Facing a slim inventory of existing homes for sale, Denver buyers are snapping up new homes at the fastest pace in the country, a rebound so strong that it has caught local builders off guard.
"During the initial stages of the pandemic in late March, especially when the stay-at-home orders were in place during all of April, no builder thought that demand would return the way that it did," said John Covert, regional director for Zonda, a real estate analytics firm. "Sales rebounded sharply through the summer and early fall to the point where many builders will not only exceed 2019 sales but will likely have their best year ever."
Zonda's pending new home sales index is up 95.3% in metro Denver compared to a 46.9% gain nationally in September. The next hottest markets in terms of the gain in contracts signed to purchase new homes are Jacksonville, Fla., up 73.3% on the index and Raleigh, N.C., up 69.6%.
"All of these markets are benefiting from positive net in-migration and are among the top markets in the country for millennials," said Ali Wolf, chief economist at Zonda Economics, in comments accompanying the index report. "Builders in Denver are outselling the national average across all categories: entry-level, move-up and luxury."
Beyond migrating millennials, builders also are seeing a flow of older adults escaping more crowded and expensive markets, especially in California, a move that the switch to remote work arrangements during the pandemic has made easier.
"We have seen a huge flight from markets where there is an affordability issue, like San Francisco and Los Angeles," said Pat Hamill, founder of Denver-based Oakwood Homes. He adds Oakwood, whose communities include Green Valley Ranch and Reunion, is also picking up buyers from downtown areas that faced unrest in recent months.
The Federal Reserve is also keeping interest rates low to support the economy, improving affordability and fueling housing demand. Freddie Mac reported Thursday that
Years of price gains have left homeowners with large amounts of equity to roll into a new purchase, Covert said. The stay-at-home orders also coincided with the start of the peak spring buying season, which created pent-up demand once restrictions lifted.
Randy Carpenter, president of the Colorado division of KB Home, said traffic has returned to levels seen last year and those who show up are buying at a much higher rate. Home sales on the whole in metro Denver are up 37% compared to 2019, he said, quoting Zonda data.
"Since the pandemic, we have seen an increased number of buyers who are specifically looking for a new home. At KB Home, we are seeing buyers across all demographics," Carpenter said.
Builders also successfully marketed improved interior air quality and technological features and design configurations that could accommodate remote workers, Covert said. And their timing was good in launching new communities, many of which offered relatively affordable options.
Purchases are mostly concentrated in the suburban ring of metro Denver, with Broomfield, Adams, Arapahoe, Douglas, and Elbert counties representing 69% of all housing production compared to 64% a year ago, Covert said. Add in southwest Weld County and nearly 80% of housing production is happening on the metro periphery.
"The uncertainty surrounding COVID-19 pandemic has not diminished the demand for new homes, and in many ways, it has increased home buying activity, thanks to the growing importance of where and how we live," Larry Mizel, executive chairman of MDC Holdings, a national homebuilder based in Denver, told analysts during an earnings call on Oct. 29.
Net new home orders rose 89% year-over-year in the third quarter to $1.65 billion and that the average selling price increased by 10%, the company said. Robust sales have contributed to a backlog valued at $3.1 billion, which is up 47% from last year.
Basically, there just aren't enough existing homes available for sale to meet demand. Hamill said the perception is that new homebuilders compete against each other, but in reality, they compete primarily against the existing home market.
Between 1985 and 2019, buyers had an average of 15,577 listings to select from at the end of October, according to the Denver Metro Association of Realtors. Last month, there were only 4,821 listings for homes and condos, a decline of nearly 44% from a year earlier, and a record low for October.
"Low inventory is pushing buyers to consider newer developments outside their initial target location, even if that means waiting for homes to finish being built by going month-to-month in leases or pushing back a closing," said Jenny Usaj, a Denver-area realtor.
When the inventory is too tight, buyers face bidding wars and must work harder to land a deal. Signing a contract on a new home can be much easier. But the trade-off is a much longer wait, which can feel like an eternity for buyers wanting to escape the confines of a tight space during the pandemic.
Hamill said Oakwood Homes is taking 6 to 9 months to complete homes after purchase. MDC Holdings reports that the time from sale to closing averaged 215 days in the third quarter, up from 198 days last year. Of that, construction time is running 142 days on average compared to 132 days.
Although new home sales are way up, the number of permits pulled this year for single-family homes is running about 4% below last year, said Rich Staky, interim CEO of the Home Builders Association of Metro Denver.
Part of that reflects obstacles created by the outbreak. Governments are slower in providing the required approvals. Expecting a big drop in construction, lumber mills shut down, creating severe shortages when demand quickly rebounded.
"I am 30 years in this business, and I have never seen the price increase that we saw in lumber," Hamill said. He notes that appliances are taking 10 to 11 weeks to arrive. Even light fixtures became harder to obtain.
Skilled labor remains in short supply, a problem that has plagued builders for several years now. And while service workers displaced by the pandemic might be more open to switching to a higher-paying career in construction, training them takes time.
"There have been a lot of sales written, but there was a delay in getting starts going. Builders are going fast and furious starting new homes," Staky said.
He expects the gap between sales and permits to narrow as builders tackle more of the backlog. But don't expect builders to try and get ahead of the curve with speculative building, something they did in the mid-00s with disastrous consequences for the industry.
That downturn wiped out the more aggressive builders, and those who survived carry deep scars. They may be enjoying an unexpectedly strong market, but they don't fully trust it yet.
"MDC's policy as a concept is not to build specs, and the specs that are created are strategic as to particular subdivisions and fallout during the construction period. We consider it very advantageous to our business model to keep the spec count low," Mizel said on the company's earnings call.
Hamill said Oakwood pre-sells 99% of what it builds, and tries to keep a good handle on where the market is headed. When the new coronavirus first hit, he feared it would be 2008 and the Great Recession all over again.
Some homes under construction did end up without buyers because of people losing their jobs, but those were quickly claimed once the economy opened up again.
Builders have enough of a backlog to keep them busy even if new shutdown orders keep buyers away this winter, which is normally a slower time for purchases.
"They will adjust construction to the sales rates. I don't think builders will be taking a lot of risks around those issues. There is not a lot of exuberance in the home building community," Stacy said.
And Hamill said he remains concerned that what happened this summer and fall could be the anomaly, not the new normal.
"I do believe we will have some headwinds as we move forward. You still can't have 22 million people unemployed without having some issues at some point," he said.
