John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Has the abnormally low inventory of unsold homes created a seller’s market in the Denver area?
An analysis released today by veteran broker Jack O’Connor indicates that is the case – with a few caveats.
A seller’s market is one in which the person listing the home has the upper-hand, in stark contrast to the buyer’s market that has swept across Denver and the nation in recent years, as the country has suffered the worst housing crisis since the Great Depression.
O’Connor analyzed Metrolist data, as of Jan. 1, and found that as of that date, there were only 8,854 single-family homes listed in the Denver area – a whopping 36.5 decline in inventory from a year earlier. O’Connor, principal of The Denver 100 brokerage firm, uses a date early in the month, as opposed to the last day of the month to analyze housing data, because most brokers end their listings on the last day of the month, which means that the end of the month inventory numbers tend to be at their lowest, not necessarily providing an accurate portrayal of inventory levels, in his opinion. A report on Tuesday by independent broker Gary Bauer, for example,shows the same trends as O’Connor’s report, although the numbers are slightly different because Bauer’s calculations were based on data collected through the end of last month.
In any case, O’Connor found that the low number of listings equated to a 4.4-month supply on homes. And when he looked at homes priced below $250,000, there was only a 2.4 month supply of unsold homes. There is more than an 18-month supply of homes priced at $1 million or above, though.
6 months equals equilibrium
A rule of thumb is that when a market has less than six months of inventory, it favors the seller, and more than six months it is the buyer that is in the catbird seat.
“I have to caution that this is a snapshot of that moment in time,” O’Connor said. “I’m looking at the lowest inventory for the year, spread over a full-year’s worth of sales. The number will definitely grow between now and April as the inventory rises.”
O’Connor said that the reason there are so few homes on the market – inventory levels are at an 11-year low – is because so many homeowners have no equity in their houses.
“Because there has been no appreciation for so long, the average homeowner has no equity,” O’Connor said. “If someone bought a typical home for $275,000 five, six or seven years ago, it’s probably worth what they paid for it.”
Homeowners seldom sell under those circumstances, because they don’t like bringing money to the closing table, he said. Homeowners typically like for their houses to be worth at least 8 percent or 9 percent more than what they owe, before they are willing to sell, he said.
Appreciation to pick up
In the second half of 2011, he said homes started appreciating on an average of 0.25 percent a month.
“But that is still only 3 percent a year,” O’Connor said. But in the second half of this year, he expects appreciation to pick up, and it will start to make sense for your typical homeowner to sell their home, make at least a modest profit after expenses, and move-up. Overall, he expects homes priced at $250,000 or below to gain 4 percent to 6 percent in value this year, with homes in sought-after neighborhood appreciating even more.
“We’ll start seeing people selling their $250,000 home and moving up to a $350,000 home,” O’Connor said. “We have not seen that kind of pattern in quite a while.”
While having so many homeowners with so little equity is a relatively recent phenomenon, O’Connor said he thinks the six-month supply remains a good demarcation of whether we are in a buyer’s or seller’s market.
“I haven’t seen any data that would indicate that the lack of equity changes that six-month number,” O’Connor said. “I don’t think there is any data to disprove that, so yes, I think less than six months of inventory is a pretty good barometer for homeowners and brokers. And I know talking to my agents and agents at other companies, they are really scraping to find homes that are priced below $350,000.”
Contact John Rebchook at JRCHOOK@gmail.com
