Understanding Market Shifts

Mike Cooke October 24, 2018 Buyer Insights Buying Market Trends Seller Insights Selling

We’re seeing lots of news recently about a shift in the metro Denver residential real estate market.

It’s true! The market IS shifting.

However, the portrayal of this shift as reported in the popular media and even by many industry sources contains only a drop of truth in an ocean of misinformation.

Let’s unravel truth from fiction.

Most of the news about a shift has to do with the rising number of homes on the market. At the end of September 2017, the number of homes on the market stood at 6,490 for the seven-county metro Denver area. This September (2018), that number has climbed to 7,696 … an 18.5% increase.

The unstated implication is that this is the early sign that a much discussed and widely feared real estate bubble may be about to burst.

Historical data doesn’t support this conclusion.

While inventory is up compared to last year, it is not out of whack with recent history.

In 2014, we had just over 7,500 homes on the market at the peak time of the year. Only slightly different than today’s 7,700. That year saw a double-digit increase in home prices.

To truly understand the significance of shifting inventory, we needed a longer term perspective. We’ve journeyed back to 1995 using our historic data. You can see the results in the accompanying graph. It shows average sale prices for “single family homes,” by month … along with the number of homes that were on the market at the end of the month.

We learn several things from this graph about the relationship between inventory levels and the sale price of properties:

  • From 1995 through 2000, the number of homes on the market at the end of any given month fluctuated in a very consistent pattern between 7,500 homes and 11,500 homes each year. Sales prices were zooming upwards at more than 10% a year during that six year period.
  • The inventory of homes on the market changed dramatically in 2001, with almost 18,000 properties on the market at the end of October. By 2003, there were almost 25,000 homes on the market at the end of August … more than double the peak levels in 1995 through 2000. Prices continued to climb steadily. Rising inventory did not cause price drops.
  • Average sale prices started dropping in 2007 due to a strong recession. Notice that the price drops did not occur in response to changing inventory. It was the other way around. Drops in the inventory levels lagged the collapse of property values. Declining values resulted in fewer sellers.
  • Prices bottomed out in early 2009 and most of the price decline was re-coupled by mid 2011. Strong price increases in 2012 and 2013 caused inventory to shrink.
  • Inventory levels stabilized in 2014 and have remained in a consistent pattern since then, with levels fluctuating between 2,500 and 5,000 or so in a given year. While the inventory numbers are lower than they were in 1995 through 2000, the patterns are quite similar.

In the next few months, we will see if the pattern of homes on the market starts to form a new pattern.

Will we see the pattern from 2001 repeat itself and see inventory levels zoom up to 10,000 or more homes on the market at the end of a given month?

Perhaps.

If so, we’ll likely see the rate of increases in home prices start to moderate. The market will become more balanced, which will be good news for buyers. The situation will be more manageable also for people that want to sell their current house and buy another.

In the meantime, this is a great time for buyers to jump in. Sellers need to be prepared for it taking longer to get a home sold right now and may need to be less aggressive on pushing the price envelope, which was possible back in the Spring of this year.

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