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Archive - May 2022 - What is going on with the real estate market? It's all about supply and demand.

In May 2022, everyone was asking, what is going on with the real estate market? To help shed some light on the subject, Nick Melzer and Julia Purrington wrote an article for Colorado Serenity Magazine entitled It's All About Supply and Demand:

Supply and Demand
Supply and Demand

Wondering what’s going on with the “market” and where it’s going to go from here? Of course, if I knew the answer to that question, I’d be rich! So, let’s focus more specifically on my area of expertise, which is what’s going on in the local housing market. The short answer is that there is still a shortage of all types of housing throughout the front rang—rental, new-build, resale, single-family, attached, and multi-family—you name it. The demand for places to live is dramatically higher than the available supply. This has been pretty constant for the last few years, particularly since the beginning of the pandemic. And, of course, when demand is higher than supply, prices go up. Nationally, housing demand is high, inventory is low, and construction costs are high, so real estate values have increased at least 10 percent each year for the last few years—even more so in our boutique foothills market, where the norm for home sales has been multiple offers over asking price in less than one week on the market. In other words, these conditions have created the hottest seller’s market we’ve ever seen.

In the last few months, however, there are signs that we may be seeing some balance enter the market. Interest rates were rumored to start increasing toward the end of last year and we saw a few little bumps, but mortgage rates settled right back down to historically low levels, with the 30-year fixed rate still hovering in the 3-4 percent range at the beginning of 2022. Then, in the first quarter of 2022, we started to see something different. Those rates took a massive jump between February and April, and in a matter of months, we went from the low 3s to over 5 percent due to both monetary policy and the war in Ukraine. I have no doubt that by the time you read this article, those rates will be in the high 5s or even low 6s. This may still be reasonable by historical standards, but it is a bit of a shock for buyers who have been house hunting with little success. When rates go up, the monthly payment for homebuyers goes up. The same price home becomes more expensive on a monthly basis. So, for buyers who are shopping at the lower price points, who are very conscious of their potential monthly payments, rising rates are decreasing affordability. This hasn’t meant prices have stopped rising, but at some point, they probably will. At higher price points, around $1,000,000, which is now close to the median contract price in our local market, buyers are less sensitive to monthly payment, and the market will be slower to adjust to higher interest rates, so we haven’t yet seen any effect.

Despite rising interest rates, there is still good reason to be bullish on U.S. housing market demand, and Colorado’s real estate market in particular. While some see a recession looming, U.S. monetary policy has become more nimble and shown an ability to keep recessions shallow over the last few decades. Moreover, if the global economy falls into a recession, historically money flows into the U.S. as a safe haven, further limiting the depth of an economic downturn here. More locally, Colorado’s economy has been consistently strong over the last decade as we have shifted from heavy reliance on oil and gas to a much more diversified economy including technology, aerospace, tourism and marijuana. Recently, as a result of the pandemic, work-from-home positions are becoming more and more popular and, given geographic flexibility, there’s no shortage of people who, now untethered from the office, want to live in Colorado and the Denver- area foothills in particular. Why wouldn’t they? At the same time, millennials are entering their homebuying prime and those who have strong financial portfolios (and right now consumers have more cash on hand than at any time in history) are attracted to areas like Evergreen and the surrounding foothills which are an easy commute to both Denver and the mountains, with good schools, decent restaurants, and tons of outdoor activities. So, demand should remain strong here simply due to Colorado’s desirability and demographic trends.

But what about supply? In the short term, we’ve seen an increase in inventory as sellers scramble to list and beat future interest rate increases, just like buyers. But once rates level out, inventory will likely stay limited. Most homeowners have refinanced into mortgage rates that are much lower than what is currently available, making the decision to move difficult from a financial perspective. Most homeowners also have significant equity in their homes due to rapidly rising prices, so there will be few defaults and foreclosures. Loose lending markets that make accessing that equity easy will also likely limit short sales as well. The financial reality is that folks can generally afford to stay right where they are and have no good reason to leave. In addition, Colorado is still one of the most beautiful and healthy places to live in the country, so people who have the option to stay, probably will. All this points to supply staying pretty low. Added to that, the cost of building has skyrocketed as the labor market tightens, supply chain issues continue to push material prices higher, and anti-growth zoning and building regulations continue to make building expensive and difficult. Moreover, in the foothills at least, there just isn’t much buildable vacant land left to build on.

In summary, despite rising interest rates, geopolitical turmoil, and decreasing affordability, I remain bullish on the foothills real estate market. We can’t escape the law of supply and demand. Demand should remain high (or at least higher here than elsewhere). We simply won’t be hurting for buyers any time soon. And, supply should remain low. Who wants to move away from here? So, absent an unexpected “shock” like the financial crisis or a third world war, low supply and high demand should keep our residential real estate market strong for the foreseeable future.

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