Be A Better Agent

A REAL ESTATE MARKET SHIFT

Posted on 06/14/2022 by Matt Hudson

A LOOK AT THE DENVER MARKET OVER THE LAST 10 YEARS

We’ve been waiting almost exactly 10 years for this moment. A market shift.

Since 2012, the Denver area and surrounding real estate markets have been running at an incredible pace. The average sales price in the Denver MSA in February of 2012 was $247,282. The average days on market was 85 days and the previous 12 month decline of interest rates from 4.8% to 3.89% spurred renewed faith in real estate after a 3-year hangover from the great recession (which officially only lasted 18 months).

Since then, the Denver 7-county area has experienced a population growth of 17.2% to 2,897,000 driven by many factors including sunshine, outdoor lifestyle and economic diversity. This has resulted in Denver’s median household income being #7 in the nation, increasing by 49% from 2012 to 2020 (most recent numbers).

Yet over the same period of time (2012-2022), the number of new listings to the market YTD (through June 3, 2022) has only increased by 7.6%, while contracts and sold properties YTD have increased by 19.8% and 32.5% respectively. Demand has not only increased through a sustained low cost of capital and diversified economy, but through the simple supply/demand ratio driven by population growth.

As of June 3, 2022, the average sales price for all residential real estate property types has increased to $728,807 and detached single family homes to $803,544.

Yet here we stand June of 2022 with rising interest rates, 9% inflation, a government that continues it’s policy of money printing and $6/gallon gas. What does this mean for the Denver real estate market?

As always, the most important thing we do is look at the lead indicators, or those factors most predictive of future change. Arguments can be made for which indicators are the “right ones.” Here’s a sample list from which one could choose.

  • Housing starts
  • Population migration and future estimates
  • Labor markets and household incomes
  • Supply chain and market availability of key raw materials such as oil, fertilizer and metals.
  • 10 year treasury rate
  • 30 year interest rate
  • Inflation rate
  • Recession predictions and stock market anticipation
  • Buyer behavior
  • Real Estate pricing and purchase patterns
  • Volume and activity change in local and national real estate markets

Reality is, I read all of it and a lot more for integration into understanding and predictions.

For example, as we have been saying for 5 months, the cost of gas and availability of fertilizer and its key ingredients to American farmers and across the world, couple with continued supply chain issues, is going to lead to rising prices and food shortages. True famine will exist in parts of the world and the availability of things we’ve always taken for granted (like Jif Peanut butter) will become scarce. Jif peanut butter doesn’t have a direct impact on the Denver real estate market (that I know of), but the impact is indicative of macro issues that likely have a ripple affect on population migration, travel, labor markets and ultimately, real estate purchasing power and consumer confidence.

Rather than making this too complicated though, let’s look at some of the basics with direct impact on Denver real estate.

INVENTORY

Denver MSA (Metrolist) inventory hit 4,493 homes as of June 3, 2022. That’s the highest inventory level since October of 2020.

While this could be interpreted as a slowdown in the market (which it is), it’s important to remember that a balanced real estate market with an MSA the size of Denver requires 15,000 or more listings.

SHOWINGS AND INTEREST RATES

Year to date has been extremely strong for showings though a pull back from the 2021 record breaking Spring. But showings have slowed markedly and correlate to the rise in 30-year fixed interest rates.

The year started with the 30-year fixed interest rate at approximately 3.2% and buyer activity was very strong. By March 1, inflation concerns had set in with the general public and FOMC monetary policy was more widely understood. Rates rose rapidly between March 1 and April 15 and there appears to have been a surge of buyer activity over that period of time, peaking the second week of April. This could be interpreted as some panic purchasing as buyers were getting priced out of the market through both continued appreciation of the competitive market and no longer qualifying for homes due to the rise in interest rates.

By April 15, reality had set in and since, we’ve seen a sharp decline in buyer activity.

This change in buyer activity has an obvious impact on the market that both buyers and sellers need to be aware of. Longer marketing times begin to surface, fewer offers, more price reductions, lower offers and the nature of those offers changing.

This also leads to emotional changes in the market. Buyers begin to become a little more patient. Sellers begin to panic and blame agents. Agents become desperate and many of those who are not true professionals begin to think about a new career. THIS IS JUST THE BEGINNING…AS THE PHOENIX PREPARES TO RISES.

LIST PRICE TO SALES PRICE

The last 18 months have been wildly imbalanced with interest rates through the floor and inventory historically low. This supply/demand ratio has driven out of control buyer behavior and off the charts historic home value appreciation.

But as those two factors, interest rates and inventory shift, we see a ripple affect. In April 2022 we saw an incredible 78.6% of homes sell for MORE THAN THE ASKING PRICE with only 11.9% selling below the asking price. Go back to February of 2012 and 15% were selling for more than the asking price and 76.4% were selling for below. Heck, February 2020 (YES JUST TWO YEARS AGO and before the pandemic) only 27.4% of homes were selling for over asking price, with 54.2% selling below.

Over the last 24 months, a Denver area real estate agent could be an idiot at pricing a home and look like a hero.

That’s over. We are seeing the leading edge of that change. It started 3 months ago.

PRICE REDUCTIONS

With incompetent agents and sellers with expectations that don’t match the new market conditions, we are just seeing the beginning of what is likely to be major price reductions. For clarity, this is not reduced home values, rather a slowing of appreciation and indication that a brain is actually required to effectively, elegantly and successfully bring a home to market and maximize its value.

In a typical year over the last 10 years, we’d see about 18% of homes experience a price reduction in April. This year we were at 6%. The pattern is following a typical and seasonal upward trend already, but this time I believe we will see acceleration; a marked rise in price reductions for a handful of reasons:

  • Sellers may be aware of the market shifting, but unwilling to accept this impacts their original list price.
  • Agents are both bad at pricing, property preparation and setting expectations with sellers. As such homes will be listed too high to accommodate the emotion of a seller or to “get a listing”.
  • Buyer activity is as low as we’ve seen this time of year, for 4 years.
  • Interest rates continue to rise (at least for the moment)
  • We are moving into the season of a negative price curve that has happened every year for as far back as we have data. Simply, average sales prices decline June through the end of the year.

This is going to be shocking to many sellers, agents won’t know how to respond or guide and we will see an increase in withdrawn and expired listings as sellers blame their agent for the home not selling. And understandably in many cases, because the agents are bad at their jobs.

Speak truth and do the hard work upfront. Clients will be happy, you’ll be a professional.

DAYS ON MARKET

All of this will result in longer marketing time of properties which will demand more professionalism of communication and execution strategy, and more of a partnership between agent and seller.

Mid-April of this year saw a historically low 6.87 average days market time for new listings. In 6 weeks that number has doubled to 13.5 days. While still incredibly low historically, I predict a marked rise in DOM over the coming months if interest rates remain where they are, inflation remains high and concerns of recession (which is coming) persist.

Reminder, we saw the beginnings of value recovery and a 10-year run of appreciation in Denver with DOM average 85 days in February of 2012.

AGENT ACTION PLAN

Business Development:

First off, education. Your job is to be a consultant, not a salesperson. So, educate yourself; thereby facilitating your ability to educate your TRIBE (clients, friends and family). But bring them close. Share information and be unattached. But do it often and with a passion to serve, NOT SELL.

  • Market trends
  • Monetary policy
  • Lead indicators of economy
  • Success stories and horror stories

Personal Growth:

And then, help them learn and grow as a human by sharing the ways in which you are continuing to push, learn and grow. Remember, we are human beings on a human journey, and none of us really know why. So, while we are here we pursue meaning, purpose, freedom, abundance, love, connection and the ripple effect of good.

You do so personally through classes, meditation and prayer, spiritual retreats, podcasts, Ted Talks, books, experiences. Share what decisions you are making and experiences you are having, and simply encourage others that they are capable to peel back the layers too.

STOP BEING AN F’ING REALTOR. Be a human being on the human journey with the humans you know.

Professional Excellence:

Learn to price homes well and set great expectations for sellers and buyers. Share this information through email, video, social channels, and classes. And then perform at the highest level, with the greatest commitment to service you ever have…and you’ll be fine.

  • Marketing time
  • Property preparation
  • Pricing
  • Contract negotiation
  • Communication
  • Strategy and the identification of objectives relative to resources

CONCLUSIONS

We haven’t even touched on disintermediation, new technologies such as blockchain and crypto currencies (WHICH ARE CRASHING) or emerging platforms. We haven’t touched on social disruption, political turmoil, national debt, immigration, or equity markets. Truth is, they don’t matter. They are a distraction of the head and heart and you will integrate what you need to know about them when it is time for you to evolve in your craft.

You do, however, have a decision to make about doubling down on your professionalism and engagement. The nature of the business will eat those alive who are not prepared for evolution. This is the third major market shift in 25 years. This one is going to be big and the emotions and distractions will be plentiful.

Surround yourself with a tribe you trust, with people and companies who value what you value, believe what you believe. Go all in on those partnerships and stop the bullshit transitory nature of agent/brokerage relationship this industry has encouraged for years. It’s the sign of an incompetent and self-serving industry and we need to change it.

If you love where you are, then double down on your partnership. If you don’t, like any relationship, maybe you should make a change. Just remember that any relationship that ends up being fulfilling requires investment.

Stop being a victim to anything…it has no place in this evolution. Take action, be bold and loving and do the work. You’ll find purpose in all of it.

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