The good news about Denver-metro real estate

According to the Denver Metro Association of Realtors, the number of new real estate listings in the Denver-metro area fell 12% in October, the number of sales dropped 6.4% and sold prices stayed flat.  However, don’t worry, the sky is not falling and there is quite a bit of good news in the data. 

What does the data say?

October was an interesting month in the Denver-metro area.  Below are some of the highlights from the Denver Metro Association of Realtors:

• Real estate listings fall 11.6% for detached single family
• Number of sales drop 6.4% from last month, basically flat for the year
• Average sales price basically flat (1.2%), and up 3.5% year over year
• Single family days on market up 15% year over year
• Condo days on market increases 36% from 2018 and 41% vs 2018, this is a bit concerning as it shows considerable softness in the condo market
• Condo sales volume down 7.4%

The data above is not what I would’ve expected. As inventory declines, prices typically increase, but in this case prices stayed flat.  This leads to the question: What is driving the listing declines and prices to flatten?

What is causing the decline in listings?

There are a few possible reasons for the decline, the first of which is weather and seasonality. This past October was historically cold and snowy in Denver, which likely led to a decline in the listings as sellers decided to wait until better weather in the spring.

The second possible reason is the rise of instant offers. Listing data comes from recolorado.com, the online MLS for the Denver Metro Association of Realtors. Instant offers are not counted in the listings.  For example, if someone gets an offer from Zillow, this does not show up in the data.  There are many players in Denver now competing in instant offers (Zillow, redfin and more).  The volume of this new real estate model is unknown but is likely impacting the listing number as sellers opt to instantly sell.

However, I think the primary reason is that sellers don’t have to sell. Currently, there are no huge drivers forcing a sale.  For example, during the recession, people had to sell due to job changes and loss, high payments and more. None of that is occurring today as people are opting not to sell, which means the market inventory will remain constrained.

How are prices flat?

The biggest driver of the flat prices is the federal reserve.  By dropping interest rates, the federal reserve has made mortgages on commercial and residential properties cheaper (i.e. interest rates have dropped) which has led to real estate becoming “effectively cheaper.”  The reason I say “effectively cheaper” is that the price of real estate in most markets is flat this year, but actual payments made to buy the real estate enables buyers to spend more for the same amount of money.

For example, assume a buyer was purchasing a $400,000 house in Denver on a 30-year mortgage with 20% down, which is a loan of $320,000.  The payment for the house, assuming a 4.9% rate (this is when rates peaked last November), would equate to a payment of $1,698 per month.  Now, because the federal reserve has dropped rates, the 30-year mortgage is closer to 3.5%, which means that using the same example as above, the new payment would be $1,436.94 per month.  Because of the lower payments a buyer can afford a more expensive house or buy the same house with a smaller payment.  Furthermore, with the lower rates many renters might move to buyers as the mortgage payment is at, or less than a rent payment.

With payments dropping substantially a “floor” has been created, meaning real estate values have remained stable even though considerable economic uncertainty remains due to tariffs and market volatility.  The value of homes in most markets have remained relatively stable because the federal reserve cut the federal funds rates and mortgage rates have dropped substantially. This has increased consumers buying power and has spurred demand for real estate.

Is this good news or bad news?

Whether the data coming out in October is good news or bad depends on if you are buying or selling.

The good news for sellers is that the data coming out in October is positive. Basically, prices have stabilized and there is no rush of inventory coming online, which means no panicked selling.  This trend will continue through the remainder of 2019 and into early 2020.

The bad news for buyers is that the seller’s good news isn’t welcome for those looking to purchase. Since inventory remains tight prices will stay high.  I don’t see this trend reversing anytime soon in the Denver-metro area.  However, there is one silver lining: there could be opportunity in condos, because the number of days on the market has increased significantly.

Summary

The recent October sales numbers show the market will remain healthy as inventory remains constrained.  This is about what I had expected because we have reached a peak in real estate and seem to be holding steady.  With the recent moves by the federal reserve to aggressively lower rates, this trend will likely continue for the foreseeable future, which is good news for sellers and bad news for buyers.