The Southwest Colorado market is in a transition period from a Seller’s market to a Buyer’s market. Many prospective buyers ask me when values will start moving downward. No one knows for sure; however, it will not be a specific point in time, rather the transition period currently underway. Additionally, the transition periods will be different for the various areas and price ranges within La Plata, Montezuma, and Archuleta counties. What will determine when a particular area/price range starts seeing declining prices? The pesky law of supply and demand.
Currently, the supply of homes and property for sale in almost all areas and price ranges is well below the demand, which has deceased, but supply has remained very low. The only exception are homes in the very high price ranges. Areas will enter into a Buyer’s market when there are more properties available for sale than prospective buyers. So the key questions are what will cause the inventory to increase and/or the number of prospective buyers to stay low or decline?
The recession is forecasted to continue and deepen, which will put financial pressure on property owners, particularly those who own second home or investment properties. Many of these owners rely on rental income to cover a portion of their monthly ownership costs. If the demand for vacation and long-term rentals goes down, their income will decrease, requiring them to cover more of the expenses. At the same time these owners could see the value of their non- real estate investments diminish and possibly the value of their primary home. The trigger for investment and second home buyers to decide to sell their southwest Colorado properties in mass will be when they believe the values will decrease over a period of time. When this process starts, most of these sellers will want to unload their homes before the market decreases further and will negotiate increasing lower prices. Once this trend begins, the Buyer’s market will be in full swing.
The second phase of the process will be when investment and second home owners who overpaid for their properties and/or financed the purchase with less than 30% down determine that their equity has shrunk or is gone. This coupled with declining rental income and higher monthly ownership expenses, will prompt an increasing number of these owners to sell their properties and cut their losses. The final phase is when the owners who waited too long to exit the market realize that they owe more for their property than it’s worth and they would have to “write a check” at closing in order to sell. A large number of these folks will decide to mail their lender the keys and the garage door opener instead of the monthly payment. Banks will now be competing with other sellers to unload properties. This will put even more downward pressure on property values caused by increasingly more supply than demand and banks accepting offers that significantly undercut what other sellers are willing to accept.
Over the past few years, a large percentage of the homes sold in Southwest Colorado were to investment and second home buyers; going forward the demand from these buyers will diminish. Additionally, economic uncertainty will keep some primary home buyers on the sidelines; others will not be able to obtain financing for the home they want. These factors will keep demand in check.
We are well into the transition period, the only question is when we will see declining values. I’m thinking later this year or early next year.
