As Close to a “Normal” Fall as Possible
“Normal is an illusion. What is normal to the spider is chaos to the fly.” Wise words for your amusement from fictional character Morticia Addams. And they are fitting this October when it comes to the real estate market. On the one hand you have the metaphorical flies, home buyers, many of whom have had to endure some of the most frenzied bidding wars in recent memory. On the other hand, you have home sellers, the metaphorical spiders, who have had to descend slightly from their comfortable webs and maybe take a less-than-optimal offer for lack of extreme bidding wars this fall. That’s right folks, market conditions are finally closer to the normal trend for this time of year.
There is usually a slowdown in the fall, and buyers have an easier time finding houses. After all, who wants to move in the middle of a snowstorm?! Buyers might find a deal if they watch houses that have been on the market longer than two weeks. Great news for buyers, for a change.
Still Some Peculiarities
But despite a return to normal seasonality, there are still some real peculiarities in the market this fall. At the end of September there were only 3,971 houses in active housing inventory in the local MLS. That means that there are currently about 75% less homes to choose from than the 30 year average. We expect this spooky low housing inventory to persist for years to come. The surge of buyer demand continues, as more workers begin working from home to avoid contracting COVID-19, trading up their rentals for full sized houses with home offices and backyards. Further, many tech companies have added corporate offices in the Denver area, adding a lot of employees to the buyer pool. Now, you might wonder why we do not see more new home construction, considering this low inventory and a high demand for homes. We broke down many of the reasons below.
Material Shortages = Low Housing Inventory
One tangible reason for persistent low inventory is that COVID-related material shortages have continued to plague many industries, including construction. Supply chain issues have made it more difficult to get building materials such as lumber, which drives up the cost of new houses considerably. According to Forbes, lumber costs back in May 2020 added an average of $34K to the cost of a new home! The cost per board has come down by about 64% since then, so let us do the math. In October 2021, lumber shortages may only amount to an increased cost of $12,240 per new home constructed. But that figure does not account for other ongoing material shortages.
Labor Shortages = Low Housing Inventory
Another big issue adding to the low inventory problem are labor shortages. As reported recently by the Wall Street Journal, US construction productivity has not grown since World War II in terms of gross value-added per hour worked. Even if the material shortages described above were magically solved overnight, the timetable for new home construction would still be slow. This is due to a lack of skilled (and unskilled) workers to build them. This is another major issue facing the real estate market that is not likely to be dispelled in a hurry.
Other factors for slow home construction include mounting red tape in the process to apply for permits to build new condos/homes, high cost of water tap fees, a shortage of land available to build per zoning issues, and more. The main thing to keep in mind when buying or selling a property: does the timing make sense for you? It is usually folly to try and time the market, especially when things are ever shifting both locally and nationally. Challenges described in this publication could eventually be solved through legislative action. However, unless there is a mass-exodus from Denver due to job shortages or other major concerns, prices will continue to climb ever upward. They have done so for 44 out of the past 47 years in Metro Denver.
Rates Will Inevitably Go Up
Interest rates will increase once the FED stops buying $120 billion in mortgage-backed securities and treasuries in July 2022. They had been buying mortgage bonds to help keep mortgage rates low and stabilize the market post-pandemic. When they stop this purchasing next year, it will provide upward pressure on rates. That will undoubtedly make homes less affordable and will diminish demand somewhat. If you are a qualified buyer in today’s market, things will only become more difficult.
A slower fall season may be the best possible time to act, before the frenzied pace restarts in spring 2022. There may not be as many bidding wars this fall compared to how things are likely to get next year. Although, it is not recommended by D.M.A.R. to get overzealous with contingent offers. It is still possible to get a contingent offer accepted. Though sellers are likely to wait an extra week or so rather than accept a less-than-ideal offer for their homes. In most cases they do not have the same desperation felt by buyers in this market.
For more, see our other recent blogs here: YourCastle.com/newsletter-blog