Metro Denver’s housing market is facing some major headwinds that will contribute to a larger than expected drop in home sales and slower than predicted price gains, according to a mid-year update from the Denver Metro Association of Realtors.
Despite the worst global pandemic in more than 100 years, both 2020 and 2021 unexpectedly turned into record-breaking years for residential real estate activity. The initial forecast was that 2022 would come off last year’s 63,684 closings by about 4% to 5%. Now the expectation is that the decline will be closer to 7% to 9%, and the plunge could be deeper than that depending on the direction of interest rates.
“Given the current volatility, do not be surprised by a number that exceeds 9%,” advised Steve Danyliw, past chairman of the DMAR Market Trends Committee, in the group’s mid-year update.
Likewise, the committee has taken its forecast of home price gains from the 11% to 13% range this year down to a 9% to 11% range, which is still robust and above the gains seen in most years before the pandemic. But if annual consumer inflation keeps running at 8.3%, the gains in real terms will be closer to 1% to 3%.
The initial forecast was based on a view that inflation was transitory and that 30-year mortgage rates, which have shot up from just over 3% to nearly 6%, wouldn’t jump as sharply as they have. The committee’s expectation is that mortgage rates will end up somewhere between 6% to 7% by the end of the year.
A typical buyer in metro Denver could afford a monthly payment of $2,100 at the start of the year, which would have allowed them to buy a home costing around $540,000, said Nadia Evangelou and Lawrence Yun, economists with the National Association of Realtors, in the update.
But given the rise in mortgage rates, that same buyer can only qualify for a home worth $420,000. When it comes to single-family properties, there aren’t very many of those available on the market in metro Denver. Sellers should expect reduced competition for their properties and be ready to drop the price if they don’t have a serious offer in the first 20 to 30 days. The typical drop is about 6%, according to the NAR.
Evangelou and Yun said the reduced competition could bring out more institutional buyers, who account for about 15% of purchases in metro Denver. Even as bidding wars grow less intense, the first-time buyers left standing may find themselves increasingly facing off against deep-pocketed investors.
Danyliw said 2022 will be a story of two halves, and the more robust half has just ended. The optimistic scenario is that the market is transitioning to a “healthier, more balanced” state with steady appreciation, more listings for buyers to choose from and fewer multiple offers over the asking price.
