What Is Going On With the Denver Metro Real Estate Market?

The Denver metro real estate market has performed a sudden U-turn with inventory up 28%, sold homes down 14% and days on the market up 23%. This is the highest amount of inventory since October 2013.  At the same time, prices have help steady while mortgage rates have plummeted.  Is this really a “goldilocks” market as characterized by the Denver Association of Realtors? How can prices hold steady while inventory increases?

Digging Into the Denver Metro Numbers

June is one of the top months for real estate sales both in Denver and nationally.  For sales to drop 14.3% in June is a harbinger for the rest of the year.  Along with the sales drop, inventory surged over 28%.  At the same time prices are flat and down less than 1%.

• The luxury market: In June, the luxury market above 1.5m took the biggest hit with sales to original list price dropping to 91%.  Buyers are paying 9% less than original list price
• The entry market ($300-500K): This price point has been the hottest in the recent expansion with appreciation topping 18% in many years.  Now the tide has turned, with sales slowing 14% and appreciation slightly negative 1%.

Both ends of the market are providing warning signs of a bigger shift that is transpiring in the market. The DMAR characterized this scenario as the “goldilocks” market, with prices staying flat enabling buyers to have more.  I think there is more going on.

Why is House Appreciation Slowing?

It is surprising that mortgage rates have dropped making housing more affordable (lower mortgage payments), and yet house prices have started to languish.  Inventory has picked up in many markets while demand has been tepid at best.  This slowdown in real estate is more than just seasonality, something fundamentally has changed in residential real estate causing buyers to be more cautious on a large purchase.  Below are two prospective drivers of the appreciation slowdown:

1. Prices got ahead of themselves:  Many markets have seen double-digit appreciation for many years.  This was clearly not sustainable, as wage growth could not keep up with the huge appreciation in values pricing many out of the market.  Wage gains continue to be tepid even as prices have moderated.  Many prospective buyers continue to wait on the sidelines for relief from the high prices.  Although lower mortgage rates have helped with affordability, I don’t see this trend reversing.
2. Consumer confidence about the future: Consumers have been fickle about large purchases.  The Michigan consumer confidence study declined slightly from March to April which shows consumers “hesitation” about the future.  Consumers are getting nervous as other large purchase items are also slowing like autos.  This lack of confidence is filtering through to the slowdown in housing.

How Will the Slowdown in Denver Impact Other Colorado Markets?

Denver is the primary driver of real estate in Colorado.  Whatever happens in Denver eventually flows through to every market in the state. 

However, each market reacts a little differently to the Denver market.  For example, in the last recession we saw many mountain markets lagged Denver by about 18 months going into the recession and coming out of it.

 We are seeing this today: As Denver slows, markets like Breckenridge continue to post records.  Unfortunately, this trend will not last.  As Denver transitions into a slower, declining market, look for other markets throughout Colorado to follow suit within about an 18-month period.

What Happens the Rest of the Year?

As inventory continues to increase, prices will have to adjust.  Just like in the three little bears the porridge can’t stay “just right” for long.  Eventually it will get cold!  Denver real estate will continue to cool off the remainder of the year.

Summary

I can’t recall a time period where interest rates were at historic lows, the stock market is at historic highs and real estate was languishing.  With stocks and rates doing so well, one would think real estate would follow right along, but this is not the case in today’s economy.  There is something more going on causing consumers to hesitate on home purchases.  Will this hesitation be fleeting, or will it persist?  If the current slowdown in housing continues, it will eventually cause consumers to pull back on other items, causing a general slowdown in the economy. 

How cold the market gets is the million-dollar question.  Fortunately, the Denver metro area has a lot going for it including low unemployment, high desirability, low taxes, etc., which should keep the market from repeating the 2008 cycle.  Although the bottom will not drop out, it will be tough to reset expectations on the market after 10 years of huge appreciation.