Inventory: The elephant in the home-buying room

The lack of homes for sale certainly is having a dramatic effect on the local real estate market, particularly in the lower price ranges.

A lot of listings are stating that “highest and best offers” must be received by “Friday” and will be reviewed by “Saturday.” There are multiple-offer situations; we have heard reports of as many as 20 offers being received on one property. Many offers contain escalation clauses and/or offer more than list price. To get around any appraisal issue, some buyers are even stating that they are prepared to pay the difference in cash if the property does not appraise for contract price. Obviously, this is making it very difficult for buyers.

The National Association of Realtors says that a balanced market between supply and demand is an inventory of about a six-month supply. This will equate to an orderly market that favors neither buyer nor seller. In a buyers’ market there is a surplus of homes on the market, which puts downward pressure on selling prices. In a sellers’ market, there is a limited supply of homes for sale, which puts upward pressure on the selling prices.

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Last year there were 18,816 single-family (attached and detached) homes sold in the area including Larimer, Weld, Broomfield and Boulder counties. During most of the year, net active listings averaged about 4,000 homes per month and, with average sales of more than 1,500 homes per month, the inventory was equivalent to about a 2.5-month supply, less than half the requirement for a balanced market.

For 2015, a reasonable 6 percent increase in demand would make the target 20,000 homes sold in 2015. The very big elephant in the room is the lack of homes for sale.

According to the rule of thumb, in order to achieve 20,000 home sales in 2015 we should have an inventory of 10,000 homes for sale. At the present time there is a net of 1,770 active listings, which is about a one-month supply.

It is even worse in the lower price ranges. The accompanying table shows the projected demand of 10,000 homes over the next six months split between the three market areas and arranged by four price levels. The supply column is the current net active listings and the equivalent months of supply.

You will note that the projected six-month demand in Larimer County for homes priced up to $250,000 is for 1,600 homes. The current inventory is 84, providing a minuscule 0.3 months’ – or about 10 days’ – supply. In Weld County, the supply is up to 15 days, and in Boulder and Broomfield counties, the supply is about one week. The supply improves in the higher-price brackets, but even above $750,000 in Broomfield and Boulder counties, the supply is still much less than the desired six months.

Inventory is only achieved from for sale listings where the seller is moving out of the area or from new home construction, and there is no way we are going to get anywhere close to the magic 10,000-home inventory in the foreseeable future.

There will be more homes listed over the next two or three months, but there will also be more buyers who are going to have to contend with a lot of competition. Even sellers had better have a plan in place because they can expect their home to sell quickly and they will need to have something else under contract.

Dave Pettigrew is a real estate broker at Ascent Real Estate Professionals in Fort Collins. Contact him at FCRealtor@msn.com or 970-282-9305.