What does “low inventory” really mean?

The economic laws of supply and demand suggest when supply is low and demand is high, prices will rise.

Across the country, with few exceptions, the real estate market has been improving consistently. Interest rates play a major role in keeping mortgage costs affordable. As rates climb over the next couple years, they will remain at appealing levels. Prior to the recession from 2008-11, the last recession Denver experienced was in the mid to late 1980s. Rates were 10% – 16% as opposed to the 4% range today. On a $100,000 30-year mortgage, the difference in payment (PI) between 4% and 5%, equals $240 a month.  This impacts the lower price ranges and people on fixed incomes more than the mid to upper price ranges. Basically, a one percent increase in interest rates equates to a 10% rise in purchase price.

One factor impacting Denver’s real estate market happens to be the same thing we complain about…low inventory!  There is a link between the booming recovery and economic elements such as Colorado’s population growth, extremely low unemployment rate (2.6%), income growth and low vacancy rates.  An expanding population puts upward pressure on demand for homes, which raises values.  Population growth is significant, yet does not address desired lifestyle changes of various demographics. Younger millennials look in urban areas, while older millennials (early – mid 30s) are having babies and moving to the suburbs for schools and back yards. Empty-nesters and those retiring typically want to be closer to urban areas, and of course newly married or divorced couples want different housing options. It will be years before enough new supply (construction) can catch up with demographic requirements. The RE market is experiencing the benefits – and the costs – of an improving economy.

The basic principles of “Supply and Demand” along with demographic considerations, help us gain an understanding of the market. Real Estate should be evaluated by geographical factors such as specific neighborhoods, but also by price range. It’s like comparing real estate markets between California and Arkansas.

According to a recent RE Colorado statistic (our local MLS), 40% – 50% of new listings that enter the market sell in eight days or less. Of course, that is incredible, but keep in mind 20% – 30% of those will fall “out of contract” and go back on the market due to a low appraisal, financing, a difficult home inspection, or inexperienced brokers who have not learned negotiation skills or how to handle issues when they arise.

On the other hand, do not expect that any house on the market sells in a week, at any price.  Properties listed below $500,000 (at market value or even the high side of reasonable) can usually anticipate multiple offers. Properties listed in the $500,000 – $700,000 range should see good activity and could sell in less than 2-3 weeks.  From $700,000 to a Million, homes will see competition, but at a more even-paced, healthier activity level, making the luxury price range more buyer-friendly.

“Average days on the market” for luxury properties can be relatively similar to less expensive homes. Typically, when luxury homes are brought to the market, one of two things happen: the property sells fairly quickly (30-90 days), or it remains on the market for a significant period of time (6-18 months).

The broker you select to represent you should be experienced, reputable, communicates with you at a high level, and will make it easy to trust them. A solid broker will find ways to save you money, and ultimately make you more money.

For more information, contact LIV Sotheby’s International Realty managing broker Steve Blank, at 303.520.5558. To service all your real estate needs visit www.livsothebysrealty.com.