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The year 2022 proved to be a crazy year for Denver’s real estate market. We saw nearly 20% appreciation in just the first two quarters, followed by potentially one of the quickest cool offs in Denver’s market, causing values to end the year with roughly 9.5% annual appreciation. With the market ending nearly the opposite of how it started, many are left scratching their heads wondering what 2023 will bring for Denver’s real estate market.

There is a lot of speculation on what is to come, everything from similar market conditions to early 2022 to a housing crash bigger than 2007/2008. These two scenarios couldn’t be more different, so what does 2023 look like for Denver’s housing market?

Unfortunately, there is not an obvious answer to this question. In fact, this prediction article might be one of the hardest articles I’ve had to write in my 7-year career as a real estate agent. There is a lot of noise out there right now about what is going to happen in the market, but I feel most of it is very one-sided and only supports one extreme or another. With this article, I want to talk about facts and how those facts can shape the 2023 market.

The fact I want to start with is homes are worth less today than they were last month; in fact, according to stats shared by the Denver Metro Association of REALTORS®, values in Denver peaked in April of 2022. Now, they stayed relativity flat from April through July, but from August on, values started to slide. However, values dropping is not the only market factor I want to focus on.

 

Buyers’ reactions to buying also drastically changed. Before August, homes for sale would have buyers nearly knocking down the door to get in, make an offer, and get to the closing table. If a home made it through the weekend without selling, something was wrong with that home, whether it was price or condition. Today, the average time on the market is 43 days (from for sale to under contract), and showings are far and few between. Simply put, there aren’t the number of buyers in the market for homes today. This is an important reminder because recent stats have come out talking about historic low inventory levels, and historically low inventory equals a seller’s market such as what we saw at the beginning 2022. This would mean the market could be heading back into a seller’s market in 2023; however, I believe there is a flaw in this viewpoint.

01-12-23_Market-Prediction_inset.jpgThese stats are only looking at one piece of the equation, the number of homes for sale. They are not taking into consideration the number of buyers in the market for these homes. If the number of buyers leaving the market is the same or more than the lower inventory, then these historically low inventory levels will not have the same effect on the market as previous periods of extremely low inventory. It is my opinion that right now due to the high-interest rate environment we are in, more buyers have left the market than sellers. This is causing the lower inventory levels to not have that same effect as we saw in previous years.

 

Since interest rates were brought up, let’s talk about these next. Due to market conditions brought on by COVID in 2020, interest rates fell to an all-time low, with many borrowers seeing mortgage rates in the 3’s or even 2’s. These extremely attractive rates and low inventory led to a heavily sided seller’s market. However, another side effect of COVID and the low interest rate environment was high inflation, which I know we are all feeling the effects of today. To combat this high inflation, the Feds started raising the benchmark rate. Now, it’s important to understand that mortgage rates are not 100% tied to this benchmark rate; however, historically they do often follow suit due to other economic factors affected by rising and lowering benchmark rates. If you have been following any of the Feds’ meetings, they have indicated that there is likely going to be at least one additional rate hike early in 2023, and then they will hold. What I am seeing and hearing many in the industry state is that rates will come down after this final rate increase. This is where I disagree and push back.

 

If you listen to what the Feds are saying, there is likely going to be one additional rate hike in early 2023, and then they will hold the rate to see how the market, or more importantly, inflation responds. This does not mean after this next rate increase that they will start bringing it back down. They will keep it flat until they see how the inflation numbers react to the higher rate. If the mortgage rate mirrors the Feds’ benchmark rate, then this would mean that mortgage rates might also level out and stay fairly steady throughout 2023. We are often seeing mortgage rates today in the low to high 6’s; it’s my believe that we may see them come down from there slightly as the Feds maintain a benchmark rate versus continually increasing it. I don’t see how it is going to drop noticeably until the Feds are happy with the inflation numbers and start bringing that benchmark rate down.

There is a lot of information here, but what does it mean for Denver’s real estate market? My prediction is that home values in Denver may still have some value to shed in 2023, especially this first quarter. Buyers are not going to have enough motivation with the current interest rate environment to jump back in the market feet first while values are still showing signs of trending downwards. However, demand for homes in Denver is still strong and as buyers start to get used to higher interest rates and/or interest rates show signs of trending back down, we may see an uptick in buyers getting back into the market. If interest rates can move downward enough, a low inventory market could turn today’s market conditions 180 degrees in the opposite direction just as quickly as we saw in the second half of 2022. The only way to know if values will see downward pressure throughout 2023 or just in the first half is by watching how buyers respond to market conditions as they come.


Luckily, in the first week of each month, TK Homes will be sharing their monthly Denver Market Update article, so you will never have to wonder what is happening in Denver’s market. As always, if you are looking to sell, buy, or invest in real estate throughout the Denver metro area, contact us today. We are ready to provide real education to help you decide the best move to meet your needs and help you achieve your real estate goals throughout 2023.


~ Written by CEO/REALTOR® Trevor Kohlhepp

 

 

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