Home Prices Continue to Rise in July 2015, Denver Still Hot

The most recent statistics presented by the S&P/Case-Shiller 20-City Index rose 5% in July. The more representative and inclusive National Home Price Index rose 4.7%.

While the statistics represent the height of the summer season and before the recent downturn within the stock market, overall the news is positive for the real estate marketplace. San Francisco and Denver have both registered the greatest increase in pricing on a year-over-year basis.

Specifically for Denver the home price index rose 0.71% for the month, 3.16% for three months and 10.26% on a year-over-year basis as mentioned above (San Francisco registered a 10.41% year-over-year gain). Yet as a real estate broker and one who not only considers home ownership not only a lifestyle choice but also as part of a diversified investment portfolio.

Thus I went digging into the numbers concerning the annualized returns for Denver as follows:

3-Years: 8.86%

5-Years: 5.88%

10-Years: 2.30%

The above statistics while some would consider bleak makes one step back and consider timing one’s purchase. I for one have been concerned with the low interest rate environment which I believe in turn has pushed housing prices up i.e. purchasers are making decisions based on the monthly payment and not underlying value. Yes, appraisals can be viewed as a safety valve but the reality is an appraisal takes a 6-month look back and does not predict future returns.

Yet I find the statistics above actually quite positive. First, those who purchased within the last 3-5 years have enjoyed an increase in valuations from the lows of the last recession. Yet even those who purchased within the last decade i.e. during the height of the market, values are still positive and technically continues to outpace inflation. Coupled with tax advantages and a roof over one’s head regardless of statistics for many home ownership is a positive option.

What is the take-away? While I am concerned about double-digit annualized growth, most would agree such gains is just not sustainable over the long-term. Assuming the Federal Reserve does raise interest rates during the 4th quarter of 2015, while the actual increase may be minimal the psychological effect may impact home purchases. While interest rates will remain historically low the perception of higher interest rates in the future may impact sales prices with downward pressure as an inverse to higher borrowing costs.

As I have mentioned in past blogs, inventory is moving assuming it is priced accordingly. For those homes with above market prices activity is slower. Yet if priced correctly and if buyers can see a potential upside in 5+ years those homes are moving quickly.

I will be watching the index measurements for August and September to see if my anecdotal view of a slight slow turn translates into actual statistical validation.

The Data is In Home Sales are Slipping

While the popular press has not indicated downturns in the housing market; in discussions with real estate peers we have collectively witnessed a slowdown in sales, contracts signed and cancelled and an uptick in inventory.

In our local Denver market we were blaming what we perceived was a slow-down on sellers being too aggressive concerning listing price, buyers hesitant to commit while interest rates were in flux and seasonal factors i.e. schools generally being their Fall classes in August. Yet new data suggests our perceptions may be reality.

U.S. home resales fell more than expected in August, According to The National Association of Realtors existing home sales dropped 4.8 percent to an annual rate of 5.31 million units.

Economists polled by Reuters had forecast a 5.51 million-unit pace of home sales last month.

One bright spot, sales were up 6.2 percent from a year ago most likely due to the continuing strengthening of our national economy and continued historically low interest rates.

According to Lawrence Yun, the NAR’s chief economist “The decline in August might be due to rising prices shutting out potential buyers”. Home sales fell most in America’s South and West, areas which had recently seen the fastest price gains, he said.

Nationwide, the median home price fell slightly in August to $228,700. That was still up 4.7 percent from a year earlier, but left the year-over-year rate at its lowest since August 2014. Prices in the West were up 7.1 percent from a year earlier.

I concentrate on the inner-city neighborhoods south and east of downtown Denver. I have witnessed an uptick in listings and residences staying on the market for longer periods of time HOWEVER I have also noticed once the asking prices are adjusted to reflect overall market conditions versus the hysteria of Spring 2015, units are going under contract and closing.

An example are two listings one block north of my personal residence:

One listing was purchased one year ago for approx $415K. While the new owners embarked and completed minor capital improvements, nothing extravagant to the level of a total fix and flip or similar. The home re-entered the market at $595K. While showings were above average (I consider healthy and average, 3-4 showing/week), no offers. Once the price was adjusted downward to approx $575K, the home went under contract including an inspection resolution requesting a new roof.

Across the block, two row houses sold within the past year for between $525K and 550K. Suddenly one comes on the market at $600K+ with less square footage than its peers. After being on the market for a few weeks the asking has been reduced yet still above the comps from the past 6 months.

I always advise both buyers and sellers to look at both comps in the neighborhood and the individual property’s history. While I believe in obtaining a profit, 30%+ gains in 1-2 years sans major capital improvements is questionable even in a hot market. In addition if financing is being considered, one must consider the appraisal which looks back not forward.

While I am not concerned about a potential bubble or impending downturn, I do believe we will witness an overall seasonal slowdown concerning inventory over the next quarter. Coupled with the potential fr a rise in the Fed Funds rate which will impact mortgage rates, I am assuming prices will stabilize and may even adjust downward from this past summer.

We must remember, in Metro Denver we have had a significant run up in prices over the last few years partially based on coming off a bottom coupled with purchases based on a monthly payment and not overall valuations. I for one welcome the opportunity to return to a more balanced marketplace where housing prices match or exceed inflation by small margins, that to me is a rational housing market.

Happy Monday.

August 2015 Metro Denver Market Overview

Digging into the August MLS stats:

6,416 New Listings came on the market.

5,383 homes were placed under contract.

5,088 homes Sold and Closed.

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The DMAR Market Trends Committee releases reports monthly, highlighting important trends and market activity emerging across the Denver metropolitan area. Reports include data for Adams, Ara pahoe, Boulder, Broomfield, Clear Creek, Denver, Douglas, Elbert, Gilpin, Jefferson and Park counties. Data for the report was sourced from REcolorado® (August 2015) and interpreted by DMAR.

At the end of August we closed out the month with:

7,587 Active Listings which represents a 1.57% increase over the previous month, which was still 6.55% less than we had available in August 2014. Thus inventory continues to lag behind demand, a seller’s market.

One of the issues is the significant decrease of 15.53% in new listings of detached Single Family Homes. This is not necessarily uncommon as August is less of a month of transition as seasonally there is a marked decrease in inventory hitting the market during the last quarter of the year.

Finally the Average and Median Sold prices remained relatively unchanged from the previous month at -0.23% to $410,525 and -0.21% to $349,250 respectively.

Now we all await the decision by the Federal Reserve concerning the Fed Funds Rate. While the jury is still out concerning trends, I am one of the few brokers who feels a rate increase is good. Yes, such an increase may lead to higher interest rates for mortgages and conversely prices for homes may adjust slightly downward. However most of my peers agree the market may be a bit over-bought and low interest rates are letting buyers purchase based on monthly payment versus underlying value.

An increase in interest rates by the Federal Reserve usually means inflation may be on the horizon. In general controlled inflation i.e. 2% annual is an overall positive for housing prices. Even with a 25 basis point interest rate increase, mortgage interest rates will continue to be historically low.

Denver Slips to 3rd Hottest Housing Market

For the month of August 2015, according to Realtor.com, the Denver housing market slipped to 3rd hottest in the country only behind Dallas (#2) and San Francisco (#1) based on number of views per listing and the median age of each listing.

As mentioned in my last blog post I am noticing as are my peers the euphoria of the market from the Spring seems to have dissipated somewhat. While inventory is still extremely limited AND I believe all would agree we are in a seller’s market, there is light at the end of the tunnel for buyers.

First, I have witnessed some price adjustments coupled with homes either on the market longer or returning to the market after being placed under contract. Usually if a home was under contract and returns to the market, the asking price may come down slightly to increase interest.

Second, while the forecast for higher interest rates on mortgages in the Fall may still be valid, with the equity markets in disarray and now the Federal Reserve ,most likely holding the Fed Fund Rate static, the impending rise of mortgage interest rates seems to be on hold. Related, as equity market instability generally blazes a trail of cash into Treasury Bonds, mortgage rates will continue to be low. Of note, any mortgage rate below 5% is historically low.

Third, the price gains witnessed over the last 2-3 years may have finally plateaued which I believe is positive for both buyers and sellers. A market which shows a steep upward trajectory usually indicates a bubble is forming. As prices stabilize and we witness more equilibrium between sellers and buyers, also known as supply and demand, the overall health of the housing market should continue to be positive.

While we may have slipped to 3rd hottest housing market in the country, I will take it as a sign of stability. San Francisco is land-constrained, Dallas prices are substantially lower than Denver, thus I am not concerned and look forward to a healthier overall real estate market heading into the historically slower fall and holiday periods.