The inventory of unsold homes on the Denver-area housing market in 2011 experienced the largest percentage drop on record from the highest point to the lowest point in a year, shows an analysis of more than 20 years of data by InsideRealEstateNews.com.
While it has been well-publicized that the inventory levels had been dropping in the Denver area last year, even experts were awed by the huge intra-year drop in 2011.
From the peak of the market in June of last year, when there were 19,573 unsold homes on the market to December when there were only 12,531, the market plunged by 36 percent. The year-over-year inventory drop at the end of 2011 also was a record at 34 percent.
By contrast, in 2010 and 2009, inventory levels fell about 21 percent from the peak to trough in each year. And in 2003, the inventory fell only 12.6 percent, the lowest intra-level drop since at least 1990.
“That is huge,” economist Patty Silverstein, said about last year’s 36 percent inventory drop. “It is really interesting to look at it that way. It really puts it into perspective.”
Surprised? Months supply lower now than in 2006
The low inventory combined with slightly increased sales, has led to less than a four-month supply of homes on the market, which under normal conditions with be considered a solid, seller’s market. By contrast, in the summer of 2006, when it was clearly a seller’s market, there was about a six-month supply of unsold homes on the market.
Yet, while there is anecdotal evidence that prices are rising at lower-price points, clearly prices have not taken off the way they would normally do when the supply is so out-of-balance with the demand.
“There are a lot of metrics we like to monitor, but they don’t tell the usual story in this unique market,” said Peter Niederman, CEO of Kentwood Real Estate.
“You still have to be cautious. There are still challenges to the economy and challenges to consumer confidence and challenges to the job market. People have to feel good about their jobs before they buy a home. But I do think that our market is better than most places in the country, and will recover faster than most places.”
Silverstein, the chief economist for the Denver Metro Economic Development Corp. and the Metro Denver Chamber of Commerce, said the drop in inventory raises the question whether consumers are simply not selling their homes because they are unhappy with the offers they are likely to receive in today’s soft housing market, or has there been a sea change in the decline of inventory because so few new homes have been built in recent years?
“My guess it is a little bit of both,” said Silverstein, who also is principal of Development Research Partners in Littleton. “Some folks will begin putting their houses out there again when they can see a bit more appreciation. And we’re starting to reach the point given the organic household formation and in-migration that it might be time that homebuilders start to build some more homes.”
Independent broker Gary Bauer said that he is “100 percent certain” that last year’s inventory drop was the biggest percentage drop ever experienced in the Denver area.
Indeed, the last time that there were fewer homes on the market in December was in 2003, when there were 8,820, a time when the Denver-area population was about 20 percent lower than it is today.
“Essentially, this is a good news, bad news story,” Bauer said. The low inventory keeps the pressure on prices, while it also means that consumers have less to choose from and may become discouraged.
A year ago, many in the market were worried that a “shadow market” of bank-owned foreclosures were going to swamp the market in Denver and markets across the country, driving down prices.
That didn’t happen.
“I just read a White Paper that the federal government is looking at putting more short sales, pre-foreclosures and REO (real estate owned, or bank foreclosures) in a rental pool,” Bauer said, which would further reduce the chance of shadow inventory causing a glut of homes hitting the market.
Stephanie Prather, a broker with 8z Real Estate, last week heard of a bank-owned home near Belmar in Lakewood receiving six offers. She had a buyer potentially buying it at around the $165,000 asking price, but the listing broker told Prather that she already had received several offers above that price.
“That home is in absolutely awful condition,” Prather said, although it is in a neighborhood of $240,000 to $250,000.
Prather sells a lot of homes in the $150,000 to $300,000 range, the “sweet spot,” for home sales in the Denver area.
Prospective buyers, especially in that price range, need to change their strategy, she said.
“It’s becoming more of a seller’s market,” in that price range, she said. “Buyers think they can still beat-up sellers when they write offers, but sellers are not cooperating the way they were. The market has not just gone crazy out there, but people, especially below $300,000, are getting multiple offers, and some of them are at the asking price or a little bit above.”
Why wait ’till spring?
The low inventory, however, does create opportunities for seller of homes that are appropriately priced.
Prather convinced one client to put her home on the market at the end of this week, rather than wait for the traditional spring selling season.
“We talked about it, and I suggested we list it now, instead of waiting to the spring when there will be more competition,” Prather said.
Chris Mygatt, president of Coldwell Banker Residential Brokerage, said today’s inventory levels “truly are incredible. They are unprecedented.”
Mygatt said the low inventory is keeping pressure on prices, “but I don’t think it artificial. The low inventory is a real driver of prices.”
However, he is concerned that some prospective buyers, especially first-time buyers, will become discouraged when they can’t find their dream home, and will continue to rent. On the other hand, rising rental rates increasingly will make buying appear attractive, especially with interest rates hovering at or near historic lows, he said.
Sense of urgency
At this point, he thinks the market can absorb quite a few more homes on the market, before it will drive down prices.
“What it is going to do is create a sense of urgency,” something the Denver market has not experienced during the past five years or so. “That’s because as some of the finer properties that are priced right begin to hit the market, they will be gobbled up quickly.”
Jack O’Connor, principal of the Denver 100 LLC, said that more people aren’t putting their homes on the market because they do not have any equity in them and either can’t, or are unwilling, to bring a check to the closing table.
“I agree with Jack on that,” said Niederman, of Kentwood. “I think a lot of people are just not comfortable yet with being able to sell.”
Still, the extent of last year’s inventory drop is “amazing,” Niederman said.
“I think a lot of parts of the country are still seeing increased inventory, while we are facing one of the largest, if not the largest, declines we have ever seen,” Niederman said.
“I think we just need to be patient right now. Markets are never 100 percent in balance; they always have a certain ebb and flow. The thing is, we do not have enough inventory right now. It might be a good time to put your home on the market. If you are a move-up buyer, you might make a little less than you had hoped for selling your home, but you will more than make it up with the deal you get on the buy side.”
Year Month with highest inventory High-point for inventory December inventory Percentage drop from high point to low point
1990 June 16,711 11,839 29.1
1991 June 13,669 10,147 25.7
1992 August 12,771 9,631 24.6
1993 August 10,415 7,711 25.9
1994 September 10,630 8,569 19.4
1995 August 11,531 9,854 14.5
1996 August 13,793 11,000 20.2
1997 Augut 14,296 11,093 22.4
1998 July 13,654 10,352 24.2
1999 September 10,310 8,097 21.4
2000 September 10,998 8,820 19.8
2001 October 19,319 16,482 14.7
2002 October 23,769 20,676 12.6
2003 July 26,764 21,623 19.2
2004 June 28,043 20,891 25.5
2005 September 27,200 23,572 13.3
2006 July 31,389 24,534 23.3
2007 August 30,827 24,603 20.2
2008 May 26,333 19,600 25.6
2009 July 20,890 16,456 21.2
2010 July 23,933 18,867 21.2
2011 June 19,580 12,531 36.0
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