Fewer Home Sales Mask Supply and Demand Patterns

July 14, 2014 | Buying

Inventory is low … blah, blah, blah. Home prices are rising rapidly … blah, blah, blah.

This is the news you’re probably hearing about the current real estate market in metro Denver. We’ve commented on these well-known trends ourselves over the last few months.

Here is another current market trend that has received less attention: fewer sales have occurred so far this year. This might lead one to conclude that demand for housing, like inventory, is down. You might think that both supply and demand are down.

This is misleading, however. In reality, demand is at an all time high and this exceedingly high demand is creating the low inventory. But the supply of homes has been steady and stable this year. It is all very confusing. Let’s sort it out.

First of all, it is true that the number of resale homes closed by real estate agents through the metro Denver MLS system is down. The decrease, however, is slight. There were 26,361 properties closed during the first six months of 2014 compared to 27,246 closed over the same time frame in 2013 – a decrease of only 985 homes.

In addition, we don’t yet know the real number of closings for the first six months of 2014. There are properties that closed, especially in the May-June time frame, that agents have not yet reported as closed to the MLS. From past experience, we know the number of closed properties will continue to drift upwards as agents get around to taking care of the paperwork and reporting.

We’ll have a few hundred more closings reported in the next couple months on properties that actually closed prior to June 30th. By the time the digital dust settles, we’ll be within a percent or two of last year’s sales number.

There is second and more important factor to consider, however, in understanding the current demand for houses. The first six months of 2014 has been the era of the “multiple offer” phenomenon. Slightly more than 50% of all properties coming on the market sold in seven days or less and a large percentage had multiple offers. For every buyer that was successful, two or three more were left to keep searching.

If we had the inventory, the number of sales so far this year would have been quite a bit higher. It is hard to know exactly what that number would be but an increase of 20% to 30% is not at all unrealistic. We have a lot of pent up demand — demand that can’t find a home (literally).

Thus, the low inventory that is much in the news is not really low per se. We’ve essentially had just as many homes available for purchase in the first six months this year as last year. Supply is steady while demand has skyrocketed.

The increased demand partly reflects a good economy in metro Denver. Fundamentals like employment, job creation and net in-migration are strong here. And so the demand for housing is likely to remain strong for the foreseeable future.

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