The media fixates on the average home price in Denver. That’s influenced by the price in different segments (e.g., FTB first time buyer, trade up, luxury) as well as the mix of what homes are selling.
Denver Jumbo Loans
No one, including me, expected the problems with getting jumbo loans at reasonable rates. Odds are, the problems in the conventional mortgage market in general, and the jumbo loan market in particular, will be corrected in the next 4-12 weeks. But it’s hard to know how fast that will happen.
Entry Level Prices vs Luxury Prices
Let’s look at a simple example of a mix variance. Imagine you own a car dealership, and you sell only entry level cars (FTB) for $20,000 and luxury cars for $100,000. You sell 50 of each. The average price is $60,000.
Next year, the entry level car is 5% more expensive; the luxury car is 2% more expensive. But loan programs are not available for luxury cars. Everyone just buys an entry level car. You still sell 100 cars.
Now your average sales price is $21,000. The price of each type of car went up, but the average price went down. A cost accountant calls this a mix variance.
Let’s try it with houses. A typical FTB (First time buyer) property might cost $350,000 (small homes and condos). A typical luxury home (top 10% of the market) is around $900,000. We sell around 50,000 properties a year in Denver. The top 10% (luxury) is around 5,000 homes. FTB might be around 10,000 homes.
The average home price is $533,000 (which is close to the actual average). You saw from my mid-March trends email (a week ago) that entry level homes are currently experiencing a modest increase in inventory. Instead of a very strong sellers market, it’s merely a seller’s market. So instead of 7-9% appreciation in 2020, perhaps we’ll see 5%. Once this COVID crisis settles down (late 2Q, early 3Q), sales count could increase for FTB since there is plenty of pent up demand. Imagine sales count for FTB goes up 3%.
Luxury homes have had a larger increase in inventory, but sales are flat to declining… and that’s before the jumbo loan shortage. Sales volume will likely be lower in 2Q. Luxury homes will go from a moderate sellers market to a balanced market. Perhaps they see only 2% appreciation in 2020. But due to financing problems, the unit count sold goes down 20%. (it’ll probably mostly recover in 3Q).
You can see the average sales price drops from $533,000 in 2019 to $521,486 in 2020, or -2.2%. The price for each type of home went up, but since the mix changed, the average price goes down. Also notice there’s a meaningful drop in the total number of homes sold, -4.7% in this example.
Denver 2Q Volume May Drop 20%+ From 2019
There’s a decent chance this will happen in 2Q. 2Q Volume will drop 20%+ from 2019. The headlines will make this sound like the end of the world. The average price could go down modestly. All the doomsday predictors will be pointing at me and saying “I told you so, prices went down.” You’ll need to be able to explain this to help them understand that while the average price went down, the price of each individual house still went up a little. I expect strong volume increases to make up for this in 3Q. We’ll end up selling 12 months of real estate in 9 months, since 2Q will be soft.
Lon Welsh – Founder, Your Castle Real Estate