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Most Surprising News
The most surprising piece of news for our friends and clients is that prices are essentially flat compared to last year. People find that surprising given what interest rates have done over the last 18 months. They wonder, how could prices not fall significantly after interest rates jumped considerably?
The answer is the fundamental economic lesson of supply and demand.
There is enough demand in the market for the current supply to keep prices stable even in an environment of higher rates.
Now that rates are (finally) trending down, it gives us even more confidence about the continued growth of real estate prices along the Front Range.
Here is a look at how home prices compare to one year ago:
Larimer County = Down 0.8%
Weld County = Up 3.4%
Metro Denver = Up 0.8%
Who Would Have Guessed?
Pretend it is 2013. The real estate market is clearly recovering from the Great Recession. The Broncos are having a great year and will eventually make it to the Super Bowl.
Now, imagine someone makes a prediction that 10 years in the future mortgage interest rates would double over the course of 12 months.
If you were to guess what sort of impact on house prices that would cause, what would you say?
It would be reasonable to guess that prices would decline if mortgage rates doubled.
Here’s what really happened. Prices kept going up.
Some thought prices would crash. Many thought prices would go down.
They keep going up. Not as fast as they were, but they are still up.
Compared to one year ago, prices are up the following amounts:
Larimer County = 2.6%
Weld County = 2.2%
Metro Denver = 1.1%
Why? Supply and demand.
Supply is low and there is still demand in the market.
Top Three
Here are the top three reasons why prices are unlikely to crash even though the market has cooled off:
- Inventory – Ultimately, prices are driven by supply and demand. Although supply has increased, it still remains relatively low with less than two months’ supply in most areas.
- New Homes – New home construction still lags behind the demand stemming from population growth. New home starts today are roughly 2/3 of what they were in 2005.
- Credit – Home buyers today are highly qualified which protects the market from a glut of ‘distressed’ properties hitting the market in an economic downturn. The average credit score of buyers is now 776 which, by definition, is ‘excellent.’ Only 2% of loans today are given to buyers with scores under 640 whereas in 2001 25% of buyers had that low of a score.
Prices Still Up
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Bubble Burst
Every so often we will hear a concern that another housing bubble is forming.
To help answer that question it’s valuable to look at the reasons that caused the last one.
There were three main drivers of the bubble that burst in 2008:
- Easy Credit – loans were very easy to attain
- Over-Leverage – people were using their homes at ATM’s
- Over-Supply – too many new homes were being built
Now, let’s compare that to today:
- Stricter Credit – the average home buyer today has a FICO score of 755
- High Equity – collectively, U.S. homeowners have $19 Trillion of equity in their homes and collective mortgage debt has not increased for 13 years
- Under-Supply – today we are building only two-thirds of the new homes being built in 2004 yet the population is much higher
Given this healthy information, we don’t see another housing bubble forming today.
If you would like to see a video recap of our annual Market Forecast you can watch that HERE.
Supply and Demand
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An Unbalanced Market
When was the last time you rode a see-saw?? (some people call it a teeter-totter.) Our market right now reminds me of when my little sister and I would try to ride one. There she was stuck up in the air and there I was stuck on the ground (I was a big kid!)
Here’s the deal- a market is “balanced” when there is 6 months of inventory for sale. Meaning it would take 6 months to sell out everything on the market assuming nothing new came on the market.
Over 6 months = buyer’s market. Under 6 months = seller’s market.
Check it out: Today, in Northern Colorado, there is only a 1.5 month supply. Yep, a seller’s market. There’s my sister stuck up in the air.
But wait! There’s more to the story! Taking a closer look at specific price ranges reveals that under $250,000 there is a two-week supply! And over $700,000 there is a 6.5 month supply.
So, we have both buyer’s markets and seller’s markets right here in our Northern Colorado market.
The big takeaway is this – for some people. This is an ideal time to move up. Depending on your home’s price and location you could sell in a seller’s market and potentially buy in a buyer’s market.
If you want to see how to do this, give us a call!
