Hornung: A tale of two markets

Sellers would benefit by listening to their Realtor, says Lane Hornung.

As 2011 draws to a close, what has captivated, engaged and surprised the Denver-area real estate market is something that is not there – houses for sale.

The Denver-area housing market in recent months witnessed the largest percentage decline ever in housing inventory.

Historically, the inventory of unsold homes tends to rise on a year-over-year basis, for no other reason than the population growing, along with the homeownership rate.

This year, in the wake of the national housing collapse that started in 2007, was different. In November, there were a mere 14,237 unsold homes on the market in the Denver area, a 30 percent drop from the 20,392 in November 2010.

This wasn’t expected. Early in 2011, the fear was that the Denver-area market would be flooded with unsold homes held by banks that would cast a long shadow on the market. This so-called “shadow-market,” by some estimates could have increased the supply by as much as 40 percent.

Given the magnitude of the lack of supply, it seemed like a good starting point for my monthly conversation with Lane Hornung, CEO and Co-founder of 8z Real Estate and COhomefinder.com.

John: Lane, how is the lack of inventory impacting the market?

Lane: We have been saying for a long time that this is a tale of two markets – and it still is. The upper-end, luxury market, and even the upper-middle market, are much softer than the low-end. It varies from neighborhood to neighborhood, but for the most part we see a much higher supply of unsold homes at the higher price points. The other market, the lower-end market, is borderline “on fire.” I am bit reluctant to use that term, but let’s just say that the lower end market is extremely active.

How the inventory relates to that is that it is super-tight at the lower end. That is no surprise to a first-time home buyer. If you are looking for a lower-priced home, you might be putting an offer on your fifth, sixth or seventh home. You keep getting beat out by competing offers.

John: So the first-time buyers are being disproportionately being impacted by the low inventory?

Lane: They’re competing not only against other first-time owner-occupants, but against investors. The word on the street is that nobody is putting their home on the market, if they don’t have to. They would rather wait until they can get a better price. There is a perception in the market that this is a bad time to sell. That is not necessarily true and the media has done little to illuminate the fact that it is really a two-tiered market, and demand is very strong at the lower-end.

John: Lane, as you have mentioned before, savvy investors are snapping up properties to rent out, especially at the lower-end.

Lane: Without a doubt the so-called “smart money” has been, and is, investing in real estate. It is giving them a yield they can’t find with other fixed-income investments, certainly not with interest bearing accounts. In most cases, you can purchase a property and rent it for immediate positive cash flow.

So, if an investor bought a home one or two years ago, and they’re renting it out and it is cash-flowing, there is no way they are putting that property on the market. I think part of it, too, is that whole flipper-mentality is gone. Investors, and owner-occupants, are buying real estate with the idea of holding it for a while. People are buying with the expectation of hunkering down. The end result of all these trends is fewer properties on the market.

John: And didn’t the tax credits in the first part of 2010 take a lot of that low-end inventory off the market?

Lane: Absolutely, the tax credit accelerated sales, especially at the low-end, in the first part of 2010. It is simply too early for those buyers to be even thinking of putting their homes back on the market. Heck, they might be still living out of boxes. They’re still unpacking.

John: Of course, all real estate is local, so buyers should expect to find differences depending on where they are shopping for a home.

Lane: It’s interesting. On COhomefinder.com, we have a custom search tool called a “Market Meter” that provides a temperature rating for any market you want to define. Is the market hot or cold? I’ve been watching those Market Meters and the arrows are slowly but steadily moving to the hot side of the meter. Saying the market is heating up is probably too strong. Let’s just say the embers are warming up and starting to glow under the ashes.

John: As you said before, it is the high-end markets that are the softest, and that is true even in stronger neighborhoods, isn’t it?

Lane: Let’s look on COhomefinder.com in a relatively strong neighborhood like Highland. (Find it at this COhomefinder.com link. ) . At this moment in real time, there are 128 listings for sale, 32 percent of those are under contract, and it would take 5.3 months to absorb the current inventory. The meter is pointed to the right toward the “Hot” indicator. If we changed the search to over $600,000, there are 15 listings, 6.7 percent of them are under contract, and there is a 15-month supply of homes. When you go over $600,000, you are in a totally different market, a much colder market.

You can specify your market on COhomefinder.com and get an idea of the temperature of that market. It’s fun to play around with different price points to segment the market. What you find is that the actual price point varies, but there will probably be an inflection point that separates the lower-end, hot market with tight inventory from the upper-end, colder market with an oversupply of listings.

8z Real Estate is a sponsor of InsideRealEstateNews. A monthly interview with Lane Hornung is a feature of IREN.