Dear Media:

I didn’t want to rain on your parade and didn’t have time to fully write a blog until next week.

modern accessible affordable

However, I still stand behind my assertion the tub is draining. (The tub I refer to is like sitting at the end of a tub drain.  When the tub is filling, so is the drain. However, when the tub is full [of homes to be sold] then even when the faucet is shut off, the drain still appears to be full…until the tub runs dry. Then the drain empties.  The drain empties after the tub.)

I shared that when prices spike…it’s because fewer, lower-priced homes are closing…that the sales pipeline is draining. That means that the conveyor belt of move-up purchase sales is breaking down. After all, who can afford homes at:

  • $310k?
  • $320k?
  • $350k?
  • $400k?

Just take a look at this chart. What happens when the prices race up? The drop.

Note the markets of: May ’07, Jan-May ’09, and now.

As those Average List Prices go up, it tells you that fewer lower priced homes come on the market (fewer homes to drag down the average). THEN, you will notice the countercyclical price action, dropping contemporaneously with those spikes. These data are complicated with the unique absence of listings, but the pattern holds. (I have some inventory volatility and listing consumption rate data that expand on and reinforce this indicator – like a canary in the coal mine.)

So, how far up can prices be chased? Let’s start with the demand side…

13% of the Denver population makes over $100k a year. The 100k earner would qualify for $350k in a normal interest rate environment ($475k today). And fewer folks have equity (see 2nd chart below). I would argue that – even with these interest rates – the increasing credit requirements and decreasing FICO scores reduces that 13% of potential buyers quite a bit. So, how does this sustain itself? It does not.

Now the supply…

Listings are at nearly a decade low at 8,847. That is down 72% from the peak. That is down 60% from the median and averages. If this market is so hotsy-totsy, why aren’t segments of homes coming onto the market? If prices were TRULY rising, wouldn’t you see homes rising over the edge of “underwaterment”…and listings increasing?

They’re not. And they have not since July 2010 – really 2009, if you exclude the influence of the first time homebuyer credit – which just pulled forward demand.

Wouldn’t you start to see some of these homes migrating from 100%+ LTV starting to come onto the market? (source: ) They’re not.

So, question for you – a question I RE-ASK of you…and nobody has answered in the cacophony of incessant cheerleading:

  • Is this a real market, or is this market getting ready for a backslide?

Given net worth is dropping, taxes are going up, employment participation is dropping, “WHO IS GOING TO KEEP CHASING PRICES UP?”

I contended a crash is coming. I may be off by a month or two, but the classic signs are there:

  • Peak of average pricing
  • Lower listing inventory
  • Frenzy (like the South Sea Bubble) for the available homes left
  • Shadow inventory that would triple the listing inventory in this market

I stand by my prediction. I don’t think this is a 30% haircut, but it’s a 10% haircut. I will be writing about it in the next week. I need to get some more research done to more deeply substantiate this. But the trigger indicators are there.

Kind regards,

Michael Clarkson

Broker / Owner

Office: 424.249.9736

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