by Larry Hotz, All Denver Real Estate
December sales of existing homes increased approximately 9% from the year ago period. Inventory of existing homes on the market were essentially the same as the year ago period but decreased approximately 8% from November.
Metrolist, the Denver MLS reporting agency, will announce this good news in Denver home sales January 8. It means that housing demand for existing homes is increasing while the supply is decreasing.
Does this mean the Denver housing market has “hit bottom”?
Could be. But, it is really too early to call. Fortunately, Denver has not been as badly “hit” as many other real estate markets in Michigan, Ohio, California, Florida Real Estate, Arizona and Nevada where sales and prices for existing homes have plummeted. Average sales prices for resale, single-family homes have decreased only an average 4% based on November comparisons to the year ago period. That decrease includes average prices on the high number of foreclosures in Denver’s northern and eastern regions.
Much of the rest of Denver has not been adversely impacted from excessive foreclosures. Some desirable neighborhoods in Denver and the suburbs have actually increased in prices in the last year if only slightly .So, how were we able to come to these conclusions before they are announced? Using weekly data from Metrolist through December 30, we were able to add the add 1/7 of the average for the last week of December to the weekly totals. The first two days of the month also were derived from using average daily sales from the weekly data. While this method is not precise, it should be very close to the numbers announced in one week.
There is no question that sales of new homes in Denver have decreased significantly. We will be watching to see those statistics when they are announced. National New Home Sales from just the previous month in statistics released last Friday. Denver is likely to follow that decline in direction if not in magnitude.
But, that report also said that new home prices were actually increasing. I suspect the same is true here too. Many folks are wondering why the builders just don’t cut prices to increase sales. There are at least two good reasons.
First, they can’t. Prices for materials keep going up and labor prices are holding steady. After offering incentives, they have their margins down about as low as they can go. Tap fees, taxes and holding costs all have increased impinging on their margins. A few builders in the worst locations, which are usually far outside the metro area, are slashing prices in desperation but they do so at the peril of their reputations. Most builders here don’t want to “slash and burn” because of their reputation. What would a buyer think of a builder who lowered the prices in their community AFTER THEY BOUGHT? It would be demoralizing and destroy values for future sales. Word of mouth is important in new home sales here.
Secondly, they don’t have to. Most builders here “gave way” their standing inventories over the last hear and half. They were sold with inflated incentives and “fire sales”. Most prudent builders now build very few “spec homes”. So, they don’t break ground until they have a solid contract. This lowers their holding costs. Some buyers, especially at the higher end, will always want “new”. So, sales will continue at a diminished rate.
Even if they did lower their margins further, how much could prices be reduced? Not much. My experience is that most builders now have less than 5% profit after expenses now. Would 1-2% price reductions increase sales that much? I doubt it.
2008 holds the secrets about how the Denver real estate market will perform. Overall, December portends a better year for sellers. But, buyers will still benefit from soft prices, lower interest rates and great selection of homes on the market!
Much of the rest of Denver has not been adversely impacted from excessive foreclosures. Some desirable neighborhoods in Denver and the suburbs have actually increased in prices in the last year if only slightly. So, how were we able to come to these conclusions before they are announced? Using weekly data from Metrolist through December 30, we were able to add the add 1/7 of the average for the last week of December to the weekly totals. The first two days of the month also were derived from using average daily sales from the weekly data. While this method is not precise, it should be very close to the numbers announced in one week.
There is no question that sales of new homes in Denver have decreased significantly. We will be watching to see those statistics when they are announced. National New Home Sales from just the previous month in statistics released last Friday. Denver is likely to follow that decline in direction if not in magnitude.
But, that report also said that new home prices were actually increasing. I suspect the same is true here too. Many folks are wondering why the builders just don’t cut prices to increase sales. There are at least two good reasons.
First, they can’t. Prices for materials keep going up and labor prices are holding steady. After offering incentives, they have their margins down about as low as they can go. Tap fees, taxes and holding costs all have increased impinging on their margins. A few builders in the worst locations, which are usually far outside the metro area, are slashing prices in desperation but they do so at the peril of their reputations. Most builders here don’t want to “slash and burn” because of their reputation. What would a buyer think of a builder who lowered the prices in their community AFTER THEY BOUGHT? It would be demoralizing and destroy values for future sales. Word of mouth is important in new home sales here.
Secondly, they don’t have to. Most builders here “gave way” their standing inventories over the last hear and half. They were sold with inflated incentives and “fire sales”. Most prudent builders now build very few “spec homes”. So, they don’t break ground until they have a solid contract. This lowers their holding costs. Some buyers, especially at the higher end, will always want “new”. So, sales will continue at a diminished rate.
Even if they did lower their margins further, how much could prices be reduced? Not much. My experience is that most builders now have less than 5% profit after expenses now. Would 1-2% price reductions increase sales that much? I doubt it.
2008 holds the secrets about how the Denver real estate market will preform. Overall, December portends a better year
for sellers. But, buyers will still benefit from soft prices, lower interest rates and great selection of homes on the market!
6 Comments
I think we are getting close to hitting bottom. Prices have stopped falling and builders are switching to more commercial projects. Mixed use projects may be the future here, because commercial real estate is still doing well. All those people that move here still want their dry cleaning and starbucks.
Hit bottom? NOT. Granted I live in SoCal, home of 20% per year appreciation, sub-prime loans, and some of the most overpriced housing in America, so the effects here will be more pronounced.
That said, looking on the net for a possible move to Denver I am not particularly impressed by “low” prices. Not as much less than I expected. One fairly narrow search in the 400-550 range turned up the anomaly of a bank repo priced about 25% under the competition. That’s a bad sign of things to come.
Tract developers may have cleaned out their inventories, but that leaves the resale market, where sellers have apparently held off price cuts (and maybe listing at all). Like Seattle and Portland, Denver may in denial about the extent of foreclosures, the difficulty in getting a a mortgage, and the national economic recession, all about to get much worse in 2008.
Here in Palm Springs prices have held up on the high end, as in most places, but an adjustment is brewing, and the “median price” will collapse when the $2mm houses stop selling.
The low end market follows low-down mortgages and average wages. The high end market follows the stock market. See any bright spots here?
Thank you, Rick. Good comments and I appreciate a lively discussion.
Of course, if either one of us knew for sure, otherwise we wouldn’t be commenting gratis here. We would be highly paid consultants. All we can do is look at the data and make some reasonable hypotheses that prove to be true in some part.
Hit bottom? What is bottom? What area of town you choose also has a lot do with how prices have preformed so far. The better the neighborhood is; the more stable are the prices.
What is bottom? Prices or payments? Sales are already increasing slightly. But when they really “break-out” aren’t interest rates also likely to increase due to more demand for mortgage money? It appears here that prices may well decline even in some better neighborhoods depending on supply and demand. But rates are now truly at 5.5%. Even a 1% increase in interest rate will increase payments more than than a 4% increase in price.
Picking the exact bottom is tough. I did not say we are there yet in term of prices but we may be close in terms of payments. Time will tell.
One thing for sure: More people are moving into the Denver area than moving out. They have to live somewhere and rental vacancies are low and getting lower. And, the economy is forecast to be stronger here than most of the country.
http://leeds.colorado.edu/uploadedFiles/Faculty_and_Research/Research_Centers/Business_Research_Division/BEOF/BEOF_2008_Economic_Outlook.pdf
Way too soon for a bottom. The credit market that funds real estate house prices is in the dumpster. Rates on treasury securities have fallen but rates on mortgages haven’t. And home mortgages are getting harder to get, not easier.
That is why we are still far from the bottom of the real estate crisis. Mortgage short sales and foreclosures and bank repos are still causing prices to fall. Buyers are more reluctant than ever to buy.
–Richard
I think that people need to look at the crisis on a local, rather than national level.
While we do have some major markets experiencing a crisis (FL, CA, DC, to name a few), there are other healthy markets in the US.
Real estate markets are all regional, not national, as the media would like to have us believe.
Glad to hear that the sales have picked up. There may be hope for the housing market.