Since 2013, a single piece of data has shown itself in record territory each year when we do this review. We may be the only ones in town to track this piece of data, and unlike other metrics, this piece of data is less something specific or tangible, and more a description of the subjective “feel” of the marketplace. That piece of data is Probability of Sale, or as expressed to a seller when presenting data on their neighborhood, “would you like to know the odds of success?” That number has gone from strong to positively goofy the last three years, and in 2017, for every 100 homes listed, 88.4 sold. That’s right, a seller’s probability, across the marketplace, of finding success in 12 months of market time, was 88.4%
One of the most basic pieces of negotiating is asking “who holds the power, the buyer or the seller?” A falsehood of real estate practice is that there is something illusory like “market-value.” There is no such thing. Speaking from practical experience of 2017, let’s dabble into the first-person of the author’s own real estate practice experience: Out of 72 transactions worked on, 18 never came to fruition because they were out-gunned in multiple-offer situations. Sellers set expectations (list price, like $315,000), an individual buyer determines market-value (“I’ll give you $337,000 with an escalator clause to $356,000, all-cash, close in 15 days, you lease it back from me for 45 days for $6!”) and an appraiser substantiates that buyer’s behavior (In this case, no appraiser is probably needed since it’s a cash deal. But say it was a loan… that appraiser would then try to triangulate three to six similar sold or under-contract properties to show an objective pattern of value explaining that buyer’s behavior with both positive and negative adjustments). That’s on-the-spot negotiation.
Well here’s another slide of market reality. This shows the number of newly-built options for buyers being provided by the building community.
What flies off the page is the fact that in 2005 there were 6269 single-family permits, and there were only 3737 in 2017. These permits apply to a MSA (metro-study area, Monument to Fountain, Peyton to Divide) that had approximately 90,000 fewer people in 2005 than it does today in 2018. The 2017 permit activity was exactly 2/3rds of what it was in the gangbuster Pre-Bubble permitting year of 2005. The average new home has a permit value more than twice as expensive as that 2005 permit, so yes, “the builders are killing it” because there is a lot more profit to be made when a builder can make half as many units for twice the price. So builders as sellers have an enormous amount of power because buyers are willing to wait 8 to 15 months for the completion of their home.
Where inventory problems get really stark is when Active Units Listed are Compared to Sold Units Closed over the course of a year.
On the right side of the graph, the two lines are basically smashing together. In the abyss of 2008 there were 9400 more homes listed than closed; in 2017, the last full week of April through the month of September saw as many closed sales as the entire 2008 sales year, and through all of 2017 the calendar year saw only 2150 more homes listed than closed. These are cumulative numbers showing “the accomplishments” of the calendar year, and listing season usually starts 30 to 60 days ahead of peak selling season. But even then, when Comparing Peak Inventory to Peak Sales, the problem remains the same for buyers.
Looking at the maximized numbers of registered listing inventory (usually July or August) versus the months when the highest units sell (usually June or August, and occasionally July), the numbers show the same sort of smashing-together effect.
Many agents like to tout that the days on market is “12 days” or “4 days” or “35 days” for the entire MLS and it simply is not true; the buyer’s mind uses “average days on market” as-if it is a median (a midpoint) not an average, for this is a market without medians in terms of how quickly homes sell. It’s either wicked fast, or curiously slow (but it will likely sell). For homes under $300,000, it’s basically 6 hours to 5 days; or over 30 days to infinity. Region to region and neighborhood to neighborhood will have a different concentration of market participants, so it is better to show the ratios of how many buyers there are per listing at different price brackets. This is how things looked at the end of 2017 (date in this graph through December 31, 2017).
As 2018 dawns, the rate of sale for single-family homes between $200,000 and $300,000 against the rate homes are coming on the market shows that a buyer can expect all of the available inventory to be purchased in 12 days (0.4 x 30 day-month). Even in the highest reaches of the market where only 1% of sales happen over $800,000, that market should sell-out entirely in less than one-year’s time.
It’s interesting to take a peak back further, to the “already-very-healthy” early 2016 marketplace; this is how things stacked up the last time the Broncos were any good at the end of January, 2016:
It’s no secret that less expensively-priced properties are selling quickly, but that $200,000 to $300,000 price range is selling out 3x faster now than it was 23 months ago (data through January 31, 2016). Maybe more impressively, $300,000 to $600,000 is now selling out at almost twice the speed that it was 23 months ago.
How all of this impacts the marketplace is that buyers have very little power. The power-curve axiom of real estate looks like this: “those with power, have few needs. Those with needs, have little power”. Buyers need houses to buy. Sellers have an abundant supply of buyers willing to buy their house. That’s Supply and Demand 101.
As we move into projection-mode for 2018, one of the things that has to be addressed is the question of inventory. Inventory levels take a long time to rebound. This is not a market that will lose value anytime quickly because when buyers out-number sellers in most price ranges, the bottom of the market remains healthy. But in terms of unit sales, it seems very doubtful that a fourth-consecutive record year in terms of unit sales will happen: December 2017 was the first time in over a year that unit sales year-over-year were down from 12 months prior. As 2018 starts, the number of pending sales has been lower than the same time period 12 months prior for half a year. Pending-sales are under-contract properties waiting to close in 30-60 days. The reason these numbers are dropping has less to do with buyer-demand, and more to do with seller-supply: there ain’t anything for a buyer to buy., and they can’t put a contract on hope. The feedback loop on this is that there are thousands of perfect sellers out there not content to stay put and who want to buy… but these wanna-be sellers will not risk putting their house up for sale if they do not know where they are going to end up purchasing. When sellers cannot “see” what’s next, they will not list, choosing a known discomfort over an unknown discomfort.
The sellers that should list? They are the sellers who want to cash out. Sellers that have lots of options. Sellers that don’t have soccer practice and pets to walk, empty-nesters looking to build and downsize for whom living in a 2-bedroom condo for a year while their patio home is built is not much of a hardship. Defining the hardship is very different for an active family of four kids with two dogs and two jobs and an existing mortgage payment and a 2018 health-care payment that just went up 27% (or more). The latter description is probably the seller demographic that has reached a definite breaking-point, a “point-of-pain” where they need to move more than want to move. But for this seller, needing to sell one house in order to buy another, needing more than one domino to line up, they’re likely to be just as stuck in inaction in 2018 as they were in 2017.
Based on information from the Pikes Peak REALTOR Services Corp. (“RSC”), for the period January 1, 2011 through December 31, 2017. RSC does not guarantee or is in any way responsible for its accuracy. Data maintained by RSC may not reflect all real estate activity in the market.
Additional data for our Annual Report Series provided by Colorado Springs Home Builder’s Association, Pikes Peak Regional Building Dept., The Gazette, The Denver Post, www.FHFA.gov, www.HUD.gov, www.Zillow.com, Fannie Mae, Freddie Mac, Colorado Springs Business Journal, Mortgage Bankers Association, www.Census.gov, www.SpringsGov.com, www.ElPasoCo.com, www.cospringstrails.com, www.bea.gov, www.city-data.com, www.corelogic.com, www.TheDeptofNumbers.com, www.TheBalance.com, www.CNN.com, www.BLS.gov., and The Colorado Springs Business Alliance.