When will the housing deals start in Denver?
When will the housing deals start in Denver? I will try to answer this with some predictions for the next year.
First, we'll take a look at the real estate market in Denver from a historical perspective. Next, we'll look at the current state of the Denver real estate market which should lay a foundation for a reasonable guess of what may happen in the future.
The Denver real estate market has been experiencing extreme price appreciation for the last decade. The average home price in Denver has increased by 218% from 2012 to 2021. That averages to around 24% appreciation, per year, for that timeframe. So, why did that happen?
While it's difficult to pinpoint an exact cause, the increase in demand for homes in Denver is a big part. This can be seen as the number of active listings on the market in Denver decreased from 2012 to 2021. This graph represents a snapshot of the number of homes available to purchase at the end of each month.
There were 75% fewer homes available to purchase in January 2021 than in January 2012. As demand for homes rises and the supply of homes shrinks, the average price goes up as there is more competition to purchase each home that's for sale. Additionally, the average interest rate to finance a house purchase between 2012 and 2021 was 3.76%. Inexpensive financing terms combined with fewer and fewer available homes to purchase define the market conditions in Denver for the last 10 years.
What's happening now
In one word - inflation. So let's unpack that. The Covid-19 Pandemic of 2020 completely shut down the economy. When that happened, everyone stopped working and as a result, nothing was produced, built, created, or shipped. You and I still needed all the items we rely on every day and now their creation had been stopped. Meanwhile, the government panicked and approved a massive amount of stimulus to prevent the economy from crashing. The stimulus amounted to a huge amount of money the government gave out for people to spend. A lot of money (demand) chasing after fewer goods (supply: cars, lumber, groceries, etc) which naturally causes the price to rise. An increase in the price of the things you buy every day is called inflation.
We have become accustomed to an inflation rate between 2 and 3%. The inflation rate at the time of this writing is 8.29%. The only way the government can reduce the inflation rate is to try to get people/corporations to stop spending money. The most popular method is to make money more expensive to borrow. This is why you see the Fed increasing interest rates. The Federal Funds rate is the rate the government sets as the cost to borrow money. The mortgage rate to purchase a home is a portion of this rate. At the time of this writing, the current mortgage interest rate is 7%.
The increase in mortgage interest rates has slowed down the demand to purchase homes in the Denver market and as a result, we have seen the number of available homes for sale increase. You can see the increase in the graph above illustrating a doubling of available homes for sale since the start of 2022. Additionally, the total days on market (the total time a home has been available for sale) is also increasing.
So, when will the housing deals start in Denver? My best prediction is early 2023. It typically takes about 3 months for sellers to recognize that the market has shifted. Early next year sellers will have accepted the reality of the market and will be more willing to negotiate. Keep an eye out for homes that have a total time on the market above 2 months. These sellers are going to be the most eager to receive an offer and the most willing to work with you to come to terms. If you are paying cash you will have some additional leverage. If you are financing the purchase, consider a variable rate mortgage to keep your initial mortgage payment lower, and refinance down the line.
If you would like to discuss a strategy for your specific situation please feel free to reach me at (720)935-4399.