Denver Home Sales Plunge, Luxury Market Cools
3 Factors driving the luxury slowdown
Denver's luxury real estate market is on sale!
According to the Denver Metro Association of Realtors' November report, active listings are up 47 percent from last year while condo listings are up 61 percent. So, what is causing the jump in inventory and how will this impact prices?
Before talking about the causes, one data point piqued attention: The total number of sales at all price points dropped 18 percent, which could – at least in part – be attributed to seasonality. But in digging deeper, it appears sales of luxury homes – $1 million or more – dropped 33 percent. That means sales in the high-end market dropped by almost double the rest of the market. Now, that's the bigger story.
THE SIGNIFICANCE OF THE LUXURY MARKET
This segment is an important indicator of the health of the market. Luxury buyers have substantial net worths and will only make a home purchase if they feel confident in the market. With a drop of 33 percent in the number of high-end home sold, these buyers are illustrating their lack of confidence. This is particularly compelling, as every major survey shows consumer confidence at a 10-year high; alas, luxury buyers are painting a radically different picture.
If we review the last cycle, we see that buyers of high price-point properties pulled back well before the rest of the market. These same trends are reoccurring today. In the recent realtor survey, the number of homes sold for less than $200,000 increased by 8.3 percent. Along with this slowdown in sales, the luxury market will also decline as inventory continues to outweigh demand.
So, what is driving this luxury slowdown?
3 FACTORS SLOWING HIGH-END SALES
1. MARKET VOLATILITY
Many luxury buyers have substantial wealth tied to the stock market. There questions as to when a correction will take place, while the daily gyrations of the stock market aren't helping improve market confidence.
2. GLOBAL UNCERTAINTY
There is considerable uncertainty on the global economy. From Brexit to China, there are surely impacts in the U.S. economy, and most economists these issues and events present risks.
3. SELF-FULFILLING PROPHECY
Market sentiment has shifted recently, with many trying to predict when, not if, the next recession will occur.
ARE BOOM TIMES OVER?
It seems we may have reached a peak in the Denver market, especially at the high-end. Market volatility, global uncertainty, and talk of recession have influenced sales and will continue to weigh heavily on the market. Further, as more luxury apartments have come online, prospective buyers can rent without the risk of a major purchase.
All these factors will continue to push up inventory in the luxury market, resulting in downward pressure on prices. Though no one can predict a peak, it sure looks like the market is close to a high for this economic cycle.
It doesn't seem likely that we will drop off a cliff like we did in 2008. In our present economic cycle, new inventory has mostly kept pace with demand, and banks have been stricter with underwriting standards than in the past. This should limit the correction to 10 percent to 15 percent, as opposed to 30 percent to 50 percent as in the last cycle.
WHAT SHOULD YOU DO?
Don't panic. There is no need to dump a property today to lock in appreciation, but sellers' expectations will need to reset to the new market. If you think you will need to sell in the next few years, it would be prudent to sell now, as the market isn't going to get any better. Furthermore, properties will need to be priced realistically and sellers will have to be patient with their timing of a sale.
WATCH THE HIGH-END
As the wealth pull back their spending on luxury properties and goods, it will likely trickle down through the rest of the economy. For instance, if buyers are pulling back form the luxury housing market, are they also slowing other discretionary spending? The nosedive in the luxury market is undoubtedly a precursor of things to come. The only question is how will it end?