Last week I had the privilege of listening to a presentation by John Covert, senior director of the west region for Metrostudy. His company consults with hundreds of homebuilders – as well as lenders, developers, investors, suppliers, utilities, school districts, and local governments – across the country who rely Metrostudy’s market intelligence and insights to help them make major decisions in their business as the real estate market changes from year to year. In our region, John and his team meticulously research and analyze the housing market. His survey team visits every new home project on every lot in the metro Denver area and the Front Range each quarter. They gather primary data to assess housing supply and demand by counting the number of finished lots available, the number of homes under construction, and the finished vacant inventory. This “on-the-ground” method produces highly accurate, unmatched data and analysis – and Metrostudy has the most comprehensive database of housing market information in the industry. Consequently, John knows every statistic about new home construction that you can possibly imagine.
I am also honored to be in a real estate Masterminds group with John, along with 20 other real estate industry influencers. At our last meeting, he gave us a quick overview of the important new home market factors he monitors. Here’s what he discussed:
New home sales are quickly influenced by changes in interest rates. In April 2018, interest rates peaked at just over 4.5 percent, producing a quick drop in new home sales. This quick drop shows how sensitive the new home market is to interest rates. Now, that rates are back in the 4 percent range, new home sales are rebounding.
One of the major trends John has seen is that in every major metro market, there is less housing being built, and as a result, this is creating housing shortages. From the recession until now, with 2008 as the baseline year, the Denver metro population has increased by 500,000 people. Yet Denver currently ranks 6th in the nation in new housing permits compared to the number of residents. Houston ranks number one in the quantity of new home construction with seven permits per 1,000 residents. Behind Houston are Charlotte, Orlando, Dallas, Seattle, and then Denver. Denver has at five permits per 1,000 residents from 2008 to 2018. That is not nearly enough to house 500,000 new residents. As a pre-recession comparison, Denver had nine permits per 1,000 residents from 1990 to 2007.
The next key trend is the quantity of multi-family housing compared to detached single-family homes. New York is number one in the nation with 76.3 percent of new housing permits for multi-family housing. Denver comes in 8th in the nation with 47.6 percent of permits for multi-family housing.
An issue which is directly connected with the quantity of multi-family homes is that new construction has been primarily aimed at for-rent housing rather than for-sale housing. Due to a variety of factors, such as land costs and construction defect laws, almost every metro market is seeing more new multi-family homes for rent. In our area, just drive down Highway 36 and Interstate 25 and you’ll see all sorts of new construction that look like new condos; however, most of them are for-rent apartments. As a result, there has been a shortage of attached homes for sale, making it very difficult for first-time home buyers to enter the market. Denver ranked 8th in the nation from 2006 to 2018 with 47 percent of housing permits for homes for rent. New York was again number one in the country with 75 percent of permits for homes for rent.
Now, we just said there were very few condos being built for sale. I think the most astonishing statistic John shared was this: in 3rd quarter 2018 compared to 3rd quarter 2019, there was a 329 percent increase in new condo starts in the Denver metro area while townhome and duplex starts were down 16.9 percent and detached starts were down 9.7 percent. Bottom line: suddenly, there has been an increase in condo starts.
Drive until you qualify
The old saying of “drive until you qualify” is definitely the case in the Denver metro area. John shared data points in terms of rings of distance drawn around downtown Denver and the new home average prices that follow those rings:
• 5-mile radius of downtown Denver
Single-Family Home: $905,495; Townhome/Duplex: $533,986; Condo: $669,879
• 5- to 10-mile radius
Single-Family Home: a $663,636; Townhome/Duplex: $425,132; Condo: $379,113
• 10- to 15-mile radius
Single-Family Home: $569,797; Townhome/Duplex: $373,710; Condo: $308,156
• 15- to 20-mile radius
Note: As the 15- to 20-mile radius approaches the Douglas County and Boulder markets, average prices bump back up.
Single-Family Home: $570,685; Townhome/Duplex: $432,999; Condo: $345,069
Challenges for the industry
According to John, the new home industry faces several challenges in the years ahead. First are the regulatory pressures including requirements and fees that municipalities place on the industry. Entitlements and/or approvals are difficult to obtain and require a lot of time. Next, restrictive zoning continues to contribute to a tight supply of buildable lots. A tight supply means increased costs of land plus increased cost of materials, and this quickly adds up to very high home prices, so much so that the industry has coined a phrase called the “missing middle”. It is becoming more difficult to build an affordable home for the middle class.
The national economy and our local economy remain strong. High employment rates and rising population continue to create a strong demand for housing. Metrostudy monitors sales traffic and contracts, both of which are remaining strong into the 4th quarter. The community count is currently flat, but is expected to grow with more approved lots coming online. In order to create a more affordable home, John is observing that many builders are decreasing the square footage in their models.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award.Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.