When Market Forces Subdues Irrational Exuberance

joseph sobin, real estate broker

Aug 29

The headlines concerning real estate have been contradictory leading to confusion for buyers and sellers. While the increase in mortgage interest rates have impacted affordability the reality is the real estate market may be "overbought" borrowing a term from Wall Street.

Consider the following:

58% of listing in Denver over the past months have had price reductions. However we are still in a seller's market.

Inventory of homes for sale have increased yet based on historical figures is still low at 2-3 months i.e. a balanced market has 4-6 months of inventory available.

During the past months I have been showing clients purchase options in two of Denver's most in-demand neighborhoods, Washington Park and Hilltop. The following are examples of what I would suggest is irrational exuberance concerning perceived valuation and how the market eventually tempered the expectations of the sellers and their listing agent.

500 Birch St (Hilltop): I pitched this property to my clients based on location. Knowing the neighborhood well as I live adjacent in Cherry Creek North I know the house and the location. The house sits on a nice corner lot. Yet the home has some challenges including but not limited to its view i.e. the rear of Hill Middle School, no true private yard space (all oriented on the south-side of the house adjacent to 5^th Ave), very close to the house on the north and finally a unique floor plan including the primary bedroom located in the north portion of the basement. Yet again based on location, proximity to Steck Elementary and being within a few blocks of Cramner Park well worth a visit.

The home first came on the market at $1,450,000 with the following provided in the MLS Private Notes: Home recently appraised at $1,500,000. Great opportunity to own in Hilltop.

Below is the listing history:

4/20/2022: Placed on market at $1,450,000

4/25/2022: Status changed to Pending or Under Contract

5/7/2022: Placed back on market

5/18/2022: Price Reduction to $1,425,000

6/12/2022: Listing Expired

6/16/2022: Placed on market at $1,300,000

6/22/2022: Status changed to Pending or Under Contract

6/27/2022: Placed back on market

7/12/2022: Status changed to Pending or Under Contract

Of note the original ask was $1,450,000 with an appraised value of $1,500,000

8/15/2022: Closed for $1,227,000 w/ a $7K credit thus $1,220,000 or 16% off the original ask and close to 20% off the appraised value as noted above from MLS notes.

501 Holly St (Hilltop): Holly St is a conundrum as it is the border between Hilltop on the west and Crestmoor on the east, two coveted neighborhoods. However Holly Street while only two-lanes carries some heavier traffic between 8^th Ave to the north and Leetsdale on the south. Add to this no on-street parking; listings on Holly St. can be challenging.

Yet 501 Holly is a pseudo mid-century modern (MCM) design with an addition concerning a primary suite including an en-suite bathroom. Also an expansive yard a no rear alley. Granted the one car garage may have deterred some prospective buyers however the MCM design is so in demand the one-car garage does not seem to deter purchasers in Krisana Park or other neighborhood where MCM's are in supply.

Below is the listing history:

6/9/2022: Placed on market at $1,180,000

6/20/2022: Price Reduction to $1,120,000

6/25/2022: Price Reduction to $950,000

7/8/2022: Price Reduction to $810,000

8/15/2022: Closed for $800,000 or 22% off the original ask

1115 S. Ogden (Washington Park): This one surprised me as when it came on the market in late May it was actually priced below sold market comparable properties based on sales in Q1 of 2022 (I always do an analysis for my buyer clients). When I showed the property at its original asking price I advised my clients based on sold comps the listing was actually a value.

1115 S Ogden St, Washington Park, Denver

Truly a charming historic home on a quiet in-demand street just a few blocks west of Washington Park. While the layout was a bit challenging due to its historic design and age still very usable. Eventually the next owner may wish to excavate a larger basement and potentially expand the main level and possibly the upper but no need to do immediately. Thus as the listing sat on the market my only thought was the market is adjusting to a new reality concerning valuations and comp sales from the prior months while justifying the original asking price did not support the new market reality.

Below is the listing history:

5/25/2022: Placed on market at $1,200,000

6/7/2022: Price Reduction to $1,100,000

7/15/2022: Price Reduction to $1,025,000

7/21/2022: Price Reduction to $999,000

7/26/2022: Price Reduction to $950,000

7/31/2022: Status changed to Pending or Under Contract

8/24/2022: Closed for $920,000 or 22% below original ask.

In Denver at present as mentioned price reductions have become the norm. This is due in part to sellers assuming the inflated prices their neighbors received in the 1^st and 2^nd Quarters of 2022 is viable; sorry that ship has sailed. To add more potential pain consider the following:

Fitch Ratings says the likelihood of a severe downturn in US housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024. Although we recently affirmed the ratings and Stable Outlooks for our US homebuilder portfolio, ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30%, or more, over a multi-year period and 10% to 15% declines in home prices.

My advice to buyers is hold off for now if possible as prices may decline further and inventory may increase as has been the historical norm. For sellers, the message is a but nuanced as inventory is low at present which is beneficial i.e. a seller market yet best to price at or below market. As we say on Wall Street, Pigs Get Fat, Hogs Get Slaughtered, thus err on the side of cautions conservatism when pricing.

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