March home sales sizzle, but inventory fizzles

Home inventory lowest on record

• Home inventory levels today are lower than in 1985.
• The market low was 6,786 in February.
• Mortgage rates in 1985 were about 13%. 

In 1985, when the Denver-area had a million fewer people than it does today, consumers had two and a half time the number of resale homes to choose from.

In February 1985, there were 17,308 unsold homes on the market, compared with an inventory of 6,786 homes last February, according to Metrolist. Metrolist, owned by local Realtor groups, collects residential sales data and publishes it on the Multiple Listing Service, or MLS. Metrolist is expected to release its March report as early as today.

Last February had the dubious distinction of having the fewest number of homes on the market since Metrolist was launched in the mid-1980s.

Prior to Metrolist, real estate data was compiled by McGraw Hill. That information is not readily available, although one long-time broker recently said he doesn’t recall inventory levels this low even in the 1970s.

“This is the sign of the new economy,” said independent broker Gary Bauer, who compiled the historic Metrolist data at the request of InsideRealEstateNews.com.

“We are living in a different environment today than we had in the past,” said Bauer, who also is the current chairman of Metrolist.

Despite rising prices in the Denver area, many home owners remain unwilling or unable to put their homes on the market, he said.

“Quite frankly, a lot of people who should be right-sizing are not putting their homes on the market,” Bauer said. “There is no sense of urgency among homeowners to put their houses on the market.”

February’s inventory level fell 32.7 percent from February 2012, when there were 10,086 homes on the market. Since 1985, on average, there were 15,599 unsold homes on the market in February.

In 2012, there were an average of 10,085 homes on the market each month, a 37.7 percent drop from the average of 16,187 in 2011, the biggest percentage drop in Metrolist’s history.

“That’s great data,” said Lane Hornung, CEO and founder of 8z Real Estate, a sponsor of InsideRealEstateNews.com

“Even for an industry practitioner who is immersed in the market daily, these macro historical stats are eye-opening,” Hornung said.

“The numbers succinctly capture what’s driving our market —the fundamental and chronic shortage of inventory,” continued Hornung.

Indeed, Hornung is concerned it the market is becoming overheated.

“I am reluctant to use the “b” word, as in bubble, but we are seeing some market dynamics reminiscent of the mid-2000s and we all know how that one turned out,” Hornung said.

“Let’s hope we can avoid a similar outcome and that today’s lending standards keeps speculative buying to a minimum. In the mean time, more inventory please.”

Patty Silverstein, chief economist for the Metro Denver Economic Development Corp. and the Denver Metro Chamber of Commerce, said it “continues to amaze me of the incredibly low inventory levels we are experiencing the Denver area.”

Her research shows that the Denver-area population has grown almost 60 percent since 1985, when there were about 1.8 million people in area. Also, a 30-year fixed rate loan in 1985 was hovering around 13 percent, while today a well-qualified borrower can lock-in such a loan around 3.8 percent or lower.

“I really do think as home prices solidify, and with the spring selling season coming on, more people are going to put their homes on the market,” said Silverstein, who also is principal of Littleton-based Development Research Partners.

Still, inventory levels aren’t going to be returning to historic levels anytime soon.

“Let’s face it. Even if we have more sellers, there is no way we are going to see another 10,000 homes come on the market,” Silverstein said.

The average home price of a home sold in February was $302,745, almost 12 percent higher than a year earlier, according to Metrolist.

“When you have this amazingly low supply and strong demand, guess what happens? Prices go up,” Silverstein said. “It is the law of supply and demand at work.”

Peter Niederman, CEO of Kentwood Real Estate, described the statistics “as a real eye-opener. To think that we have less inventory now than we did 28 years ago is simply staggering.”

Inventory levels are down 78.7 percent from the peak in July 2006, when there were 31,989 on the market.

“To see a 79 percent drop from peak to trough in less than seven years is even more staggering and more amazing,” Niederman said.

“That is just mind-boggling to see such a huge drop in such a relatively short time period.”

Niederman said he is frequently asked why there are so few homes on the market.

One reason, he believes, is that “a lot of homes were purchased at the height of the market in 2005, 2006 and 2007.”

Many of those homeowners still cannot sell their homes for a profit, especially after the expenses of selling, such as paying the brokerage commissions.

“They still have negative equity,” Niederman said. That is, they owe more than their net selling price.

“What I think will happen is that if the average sale price goes up another 6 percent or 8 percent this year, all of a sudden the people who bought at the top of the cycle will be able to sell their homes, giving consumers more choices,” Niederman said.

New home builders also are helping to meet some of the demand, said Chris Mygatt, president of Coldwell Banker Residential in Colorado.

“Certainly, this is a heyday for builders,” Mygatt said.

“The problem is, all along the Front Range, they can’t entitle land and build homes fast enough to meet demand. They also are grappling with rising commodity prices and labor shortages.”

Since the Great Recession, which started in late 2007, construction employment has dramatically dropped in the Denver area, Mygatt noted.

“In the coming months, I think we are going to see a big jump in construction employment, which is good news for the entire economy,” Mygatt said.

He said he would like to see home values rise by no more than 5 percent to 7 percent in 2013.

“If we get double-digit increases, that is not sustainable,” Mygatt said. “We then run the risk of getting hyper-activity in the market and that is not going to end well. We need more inventory to keep downward pressure on prices.”

Mygatt said if someone said in 1985 that consumers would have 10,000 fewer home choices in 2013, no one would have believed it.

“It is simply amazing we can have a million more people and thousands fewer choices for home buyers,” Mygatt said.

He also thinks that few consumers, unless they are house hunters frustrated by the lack of choices and unhappy with being out-bid for their chance at the American Dream, are aware of the extent of today’s supply shortage.

“For one thing, we as Americans have very short attention spans,” Mygatt said.

Hornung said it is critical to the health of the Denver-area housing market that inventory levels increase.

“Our market is wildly out of balance,” Hornung said.  “We desperately need new listings to satisfy demand and return to a more balanced, and frankly, a less zany market.

 

John Marcotte

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