Some Perspective for 2022 on the Denver Metro Real Estate Market

In Buyers, Homeowners, Sellers by Doug Phelps

When will home prices drop?

With the weirdness surrounding the last two years as we have all dealt with a pandemic and the continuing state of the residential real estate market, this question is often on the minds of my clients and sphere, and certainly many other people in the Denver metro area and throughout the country.

As the year-end numbers wrap up over the next few weeks, the 2021 Denver metro housing market will no doubt be setting records in terms of both the number of closed transactions and average sale prices. Although it may appear there are no homes to choose from this year, surprisingly, we had the 3rd highest number of homes ever for sale! Buyers remain eager to purchase homes and are taking homes off the market so quickly the supply of new listings is struggling to keep pace with demand.

Since 2013, the basic tenet of Supply versus Demand Economics has held strong in our Denver Front Range marketplace. Even more so in both 2020 and 2021, with 8-9 well-qualified buyers for each available home. 

With our local economy strong with a variety of high-paying industries, low unemployment, our active lifestyles and recreational pursuits abounding to satisfy it, moderate weather in four seasons, these buyers are in competition for the available supply. together with LinkedIn recently studied where the 180 million LinkedIn members are relocating this year. Nearly every city on the list is in the south and west. Denver is #8 on this list.

There is no expectation of a significant retreat in buyer demand. Therefore, my expectation is that home prices locally will increase up to 10% in the Denver metro area in 2022.

I suggest the question should not be about if/when home prices will drop but more about what factors could play a role in possibly shifting the supply vs. demand dynamics and at least calming the rise. 

Looking ahead to 2022, here are some thoughts on six different factors:

The Economy

As the year ends, inflation is still uncomfortably high. The highest level in fact in nearly 31 years. Businesses and consumers alike are feeling the impact in many areas.  With supply chain issues and money in consumers’ pockets who are eager to spend it, the law of supply and demand is evident here too. The overwhelming demand growth has outstripped the slower-moving supply-side and put us in this situation.

A unique combination of pent-up demand, initially depressed price levels as the pandemic began, and profound stimulus support boosting both savings and disposable income, yielded somewhat explosive demand and consumer spending. These fundamentals will begin to fade, setting us up for a different consumption environment in 2022. If so, it will cool demand growth which will help return us to something more closely resembling a pre-COVID “normal.” 

In the Denver metro market, this still means it is a seller’s market, appreciating prices and equity.

New Listings

Just about everywhere we turn these days, there is a supply chain issue. Contrary to popular belief though, this has been the case for Denver metro housing for about a decade. 

An excellent leading indicator of the strength of the market is new Active listings. That is, homeowners wanting to sell their home on the open market. As November ended, only 2,167 single-family homes (both detached and attached condos/townhomes) were listed on the market, the lowest figure in over two decades. As of this post date, the figure is even less. The final year-end number will be known by the middle of January 2022. 

Historically, when mortgage rates have moved up or down, the number of homes on the market didn’t increase all that much. Much more significant economic events must happen to make any significant improvement in this measure.

Months of Inventory

Months of inventory is a lagging indicator, evaluated based on the number of new Active listings to the marketplace and the number of homes Pending (under contract) at the time of the snapshot. 

We leave 2021 with the available inventory of homes in all categories at the lowest ever in the history of the Denver metro market: .45. This stat means if no more homes came onto the market, it would take less than two weekends(!) for all the inventory to be purchased.

And while this looks broadly at the real estate marketplace, it is wise to keep in mind that real estate is always hyper-localized. Different price points and neighborhoods for homes can be distinctly unique.

This two-weeks’ number reflects a 50% drop in inventory supply from 2020 for single-family homes and a nearly 70% decline in the multi-family condo/townhome market from this time last year. This is not a direction that suggests supply improvement. We have had less than 2 months of inventory since early 2013.

The typical definition of a neutral (balanced) market is 3-6 months of inventory and greater than 6 months for a buyer’s market. What’s Denver’s new stable or “normal?” 2 months or less of inventory. Prices will continue to rise until months of inventory is over 3, maybe even 4, months.

New Construction

Nationally, Builders’ confidence is up and single-family homes housing starts are up to the highest level since 2007.

Even so, there is only so much land. The fact is land is finite. We can’t build more land, we can only go atop it. Single family homes, be it detached homes or attached homes, (and the land they sit on) will always be worth more tomorrow than today. Along the Denver Metro Front Range, new construction is happening in the outskirts to the north, east, and south.

Nationally, builders have about 5 months of inventory for sale. However, 91% of all new homes for sale are still being built and a large majority of them already are under contract, according to the National Association of Home Builders. Thus, there is probably 1 month or less of inventory of new homes for sale across the country. Similarly in the Denver metro area too. 

In 2006, builders had 30 months of inventory for sale in Denver. According to a June 2021 white paper released by the local Common Sense Institute, Colorado needs to build 54,190 new housing units per year over the next 5 years just to cover its deficit and keep pace with population growth. Currently our state is building about 30k new housing units a year. This needs to increase by 80%.

The new construction industry is also challenged with materials supply chain issues as well as labor issues. Additionally, the costs by local government entities for permits and the like has sky-rocketed. Moreover, there are investors purchasing new construction homes for use as rental properties and taking them out of the hands of families as primary owners.

Mortgage Interest Rates

The economy, political decisions, and inflation expectations affect long term rates. Right now, the economy is good because people have had money to spend it on, while twice as many jobs are out there as there are job seekers will continue to put pressure on employers and wages. This is leading to high inflation expectations which could force long term mortgage rates to go up.

Often in the news are headlines about the Fed Funds Rate. Just because the Fed Rate goes up or down (this is an overnight rate used by the Fed to loan money to banks), the long term rates (10-year Treasury and the 30-year mortgage rate) might not. Historically, when the Fed raises the Fed Funds Rate long-term rates like mortgages drop.

If the activity by the Fed does impact the long term rates, by how much might we see mortgage rates increase?  My lender sources and I guess somewhere around 3.625-3.75% by the end of 2022, beginning as we approach our typical Spring selling season. This compared to the rate today of 3.125%.

In dollars and cents, what does this mean? On a mortgage loan amount of $500,000, this is a principal and Interest payment amount increase of about $174 per month.

Buyer / Borrower Strength

Who’s Buying Homes Today? Contrary to popular belief, millennials are the best demographics our housing market has ever seen. The median age of first-time homebuyers is 33. Millions of them create their own household a few years before they buy. Therefore, I expect we will see exceptional demand for housing well into this decade. There were nearly 4 million Millennials born in 1996 and they will turn 33 in 2029. This demand will be natural and organic.

As interest rates go up, affordability may be challenged for some. $174 per month more is a bit of a bite. Buyers may be less willing to buy high, but with 8-9 well-qualified buyers for each available home, buyers are in competition and will need to be creative in making offers.

Who else is buying homes today? Move up buyers, move down buyers, second home buyers. Also and quite significantly in 2021, real estate investors both small and big. Not for fix and flips, but for long-term cash flow and long-term capital appreciation. Real estate is the best hedge against inflation.

All these buyers are comprised of people with large down payments, great credit, and good job histories. As expected, prices eased from their 2021 summer highs but even in these fall and early winter months, buyers paid more than the asking price 54% of the time.

Expect the percentage of buyers paying over the asking price to increase this coming spring as inventory remains an issue, driving competition.

Bottom Line…

Mortgage interest rates should and will go up in 2022 (but remaining in the realm of historic lows that have minimal impact on monthly mortgage payments). In the current and expected economic conditions and waving a broad high-level brush, a softening of home prices and moving towards a neutral market, let alone a buyer’s market, is highly improbable to – dare I say — impossible. The Law of Supply and Demand will continue to rule.