Are Declining Home Prices in the Metro Area a Trend or a Hiccup?
Does the data predict a slowdown in the housing market?
A recent headline in The Denver Post reported declining home prices in three metro-area counties, going on to speculate on whether the shift is a blip or a trend. Boulder’s average sales price is down 2.7 percent, Denver 1.2 percent, and Douglas 2.1 percent. Are lower home prices on the way? Is this the beginning of the next cycle? How accurate is the eye-catching headline? What should you do now? Unfortunately, there is more to the story than the headline reveals.
Major flaw in analysis
The headline is sensational, but misleading as to what is actually happening in the market. January is one of the slowest months in real estate in Colorado, so to make assumptions using one month’s numbers is statistically impossible.
Let’s look at Denver County. In Jan. 2019, there were 357 home sales. In all of 2018, there were 7,198 home sales. Assuming 2019 is similar to 2018, this means Jan. sales are just 4.96 percent of total yearly sales. Boulder County is even more profound, with only 150 sales in Jan. In 2018, Jan. sales made up just 4 percent of total sales in 2018. It would be a stretch to base any assumptions from less than 5 percent of total annual sales.
Data flaws lead to false assumptions
With a flawed analysis of such a small sample size of total sales, any assumptions made would be false. In the article, the author says, “Kiss those years of double-digit annual home price gains goodbye. Depreciation has made a comeback in Boulder, Denver and Douglas counties, foreshadowing more widespread declines in the months ahead, according to a report Tuesday from the Colorado Association of Realtors.” Just like the analysis, the assumption above is not accurate due to issues with the data including small sample size and limited data compared to total sales.
Is there really a slowdown?
It’s tough to say whether there really is a market slowdown based on the data we have so far. Colorado’s market, like many others, is highly cyclical. The spring selling season starts in April or May, while Nov. through March are slow in real estate. On top of the limited data on sales there are many factors that are likely influencing sales:
- Rates have been going up and down almost daily and is likely keeping people on the sidelines.
- This is the first Jan. in four years where Denver has gotten some real winter weather with snow and cold, both of which decrease peoples’ mood for real estate shopping.
- With limited data, large sales can swing the averages. For example, what if there was a $20 million sale in Boulder in Jan. 2018 and only a $5 million sale as the largest sale in Jan. 2019? With limited numbers to compare, it is relatively easy for the data to become skewed.
Where do we go from here?
I don’t see any cliff drop on the horizon for Denver or the metro area. I think the market will become a balanced market overall. For the next several years, I see flat appreciation to allow incomes to catch up with appreciation. There could be some slight declines but nothing like we saw in the past recession.
Denver and the Front Range over the long term will remain a healthy market. Like stocks, real estate doesn’t go up forever and needs to take a breather. We’re in the breather stage of the market but remember that Denver has strong fundamentals: highly educated workforce, desirable quality of life, low cost of living compared to the coasts and continues to attract desirable employers from North Face to Google. These fundamentals will be consistent over the long term. For now, enjoy Colorado’s 300 days of sunshine and sit back and relax just like the real estate market.