Colorado is poised before the fall of another real estate cycle

REAL ESTATE: BEFORE THE FALL, THE FALL, THE BOTTOM, AND THE RECOVERY

Your Castle Real Estate, a Colorado-based real estate firm, completed a comprehensive comparative analysis of real estate market cycles in Colorado. At the conclusion of the study, Your Castle found that there are many common features and patterns between market cycles.

“Your Castle’s study breaks down the stages of the real estate market cycle into four different parts: Before the Fall, The Fall, The Bottom, and The Recovery,” said Lon Welsh, Founder/Chairman of Your Castle Real Estate.

Within each segment, Your Castle Real Estate identified and analyzed common patterns in client behaviors and market behaviors. A brief overview of the analysis reveals that (Link 1):

A: BEFORE THE FALL

• Prices are appreciating, but at a slowing pace, as the end of the cycle is near
• Increasing foreclosure volume (though still at a relatively low level compared to The Fall)
• Discounts and Days On Market (DOM) increase as inventory builds.

B: THE FALL

• Number of foreclosures increases dramatically
• Low cost distress sales replace regular full price sales, so blended average price decreases quickly
• Elective sellers in with homes in good condition decide to wait to sell or rent their homes instead, further reducing non-distress sales
• DOM reaching peak; then inventories fall as owner occupant sellers pull out.

C: THE BOTTOM

• Distress volume peaks and distress pricing hits bottom
• While prices are low, first time buyers are frustrated with lack of move-in-ready inventory, thus building pent-up demand
• Fix & flippers start to re-enter the market
• For buy-and-hold investors (landlords), demand exceeds supply; multiple bids create a floor for prices (as lowest bid = minimum price).

D: THE RECOVERY

• Foreclosure volume declines
• Non-distress sellers that had been waiting on the sidelines finally re-enter the market
• Mix shifts from less desirable houses to nicer homes, and prices increase
• “Show me investors” (what is this?) on sidelines rush in to market, increasing the market frenzy
• Number of true “investor deals” shrinks but newbie investors buy anyways, driving up prices
• Fix & flip activity increases; increasing the quality and price of inventory
• First time buyers finally buy, absorbing pent-up demand.

Where are we in the real estate market cycle?

Stage A: Before The Fall is characterized by discounts and Days On Market (DOM) increasing as inventory builds. The market conditions that Colorado is experiencing right now is very similar to Stage A: Before the Fall (Link 2). Colorado’s yearly average DOM has increased yearly since 2015. This past January was no different, with the Colorado average hovering at 55 DOM.

Colorado’s housing inventory also sat at 55 DOM this time last year, which effectively puts Colorado on track to increase average DOM for the fifth year in a row. This increase will be less significant than the five DOM jump the Colorado real estate market experienced between the 2017 and 2018 market cycle.

Colorado’s housing inventory slowly continues to build back from historical lows, another common characteristic of Stage A. January 2019 produced just over 10,000 active listings, up almost 24% from this time last year.

 

Average sale price in Colorado has reliably increased since the market began to recover in 2011 (Link 3). Colorado’s average sale price increased 2.5% between January 2018 to January 2019. This is significantly smaller than the 6.4% average price increase between January 2017 and January 2018. This slower appreciation rate is another trademark characteristic of Stage A: Before the Fall.

WHAT DOES THIS MEAN FOR COLORADO REAL ESTATE?

“In the business world, the rearview mirror is always clearer than the windshield.” – Warren Buffett

For the past six years or so, prices have been appreciating by about 8-9% a year. This is a lot more than historical appreciation, which is closer to 6% a year.

This time, we are not likely to see something akin to the market crash of 2008. We are also not likely to see a large reduction in prices. Instead, what we will see is that price appreciation is simply going to slow down.

The number one driver of home price change is the amount of inventory on the market, and current inventory remains historically low. Because of this, and because of where we are in the real estate market cycle, I estimate that we are likely to see something closer to 4-5% appreciation over the next one to three years.

“This will be great for overall affordability for Colorado buyers,” said Welsh. “Many buyers who had been waiting and hoping the market would slow down will now have a fighting chance to become home owners.”

A thorough understanding of typical real estate cycle benchmarks is certainly useful, but we must not spend too much time focused in the rearview mirror. It is easy to become subject to behavioral biases based on the past, but it is equally important to focus on what is happening in our market right now. Again, we cannot predict the future, but we can glean insight into what we should prepare for next.

LEARN MORE

Your Castle’s slogan is “Local Knowledge. Total Commitment.” Our in-house researchers work hand-in-hand with our Founder Lon Welsh to create some of the most innovative real estate trends pieces out there.

We believe that access to the best and most timely information can dramatically shape your decisions and no one does more research on the local housing market than Your Castle. Your Castle conducts exclusive in-house research to provide the most up-to-date statistics and market trends for our agents and clients. To learn more, visit us at www (dot) yourcastle (dot) com.

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