Wednesday, March 23, 2016

Will Denver's Bubble Burst? Denver House Guy University Part 1 of 4: Inventory

The real core of a market's strength or weakness is supply and demand. Let's use a simple example: 

You have a lemonade stand on a street corner and you buy 30 pounds of lemonade powder for the weekend.

Scenario 1: There are 10 other lemonade stands on your street. One person buys a cup of lemonade from you for $1. You still have like 29 pounds of lemonade powder. That is lots of supply, and no real demand. You are losing money. You will probably need to shut down your business soon. (This is what was happening in 2008.)

Scenario 2: You are the only lemonade stand on the street and have a line down the street waiting to buy from you and you sell out quickly in 1 day - people are willing to pay $10 to get a cup of lemonade from you. There is a lot of demand, and not enough supply. You can even open up a second and third stand and still have plenty of buyers. You may become rich. (This is what is happening in Denver right now.) 
And say for some reason in Scenario 2 more and more people kept coming to your street each week because they hear how good the lemonade and weather are. You will have even more demand. 

In 2007 Denver Metro had 25,000 homes for sale, and about 5,000 homes were being sold each month. That is a lot of supply and not much demand. That would take about 5 months for buyers to absorb all the houses for sale on the market. Today there are about 4,300 homes for sale in metro Denver and 4,100 are being sold each month! That is almost total absorption, meaning each month buyers are buying almost all the homes that come up for sale. 

In short: Back in 2007 we could see clues for the recession and the bubble burst because of such high supply of homes for sale, and not enough demand. But today the demand is so high, and supply is so low (and has been for 4 years), and rents are so high, that the demand itself is showing hard evidence of economic thriving in the Denver housing market for years to come, especially since 50,000+ people move to Denver each and every year.