News from The Mile High Home Hunter

July 2008

Is Denver Facing a Housing Shortage?
Inventory Down; Demand Up

Dear E-Mail,

My apologies for what has been a 6 week absence from the "Daily Dirt". Ironically, the reason for this article is one of the reasons for my absence.

Also, stay tuned for the other reason...coming September 1, 2008!

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Is There a Housing Shortage Looming in Denver?

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.)

Active Listings Denver

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).

UC to Solds

Sold Listings

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:

Denver vs National

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.

MOI if CM Continues

In this first chart above, 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).
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.

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.

Inventory Volatility
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.