If you had told me a few short months ago that 2020 wasn’t going to be a productive year, I probably would have laughed. I started the year with a sun-filled family vacation in San Diego and a beautiful Platt Park listing, which went under contract for full-asking 48-hours after hitting the market. Then COVID-19 hit and any sense of control-your-own-destiny disappeared. On March 6, the buyer for my listing backed out citing financing concerns, and two weeks later, the Governor issued a statewide shelter-in-place order, halting all in-person real estate showings. It was a tough time to be in the middle of any major contract. As we all experienced, most business came to a screeching halt and unemployment skyrocketed. Now, it is mid-summer and the world is cautiously reopening amid looming fears of a second closing. Will the short term rebound in home sales be enough to create long term stability for the Denver market?
The spring 2020 Denver real estate market was so volatile and unpredictable that REColorado, producer of the Denver-metro MLS database, started providing weekly market reports to keep track of the sharp changes. In March, we saw a lot of active listings get withdrawn from the market, and a 9 percent decrease in the number of new listings year-over-year (YOY). However, due to the nature of real estate closings, sold homes were up 2 percent for the same time period.
As anticipated, April and May saw a different outcome with a 26 and 44 percent decrease in home sales since 2019, respectively. Although sales were down for both months, home prices and days on the market remained relatively steady. In April, the average sold price decreased less than 1 percent, and was flat in May. May also saw a significant jump in the number of homes going under contract, up 119 percent over last month and 14 percent vs. May 2019, reflecting pent up buyer demand from the spring quarantine.
The buying surge has continued into the summer albeit at a much steadier pace, supported by historically low mortgage rates. June 2020 saw a 69 percent increase in home sales over last month, but a more stable 3 percent increase over the same time last year. Home values also saw a steady 2 percent increase over 2019, lending more stability in the wake of severe springtime market swings.
The negative trend we are experiencing now, as the summer stretches out, is a sharp decline in inventory. The number of new homes on the market dropped by 17 percent YOY in May, and yet another 2 percent in June. The Denver-metro area currently stands at five weeks of inventory; four weeks less than last month, and two weeks less than last year.
A recent press release from CoreLogic, a leading data-analytics firm, paints a gloomy picture. Their recent Home Pricing Index (HPI) and HPI Forecast model predicts that despite a resurgence in demand through the spring and into the summer, a market cool down is imminent. CoreLogic expects the HPI index to drop 6.6 percent nationally by May 2021, with 125 metro areas having at least a 75 percent likelihood of a price decline. They specifically forecast the Denver-metro area to see a 9 percent decline by May of next year due to an overvalued market. CoreLogic attributes this overall decline largely to a high unemployment rate, exasperated by a recent spike in COVID-19 cases.
In a recent post on LinkedIn, NARs Chief Economist, Lawrence Yun, describes a “hot market” and accredits low inventory and low interest rates for creating bidding wars. Yun also said we should “expect multiple offers to be common on many mid-priced homes for the remainder of the year”. CoreLogic’s press release included one sentence that offers support to Yun’s insight. “While harder-hit areas may also experience a slower rebound, the preservation of factors like low mortgage interest rates and a shortage of for-sale supply have already supported prices in some metros and may also encourage home price stabilization nationwide.”
The only certainty right now is that life is extremely uncertain. The rules change from day-to-day and there is a lot of anxiety around the unknown. The contrast between this recession and The Great Recession, is that the mortgage industry (RE: the oft-blamed real estate industry) is not the culprit. The real estate industry has been a source of economic resurgence in 2020. Home values will most certainly take a hit, but how bad is still a guess at best. As people hold on to their assets, they continue to build equity, which could potentially help them out of a financial hardship should it arise down the road. However, personal equity and security will continue to put a squeeze on inventory and further drive demand. While this does sound reassuring, we also have to contend with a high, yet declining, unemployment rate and a record number of delinquent mortgages. Both of which continue to pose a threat to market stability.
There are larger issues at play in the metro area as well. How will recent RTD cuts affect commercial leases and new businesses entering the downtown business district? How will banks choose to punish or forgive mortgage delinquencies and what will happen when forbearance periods end? What new innovative ways will we find to stay employed and keep our economy moving despite an abrupt end to the way we were used to doing things? How it will ultimately play out is anyone’s guess because there is no precedent. This lack or precedent, however, also creates space for innovation and new thinking.
It is easy to surmise what would happen if the punches keep coming, but people and economies are resilient. This too shall pass. A drop in home values can be compensated for right now via interest rate savings on a new mortgage. As with my Platt Park contract that fell through in early March, life currently requires innovative thinking. We have to adjust our approach and create new ways of doing business. With a little creative thinking and a lot patience, I was able to bring my clients a better offer and sell their home two months later. The show will go on and Denver home values will recover.