At the onset of 2020, there was no way to predict that Covid19 would make “stay home’ the theme of last year. One thing is for sure, homes are in more demand than ever in 2021
Denver has become accustomed to low inventory. Since 2012 we’ve been operating at about one month’s inventory vs the 6 months of inventory required to create a “balanced market”. Typically we get a spike in inventory in Spring but in 2020 due to Covid19 instead of seeing a spike, we actually saw inventory decrease. Supply has dropped to less than 0.5 months of inventory in January 2021. Yet demand is stronger than ever. In the resale market, almost every single-family home has multiple offers. In 2021 I’ve witnessed a new phenomenon – showings are completely booked through the weekend. With only one group allowed in the house every 15 minutes, popular homes book up quickly. Terms escalate quickly in these competitive situations. It is now commonplace that buyers waive inspections, pay appraisal gaps, and use Accept. inc to make cash offers.
Multiple offer situations and low-interest rates are pushing prices up.
With lower inventory, most listings are receiving multiple offers and going significantly over the asking price. This demand for homes in Denver is accelerating the increase in prices. Why is this? COVID? Partially. With Covid, people’s needs changed. The need for more space, a home office, and a backyard/outdoor space is important. That paired with all-time low-interest rates. With low-interest rates, buyers are not wavering at the prospect of higher purchase prices. With no end in sight, the buyer wants to jump on this opportunity because they know if they wait, prices will be more expensive next month and when interest rates could rise, their buying power/price goes down.
Current homeowners have a massive amount of untapped equity.
I disagree with a recent piece by the Denver Post that said, “distressed sales and foreclosures could rise significantly from low levels as forbearance plans granted by the CARES Act expire and borrowers look for an exit strategy.” I do not see this happening. In the Denver market, I believe foreclosure will continue to be almost nonexistent. Residential values have gone up close to 40% in the last two years in Denver. Even facing unemployment, an owner can sell their home for a profit. It’s statically likely to sell in one weekend, over the asking price. An educated homeowner would not go into foreclose when they can sell at a profit and keep their credit clean.
Moreover, everyone who owns a home in Denver is sitting on major equity. They can tap into this equity using a home equity line of credit or by selling their home. Either way, we have a huge group of current homeowners who are anxious to make the most of their home equity. Now is an exceptionally good time to sell. Sellers can use their home equity for a down payment or they can sell and get a 60-day rent back from the buyer so they can stay in their home while they make non-contingent offers on their replacement home. We are seeing many homeowners keep their current home as a rental that cash flows and use that additional income to subsidize their new home’s mortgage payment.
Rising taxes and interest rates could reign in appreciation in Denver in 2022.
NO ONE IS TALKING ABOUT THE MAJOR IMPACT THIS TAX CHANGE WILL HAVE ON THE REAL ESTATE MARKET. I was only able to find one article about it online, summarized below.
In November 2020, Colorado voters passed every statewide ballot measure that dealt with taxes despite being in the midst of a pandemic. Voters repealed the Gallagher amendment (which has actually caused taxes to decrease in previous years). Without Gallagher tax bills will rise in lockstep with property appreciation from now to eternity. Taxes in Denver will increase by $2400/year minimum for the median home in 2022. Denver sales tax rates increased by .5% and the mill levy increase by 4 mills, so assuming the median home price of $606,000, the tax bill would increase by about $2400/year minimum, if Denver continues to appreciate, which it likely will that number will be closer to $3000/year into perpetuity.
2021 is a reassessment year but taxes are paid in arrears so the higher bills won’t appear until 2022. One of the largest drivers of appreciation in Colorado is the out of state buyers from higher-cost coastal areas like California or New York. They are leaving these areas due to large property and income tax bills. As Colorado continues its upward trajectory of taxation, it will soon join the coastal club of expensive cities and at some point, see more migration out than in as people move to the next up and coming city with lower taxes.
An extra $2400 per year in taxes, would be equivalent to interest rates going from 2.75% in 2021 to 6% in 2022. If property taxes go up as planned in 2023, that would be equivalent to a 9% interest rate. In addition to taxes starting to double every year, some people think interest rates might increase in the future. I’ll believe it when I see it!
If you are looking for an opportunity for a good deal, consider a city condo in 2021.
Downtown has become a ghost town without workers, sports events, and conferences. Many bars and restaurants have shut their doors and the homeless have set up camp. Young adults didn’t last long on college campuses and moved back in with their parents at much higher rates this year than last, with nearly 2 million 18 to 25 years old still living at home in August according to Zillow.com. Pre covid, commutes, and being in “walkable” neighborhoods were a primary focus. With the vaccine, downtown will enjoy a renaissance in 2022 as these younger buyers leave the nest and flock back to city centers. Until then, there are deals all over downtown in the condo market. Get one today below market value at low-interest rates and wait for the renaissance of Downtown to realize gains from your genius foresight.