Limited inventory in several housing markets appears to be increasing home prices dramatically. Let’s discuss how low inventory will affect house prices.
House prices went up 4.9% year over year in June 2020. This is according to the latest numbers produced by CoreLogic home price index report.
General consensus is the low supply of houses for sale is a key reason for home prices to continue to rise. This goes against what a lot of expert’s thought would happen in 2020. Especially with the rise of the global pandemic.
March 2020 saw the beginning of the economic downturn. Many believe this downturn will cause a drop in the house price index by 1% in 12 months time. This would be the first decrease in house prices in over 9 years. It is normal for house prices to go down during a recession. Four out of the last five recessions saw this happening. However, in the first four months of this recession house prices have bucked this trend and have continued to rise. To compare it with the Great Recession that started in 2008 the most obvious difference is today there is a lack of inventory. In 2008 there was a significant excess supply of houses for sale. Today there is a major shortage.
Increases in the price of homes can be seen in all price tiers of housing across the country. Houses from low worth up to high prices have all seen an acceleration in the amount they are increasing as a percentage over the past few months. If we look more closely at the states with the most growth there are 5 that exceed or are very close to double digit growth. Of interest is four of the top five spots are taken up by western states.
Below we see Western States are on top when it comes to increases of house prices as a percentage.
Of interest is Colorado, home to one of the more expensive cites in the region, Denver, is not in the top 5. Denver say an increase of 3.9% which was reflected roughly across Colorado.
Let’s take a look at what has happened to the value of houses in some specific cities. Denver house prices continue to rise. Denver saw an average increase in house price go out by 3.9%. Denver house prices did just sit a record high for the average price for July 2020. It was the first time Denver store an average house price more than $600,000. Other cities to compare that to are Las Vegas, which saw a 3.5% increase in house prices. Houston saw their house prices go up by 4.4%. In Miami the average price of a house increased by 3.5% compared to the same time last year. San Diego and Los Angeles both saw house prices increase by 4.5 and 4% respectively. An interesting note was San Francisco, an extremely expensive housing market, saw a slight decrease in the average price. Their average price went down by 0.2% over the past 12 months.
Below we see what houses are selling for in Denver and other cities across America.
To get a little more local insight we spoke to a Denver real estate investor. “We have seen house prices continue to rise over the past 12 months. I was expecting the slowdown that we saw a year ago, from June 2019 through till the beginning of 2020, to continue. When the global pandemic happened, I really thought that was a strong headwind that would hamper the housing market and would be the beginning of a downward trend in the real estate cycle. Clearly this hasn’t happened. We buy Denver houses regularly and I have to say it has not got any cheaper despite the recession. I would argue the continued lack of inventory is a key force in the appreciation of homes in Denver Colorado.”
And that is a great Segway into how lack of inventory is forcing up the price of homes across America even though we’re going into a recession. Low inventory generally tends to increase the price because you have the same number of people trying to buy a house but less houses to buy.
What is Low inventory as it relates to housing?
Low inventory is a relative term. It can be relative to the number of houses for sale last year, the number of homes in a certain price range, or even the number of houses for sale in an area. To use Denver as an example we have seen the total number of homes for sales, in every neighborhood and at every price range decrease. Therefore, no matter how you look at it the inventory in Denver is low.
Supply and demand are what we’re talking about here.
In Denver the supply remains historically low and the demand historically high. Therefore, house prices are going to continue to go up.
How does inventory affect home prices?
It seems like we just sang the same thing repeatedly. But let’s talk about inventory during different periods of the housing cycle.
During the last housing bubble the demand went down significantly. as the demand went down what we saw was a massive increase in the supply or availability. In fact, we saw over 4 million houses available at one point. These increase inventories with due to foreclosures and banks changing their lending practices. So, these massive supplies and reduced demands so house prices go down is. Is this starting to make sense?
As economic conditions improved the prices of houses increased.
We saw banks loosening their requirements. Interest rates remained at historical lows. Foreclosures slowed an inventory gradually reduced. This continued on in many markets, including Denver, to the point where at today.
Today we still see historically low interest rates, builders are still not building new homes at the rates they were in the early 2000s, so the number of homes available is low. Low inventory plus high demand equals higher prices.
Higher prices are even more exaggerated in cities that people want to live in. Denver, Colorado is a fine example where people are moving to because of lifestyle opportunities. Over the past 10 to 20 years lifestyle has become a focus for people particularly in the younger generations who value quality of life somewhat over quantity of money. Denver is the back door to many fabulous vacation spots in the Colorado Rockies. World class ski resorts like Vail, Beavercreek, Aspen and closer to Denver like Winter Park. Did you know that Winter Park is only 50 miles from Denver? That’s how close amazing ski resorts are to Colorado’s capital city.
So, what does this mean If you are a homeowner in Denver Colorado?
If you need to sell your house fast in Denver Colorado you will not have any problems doing so right now . As we’ve stated there is a significant lack of inventory coupled with a very high demand. If you are thinking about selling your house you do have many options. The three main strategies for selling a house are selling it with a real estate agent selling it yourself or selling it to a cash home buyer. Cash home buyers a typically real estate investors who use their own funds they will buy the property as is. However this will mean you have to give up a little bit of your money. That said when using a we buy houses type company you don’t pay any commissions or fees typically or have to do any repairs so sometimes it’s actually a much better option. If you are thinking I need to sell my Denver house fast then a cash home buyer could be a great option for you. Horses for courses I say.
So, in conclusion Low inventory does drive up the price of houses if there is demand . Demand is currently high generally across the entire country because interest late rates are low, builders have not built as many houses as they have in the past, and people are looking for new homes. we didn’t touch on these people that are looking for new homes but there is evidence that millennials are starting to by harms whereas in the past they were not . This new group of homebuyers will continue to drive demand. I hope you have found this somewhat interesting and I would invite you to leave a comment.
Thank you for your time stay safe and happy house hunting .