Is there a housing shortage in Denver's future?

Is there a looming housing shortage in the Denver area?  Yeah, you heard me correctly.  A housing shortage. 

Though no one knows the future, there is meaningful data that point towards:

1.       Reduced housing inventory

2.       Increased, sustained demand

These factors point to a market which will be characterized by under-supply and over-demand – a classic recipe for a shortage.  This shortage is focused in the largest part of the market, near the median price point.

 

First, let’s take a look at the supply side of the equation. 

 

The chart below “Number of Active Listings – Denver” is a meaningful as one sees that listing in the Denver MLS, MetroList, as of June 2008, is only 70 listings away from being at the lowest sustained level in three years at 26,104 listings.  This is down 5,796, or 18.2%, from the June 2006 level of 31,900 listings.  This means that numerically only 4 of the 5 listings available in 2006 are available today.  (2006 is the red line with the square data points; 2008 is the purple line with the “X” data points.)

 

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

 

That number is profound in-and-of-itself, then one realizes these additional factors:

1.       There are more total homes in the Denver Metro Area now than 2 years ago, so the percentage of available homes is lower than 2 years ago.

2.       The percentage of homes under contract vs. those closing in any given month is strong, continuing at 130.2%, after the following trend:

a.       January – 152.3%            

b.      February – 170.8%

c.       March – 158.4%

d.      April – 147.4%

e.      May – 135.9%

3.       Sure. That percentage is decreasing. However, that decrease is due to the denominator in the equation (the bottom number – Solds) growing 62% from 2,987 sold units in January to 4,845 sold units in June, compared to the “under contracts”, which grew only 38%.   Given decreased active listing housing inventory, it is realistic to expect that homes will go from under contract to sold, with fewer and fewer “under contracts” coming online to move to solds. 

The pace of closings is outpacing that of going under contract.  When one looks at the “Sold Listings” chart, it shows solds are down about 8% (likely sub-prime fallout), while active listing inventory is down 18% -- meaning a 10% net market demand increase relative to the inventory (active listings).

 

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

 

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

 

One can see supply is down.  And, as those closings increase, the supply of homes drops.

So, let’s look at demand and the Denver.

 

First, Denver’s population has grown 1.9% per year (or about 3.6% since 2006), meaning 3.6% more demand than 2006 competing for the 18.2% fewer homes in the listing inventory.

 

One can appreciate that is an abstract concept. However, when that demand translates into effective demand (purchasing demand), how does it manifest itself?  In changes in Months of Inventory.

 

Now, the National Association of Realtors® identifies that 6 months of inventory is a “well-balanced” market or a market in equilibrium. 

In Denver’s instance, however, the market is showing signs of being on a significantly different pace to the national market.

 

The chart below indicates just how stark that contrast is:

 

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

Also, sourced from National Association of Realtors® EHS Data.

 

The seasonalized data, which uses 12-months’ trailing average sold properties, shows a stark contrast to the National Market.  Now, when one looks at NON-SEASONALIZED data, a more dramatic difference appears.  When looking at the current level of activity vs. the 12 trailing months average, the Denver market drops from 6.56 months of inventory to 5.39 months of inventory. 

 

Considering the buyer is competing against current levels of competition and not the average competition over the past 12 months, using seasonalized data may not provide the appropriate visibility. So, if I am competing in the market, I am competing against demand that is causing a 5.39 months of inventory.  That is less than ½ of the national months of inventory!

 

To emphasize just how strong this demand shift is, please view the two following charts. 

 

In this first chart, the intent is to capture how comparatively strong the current month is against an existing inventory of listings.  Now, what one should see is:

·         Higher summertime inventories that get worked off into the autumn (as Denver has a 60/40 seasonality).

o   From 2005 to 2008, 88,271 of the 153,139 homes sold were sold between April and September – or 58%.

·         Notice that inventories in 2008 are not “V” shaped as in 2005, 2006 and 2007 in response to more sellers coming online, but rather parabolically shaped, like a flattened “U”.   This indicates that listings are being outpaced by demand, which we see in the months of inventory chart above.

·         Thus, the data here speaks to continued demand exceeding supply.

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

 

One will note that as demand increases, current months of inventory decreases (assuming static supply).  So, the above shows that present demand – since January – continues to be strong (as previously noted).  Also, one will note that the Denver market has not been this demonstrably strong (nearly 4 consecutive months near the 4 months inventory level) since early 2005 (when interest rates were about 2% lower than now) – again with considerable smaller supply.  So, without that additional listing supply, it is reasonable to believe that this comparative demand strength will continue

 

Now, as one final measure of demand, please note the chart below: Inventory Volatility. This chart measures the relative monthly effect on inventories.  Downward numbers indicate relative strengthening in the market, upward numbers indicate relative weakness.

Now, post-holidays, it is common for subtantial inventory to come into the market. That inventory gets worked off, as seen in 2006 and 2007 through the end of the year.  However, the “glut” was the smallest of all three years (2005 – 2008) and has been worked off by June.  This means that if the end of 2008 is as steep a drop as in prior years – with 18.2% less inventory – a housing availabilty shortage is realistic in Denver by the holidays. 

 

Based on information from MetroList, Inc. for period January 2005 until June 2008.

Note: This representation is based in whole or in part on content supplied by MetroList, Inc. MetroList, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by MetroList, Inc. may not reflect all real estate activity in the market.

 

Now, are all price points and locations enjoying this upswing?  To be sure, no.  However, what one will see is that homes in the median price point, about $275k and lower are.

 

 

Market Trend Analysis - Denver Metro Selected Towns/Cities
Based on information from Metrolist, Inc. for period June 7, 2008 until July 10, 2008.
Single Family Residences - All Price Levels
Excludes Housing Not Listed in MetroList
Note: Six (5.5 to 6.5) Months of Inventory Tends to Indicate Neutral Market, Over 6.5 Months a Buyer's Market, Under 5.5 Months a Seller's Market
(How Calculated)		A		B	C = B/12	D = A/C		E		F = A/E
Price Range		Active	% of Market	Sold in Past 12 Months	Sold Per Month	Months of Inventory	Current Activity Status	Curr Month Under Contract	Near Term Sales Trend	Months of Inventory if Current Month Activity Level Continues
$                  -	$        100,000	878	4.22%	3,439	287	3.1	Seller's Market	942	Seller's Trend	0.9
$        100,001	$        200,000	3,972	19.11%	11,114	926	4.3	Seller's Market	2,115	Seller's Trend	1.9
$        200,001	$        300,000	4,788	23.03%	11,042	920	5.2	Seller's Market	1,605	Seller's Trend	3.0
$        300,001	$        400,000	3,235	15.56%	5,576	465	7.0	Buyer's Market	817	Seller's Trend	4.0
$        400,001	$        500,000	2,149	10.34%	2,537	211	10.2	Buyer's Market	428	Seller's Trend	5.0
$        500,001	$        600,000	1,318	6.34%	1,360	113	11.6	Buyer's Market	220	Seller's Trend	6.0
$        600,001	$        700,000	981	4.72%	723	60	16.3	Buyer's Market	112	Seller's Trend	8.8
$        700,001	$        800,000	738	3.55%	453	38	19.5	Buyer's Market	66	Seller's Trend	11.2
$        800,001	$        900,000	518	2.49%	343	29	18.1	Buyer's Market	51	Seller's Trend	10.2
$        900,001	$     1,000,000	429	2.06%	203	17	25.4	Buyer's Market	23	Seller's Trend	18.7
$     1,000,001	No Upper Boundary	1,784	8.58%	680	57	31.5	Buyer's Market	120	Seller's Trend	14.9
Total (Seasonally Adjusted)*		20,790	100.00%	37,470	3,123	6.7	Buyer's Market	6,499	Seller's Trend	3.2
Total (NOT Seasonally Adjusted)**		20,105	xx	xx	3,847	5.2	Seller's Market	5,091	Seller's Trend	3.9
Note: This representation is based in whole or in part on content supplied by Metrolist, Inc. Metrolist, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by Metrolist, Inc. may not reflect all real estate activity in the market.
* Uses 12-trailing months' average to smooth out the effects of Denver's purchase season (60% Apr - Sep; 40% Oct - Mar).
** Uses raw data to show the impact of current levels of purchases on current levels of supply.  This causes substantial seasonal swings in months of inventory.

 

 

 

Here is how the markets I track fared around the Denver area.

 

Market Trend Analysis - Denver Metro Selected Towns/Cities
Based on information from Metrolist, Inc. for period June 7, 2008 until July 10, 2008.
Single Family Residences - All Price Levels
Excludes Housing Not Listed in MetroList
Note: Six (5.5 to 6.5) Months of Inventory Tends to Indicate Neutral Market, Over 6.5 Months a Buyer's Market, Under 5.5 Months a Seller's Market
						6
Locale	Active Listings	12 Months Sold	Sold per Month (Avg)	Months  Inventory (MOI)	MOI Chg from Prior Month	Current Mkt State	Under Contract	Sales Trend	Sales Trend Chg.%
Arvada	548	1,326	110.5	5.0	0.1	Seller's Market	239	Seller's Trend	116%
Aurora	2,092	4,836	403.0	5.2	(0.3)	Seller's Market	877	Seller's Trend	118%
Boulder	162	272	22.7	7.1	0.5	Buyer's Market	46	Seller's Trend	103%
Broomfield	350	758	63.2	5.5	0.1	Neutral Market	126	Seller's Trend	99%
Castle Rock	1,139	1,260	105.0	10.8	0.5	Buyer's Market	189	Seller's Trend	80%
Centennial	530	1,276	106.3	5.0	0.0	Seller's Market	197	Seller's Trend	85%
Commerce City	445	804	67.0	6.6	(0.8)	Buyer's Market	185	Seller's Trend	176%
Denver	4,504	9,084	757.0	5.9	(0.4)	Neutral Market	1,789	Seller's Trend	136%
Erie	169	316	26.3	6.4	(1.1)	Neutral Market	54	Seller's Trend	105%
Golden	549	645	53.8	10.2	0.9	Buyer's Market	76	Seller's Trend	41%
Greenwood Village	147	138	11.5	12.8	0.3	Buyer's Market	22	Seller's Trend	91%
Highlands Ranch	496	1,240	103.3	4.8	(0.6)	Seller's Market	208	Seller's Trend	101%
Lafayette	107	156	13.0	8.2	(0.2)	Buyer's Market	36	Seller's Trend	177%
Lakewood	576	1,280	106.7	5.4	(0.1)	Seller's Market	228	Seller's Trend	114%
Littleton	1,015	2,460	205.0	5.0	0.3	Seller's Market	292	Seller's Trend	42%
Louisville	33	105	8.8	3.8	0.9	Seller's Market	13	Seller's Trend	49%
Northglenn	147	411	34.3	4.3	0.0	Seller's Market	95	Seller's Trend	177%
Parker	929	1,495	124.6	7.5	0.2	Buyer's Market	246	Seller's Trend	97%
Superior	46	110	9.2	5.0	0.9	Seller's Market	17	Seller's Trend	85%
Thornton	596	1,727	143.9	4.1	(0.5)	Seller's Market	332	Seller's Trend	131%
Westminster	555	1,270	105.8	5.2	(0.3)	Seller's Market	217	Seller's Trend	105%
Wheat Ridge	126	296	24.7	5.1	(0.4)	Seller's Market	50	Seller's Trend	103%
Total of Selected Towns & Locales	15,261	31,265	2,605.4	5.9	(0.2)	Neutral Market	5,534	Seller's Trend	112%
Total MetroList*	20,105	xx	3,847.0	5.2	(1.2)	Seller's Market	5,091	Seller's Trend	32%
* Single Family Residences Only
Chg from Prior Month	(182)		702				(25)	Buyer's Trend
Note: This representation is based in whole or in part on content supplied by Metrolist, Inc. Metrolist, Inc. does not guarantee nor is in any way responsible for its accuracy. Content maintained by Metrolist, Inc. may not reflect all real estate activity in the market.

 

Now, there are exogenous factors which can mitigate the trends in the present data:

·         Increasing interest rates

·         High petrol prices continuing

·         Restrictive lending practices

·         General societal angst about the market in general

However, the general factors indicate:

·         Lowered supply

·         Heightened demand

·         A comparatively stronger local market compared to the nation

However, the data does look favorable in the near term for an improving market.  IN fact, as one sees above, demand comparable to the level in prior years with the 18.2% reduced supply, will have a stronger relative impact than in prior years, potentially to the point of creating a housing shortage.

 

Now, things can change, which is why you should consult with YOUR Realtor® about how these conditions may or may not affect your home or purchase.