Denver Housing to Gain Despite Coronavirus, Recession Fears
Low Inventory, Again
Out of the 5,122 new listings that came on the market in February, 5,083 homes were under contract in DMAR’s 11 county area, highlighting the metro area’s low inventory market dynamics. The low inventory trend seems to continue as we ended February with just 4,835 active listings, down 2.15% from January.
Just what do you think is going to happen to home prices in a metro area of about 2.8 million people?
Where is the Inventory?
My hunch is 2020 might bring the biggest housing inventory shortage in US history.
Currently, 55.2% of all owner-occupied homes are owned by people age 50 or older. An increasing number of Baby Boomers are aging in place, unlike their parents who sold their homes to downsize or move ahead of retirement.
It’s not just Baby Boomers. Homeownership tenures have reached new highs at an average of 13 years - the highest average in 18 years!
Nationally, new construction just hit a 12 year high but only caters to the upper tier of housing, which leaves an estimated gap of 3.8M homes needed to meet market demand across the United States. In Colorado, housing permits are down year-over-year as builders try to shift from large homes to smaller, more affordable homes, townhomes and condos.
The lack of inventory is creating appreciation. Metro Denver’s February year to date is already 6.25% and primed to continue, whereas median home prices in metro Denver increased only 2.46% in 2019. A recent CoreLogic report shows 4% year over year gains and homes reported by FHFA showed a 5.2% increase year over year.
Coronavirus to Slow Down U.S. Economy
The Coronavirus is a threat not just to public health, but to the global economy. As China scrambles to contain the outbreak, we’re already seeing effects on global trade, supply chains, and manufacturing. In China, workers and truck drivers are being ordered to stay at home to limit the virus’ spread, grinding manufacturing and logistics to a halt. Shipping companies are also canceling routes from China to the U.S., further limiting the number of Chinese products reaching the U.S.
American companies who rely on Chinese imports are experiencing Chinese virus containment procedures’ effect. The Port of Los Angeles stated it saw a 25% decrease in Chinese imports in February, whose effects will ripple across the domestic U.S. economy and the world.
To add additional macroeconomic context to today’s health crisis, the U.S. economy has been slowly moving towards a recession for the past 18 months with a slowdown in growth due to global trade, manufacturing, shipping, business reinvestments, and weaker earnings. We also have incredibly low inflation with personal consumption expenditures (PCE) sitting at 1.7% and increasing debt as the Fed continues to purchase short term bills at $60 Billion a month.
U.S. Election Worries
For all the cable television hype of the U.S. election, I expect the election to be a blip in the radar for the overall U..S. economy. In fact, it is expected to be business as usual. Today’s Super Tuesday, whether Vice President Joe Biden or Senator Bernie Sanders win large enough to pad their leads with delegates, is simply fodder for TV pundits and won’t be a cause for market alarm.
Fed Cuts Rates Again
The Federal Reserve would typically not lower the Fed Rate during an election year so as not to be seen as favoring a political party. But this year is not a typical year, and the futures market is expecting as much as another .75% drop in rates over 2020. On Tuesday morning, the Federal Reserve implemented an emergency rate cut of 0.5%.
My question is how can a drop in the Fed’s rate cut help us combat the Coronavirus or pull us out of a recession that hasn’t started yet? In my humble opinion, the Fed reacted too quickly and should hold off on rate cuts until we find ourselves needing monetary stimulus to get out of a recession.
How Will Denver’s Housing Market React?
Denver will continue to see strong demand in the housing market, despite Coronavirus and recession fears. Colorado has the third strongest job market in the United States and will see an expected 5.8M more people in 2020. According to Zillow, Denver is one of only three non-southern cities predicted to outperform in 2020.
Today’s market trends report substantiates the high-demand, low-supply theory with an average of 1.38 months of inventory, a decrease from 27 to 12 days for homes listed on the MLS, and an estimated 8.8 to 9.2M first-time homebuyers coming expected to participate in the housing market.
Housing inventory will continue to be a challenge as home builders in Colorado simply cannot keep up with market demand, in addition to homeowners and Baby Boomers staying put.
Housing will not be a contributing factor in any upcoming recession, lowering the risk of any unexpected home devaluation. In fact, the housing market went through a pricing correction in fourth-quarter 2018 through 2019, indicating a healthy housing market values.
What Advice Would I Give a Buyer in this Market?
Buyers need to keep an eye new inventory and be prepared to act quickly on a new home. Ensure your offer is competitive by being pre-approved with a great lender, so you can act when that perfect home comes on the market.
Your partner in building wealth through Real Estate,
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