increasing demand coming from?
- The number of home sales dropped by about 30% during the recession, even though area populations either remained stable or increased slightly from 2008 to 2011. This means that more than a year’s quota of home buyers had put their purchase on hold during the recession, many of whom returned to the market to buy in 2012 and 2013 as the economy picked up…competing with the normal year’s crop of buyers for the limited inventory.
- Largely because of low inventories, MLS sales from 2012 to 2015 were also 10-20% below pre-recession norms, effectively adding another batch of extra buyers to compete with those “coming of age” to buy…or moving to the area to buy…in recent years.
- Meanwhile, while increasing rents have convinced many property owners to become landlords rather than sell, these same high rents have pushed many would be renters into the market as buyers to compete for the limited inventories of available homes.
- And then Colorado’s population is increasing, mostly from migration into the state given the strong job market, with nearly 80% the influx settling in the Front Range area where the real estate market is so tight.
Rising Prices and Competition for Properties
Asking Price vs. Sale Price
Speed of Sale
The best long term data we have on pricing in our local Colorado markets is the Federal Housing Finance Authority’s House Price Index. This index has tracked prices nationally, by state and by metropolitan areas across the US since the early 1980s. This chart, compiled using FHFA data, illustrates home price increases and decreases on a quarterly basis for the US, Colorado, the Denver Metro Area, and Boulder County, beginning with the first quarter of 1984.
Over the past three decades, these data indicate that Boulder County’s average rate of price appreciation was 5.1%, compared with 4.2% for the Denver metro area, 4.1% for Colorado, and 3.7% for the US as a whole. This chart also shows, however, that these average rate increases aren’t the norm. To the contrary, if we define the average as price increases in the 4-6% range, prices are increasing faster or slower than that about 3/4’s of the time. On the high side, prices have increased at a 6-15% rate about 34% of the time in Boulder County and 36% in Denver. On the low side, they’ve increased at a less than 4% annual rate 40% of the time in Boulder County and 32% in Denver. And prices have actually dropped about 10% of the time in Boulder County and 23% in Denver. Far from representing “the norm,” price increases between 4% and 6% are relatively rare, representing about 16% of all quarters over the past 3 decades in Boulder County and 9% in Denver.
But even if annual price increases well in excess of the average are common in our markets, doesn’t the current run-up in prices seem a bit extreme? Not according to these data. In brief, the price run-up that we experienced between 1992 and 1996 ran for 17 quarters, with an average increase of 10.7% increase in Boulder County and 8.3% increase in the Denver Metro Area. From 1998 to 2002, the “price bubble” ran for 18 quarters with average increases of 10.1% for Boulder County and 9.9% for Denver. So far, our current price run-up has run for 13 quarters, with average increases of 9.7% in Boulder County and 11.3% in Denver. Generally, these annual increases are pretty comparable to what we’ve seen before, and this “boom” has run about a year to a year and a half less. In a word, with respect to price increases, it looks pretty normal. And if we look at average prices since the end of our last “boom” period, the average price increases from the 3rd quarter of 2002 to date are running at 3.3% for Boulder County and 3.1% for the Denver Metro Area, a point or two below our longer term average.
And the norm over the past 30 years in our market just doesn’t include bursting bubbles. As FHFA data indicates, we’ve only had two periods of price depreciation in Boulder County or Denver from 1984 to 2016. Both lagged earlier price run-ups substantially and both were associated with national or world-wide recessions…each characterized in its time as the worst since the Great Depression. Our markets aren’t impervious to downturns associated with widespread recessions, but they don’t seem susceptible to boom/bust cycles either. Boom cycles just seem to be followed by slower than average appreciation rates. One might call it a boom/coast market.
When and Where Does it End?
Lessons from the Recession