I printed off 2 important slides from my Bubble class, one slide showing detached home prices back to 1971 and then months of inventory back to 1985 and here is what I see—

Home prices finally dropped in 1988 after 3 consecutive years of 10+ months of inventory. I was shocked that it took that long for prices to drop. Maybe high inflation rates helped prop up home prices some? Of course mortgage rates were over 10% then too holding back price gains.

Home prices started increasing when months of inventory dropped to 6 months in 1991.

Months of inventory remained at 3 to 4 months every year from 1993-1998 and prices rose from $125k to $185k, an average annual increase of 6.8% roughly.

Our market saw the biggest price increases in 1999 and 2000 when we averaged about 2.2 months of inventory and prices rose to $245k, an average annual increase of 15% for those 2 years!

In 2001 we had 4 MOI and rising and price increases slowed down to 4%.

From 2002-2005 we averaged 5.5 months to 6.1 months of inventory each year and prices still rose from $270k to $305k, an average annual increase of about 3% a year.

Prices peaked in 2006 at $322k when we had 7 months of inventory that year.

Prices dropped 25% from 2006 to 2008 as we had 7 months of inventory in 2007 and 6 months in 2008. Plus, we had 60,000 too many new homes to sell as well.

Prices shot back up in 2009 by about $40k with help from the federal government encouraging/paying people to buy homes again. That year our inventory levels dropped back a little under 6 months.

Prices dropped by about $7k in 2010 as MOI went back over 6 months.

Prices remained constant in 2011 as MOI dropped to 5 months; but change was in the air.

Prices started to soar in 2012 when MOI dropped to just 2.5 months.

Since 2013 we have averaged less than 2 MOI every year and prices have soared.

So, what can we learn from this?

Prices will continue to rise until months of inventory is over 6 months most likely.

When we have 3 to 4 MOI we typically see strong appreciation in the 7% range.

When MOI drops to near 2 months or below 2 months we begin seeing appreciation rates greater than 8%. .

Finally, when will prices drop? I predict prices will drop when months of inventory exceeds 6 months for at least 1 or 2 consecutive years. When will that happen? Probably over 10 years from now as I know according to the State Demography Office that builders are behind by 62,000 housing units in Metro Denver. And this number also needs to drop to near ZERO or even go negative before prices will drop.

From 2001-2016 metro Denver added approximately 324k new households, or an average of 20,000 new households a year. Last year builders built 23k new housing units, the most since 2005.

Let’s assume our household growth rate reverts to our average of 20,000 new households a year and builders can continue to build 23k new housing units a year and from everything I read 23k new housing units will be very difficult level for builders to meet this year. But. let’s assume they can meet this goal and will continue to do so for years to come.

It would take them 20 years to fulfill the pent-up demand (62,000 more housing units needed/3,000 extra built a year)! What if they could build 25k housing units a year and household growth remained at 20k a year? It would still take them 12 years to catch up. And if they could build 30k housing units a year, it would still take them 6 years to catch up with the pent-up demand.

The most probable optimistic scenario is builders can out-build demand by an average of 5,000 units a year Thus, it may be 2030 before our housing market is back in balance and home prices drop some. But, what will home prices be then? The average price of a detached SFR last month was $513k. If prices rise 7% a year until 2030 the average home price will be $1.155 MILLION! So, by time home prices drop, the average home price may be over $1 million.

Ask your fence sitters are you willing to lose out on over $500k in wealth creation to buy on the dip? If they are, delete them from your database as they are TIME SUCKERS.