Market Update
The next sixty days will tell us much about the direction of the real estate market in Boulder County. If you are reading this newsletter, you are aware that our market has been on a torrid pace since 2013. Over the past five years the average home has appreciated in value by over 60%[1] . A year ago, during the second quarter, our annual appreciation rate was ranked number 1 in the nation. In short, our market has been sizzling hot. As I have written about before, net migration to the area, a strong economy, a desirable lifestyle and a shortage of housing and buildable land have been the major drivers of this trend. However, anyone who pays attention to markets over the long term knows that all markets are cyclical. In this short update I will highlight some current trends in the market and see what that might mean for the future.
Trend #1 – Slowing Sales
Through the end of July, sales in Boulder County were down 3% from a year ago. This alone isn’t such a big deal. What is more interesting is looking at sales on a monthly basis. Through March, cumulative sales in Boulder County were up by 6% over 2016. The market was strong, multiple offer situations were common and houses were selling quickly. Sales tailed off a bit in April and May but that was due more to lack of inventory than anything else. Then right around Memorial Day the market noticeably slowed down. Houses that one would expect to sell quickly lingered on the market. We also started to see price reductions at a higher pace than previous years and the total number of sales dropped. Closings in June were down 12% from the prior year and down 10% in July.
Trend #2 – Increasing Inventory
In 2015, inventory of available homes in the market dropped dramatically. At the same time demand for homes started to spike. The result was crazy price appreciation. Last year, especially in the third and fourth quarters we saw our inventory rise. This year that trend has increased. We are not back to 2014 levels but buyers are starting to have more to look at and properties are staying on the market longer.
Trend #3 – Price Range Matters
When we speak about the average listing in Boulder County we are talking about a price range in Boulder County of roughly $500,000. When one deviates from that range the story can differ from what is reported. Over the past few years there has been a record number of sales over $1 million. However, the sales of homes in the luxury range have shown less of a seller’s market than lower price ranges. Currently there is 2.8 months of inventory on the market in the price range of $500,000 and lower; 3.4 months for those homes in the $500 – $750k range; 4.4 months for homes between $750,000 and $1 million; and 7.7 months for homes priced above 1 million. The National Association of Realtors has stated that 6 months of inventory is a balanced market.
Trend #4 – Interest Rates
At the end of July the average national 30 year mortgage interest rate was 3.97%. This is up slightly from a year ago but still below the five-year average. At the end of the day what matters to a potential home purchaser is if they can afford the payment. As prices rise, buyers slowly adjust to the new normal but if they can afford it and if their friends and colleagues are also buying homes, the price objection as a stand alone issue dissolves as long as they can afford the payment. So when prices rise, like they have over the past five years affordability needs to come from somewhere. Buyers must either have their incomes increase in a proportional way, be able to bring a larger down payment, or interest rates must be low enough to allow for a reasonable payment relative to their overall monthly income. So far, interest rates are staying low and allowing for sustained sales. If we do see a spike in interest rates that compounds the effect of the recent price increases, we can expect to see demand fall and prices flatten. This flattening of prices has been the normal for the Boulder County market over the past 30 years after a period of rapid price gains.
Trend #5 – Price Appreciation Losing Some Steam
I’m splitting hairs a bit here because we have seen some slowing this summer on price appreciation. According to FHFA.gov Boulder County homes showed a 10.84% gain in value from June 2016 to June 2017. This was tied for 19th best in the nation with Portland OR. But the rise in inventory and the drop in sales this summer tell me that the pace of appreciation has slowed.
Conclusion
There is a normal slow down during the summer months in our area, but when I compare the market conditions of this summer to past summers the slow down seems to have happened earlier and had more price reductions this summer than in the past. Only time will tell if this was just a temporary pause of if the market has shifted a bit toward the buyer. That is why the next 60 days is so important. I will let you know how it turns out.
[1] FHFA.gov Home Price Index 2nd Qtr. 2017
