With a low inventory of existing homes for sale, Denver buyers are snapping up new homes at the fastest pace in the country, a recovery so strong it has taken local builders by surprise.
"In the early stages of the pandemic in late March, especially when the stay at home orders were valid for all of April, no contractor believed demand would return as it did," said John Covert, Zonda Regional Director, a real estate analysis company. "Sales rebounded sharply in the summer and early fall to the point where many builders not only beat 2019 sales, but will likely have the best year ever."
Zonda's New Home Sales Index for Metro Denver is up 95.3%, compared to a national gain of 46.9% in September. The next hottest markets in terms of earnings on new home purchase contracts are Jacksonville, Florida, which is up 73.3% on the index and Raleigh, NC, which is up 69.6%.
"All of these markets benefit from positive net immigration and have been among the top markets in the country for millennia," said Ali Wolf, chief economist at Zonda Economics, in comments on the index report. "Denver builders beat the national average in all categories: entry-level, advancement, and luxury."
Beyond the migration of millennials, home builders are also seeing an influx of older adults escaping crowded and more expensive markets, particularly in California. This has made the switch to remote working arrangements easier during the pandemic.
"We have seen a great runaway from markets that have an affordability issue, like San Francisco and Los Angeles," said Pat Hamill, founder of Oakwood Homes in Denver. He adds that Oakwood, whose parishes include Green Valley Ranch and Reunion, is also welcoming downtown shoppers who have faced riot in recent months.
The Federal Reserve also keeps interest rates low to support the economy, improve affordability, and fuel demand for housing. Freddie Mac reported Thursday that the 30-year mortgage interest rate averaged 2.84%, compared with 3.75% the previous year at the time.
With years of price hikes, homeowners have plenty of equity to make a new purchase, Covert said. Home stay orders also coincided with the start of the spring season, which created a backlog after the restrictions were lifted.
Randy Carpenter, president of KB Home's Colorado division, said traffic has returned to last year's levels and those that do show up are buying at a much higher rate. Overall, metro Denver home sales rose 37% compared to 2019, he said, citing Zonda data.
"Since the pandemic, we've seen an increased number of buyers specifically looking for a new home. At KB Home, we see buyers in all segments of the population," Carpenter said.
The builders also successfully marketed improved indoor air quality as well as technological features and design configurations that could accommodate remote workers, Covert said. And their timing was good for starting new communities, many of which offered relatively affordable options.
The purchases are mostly concentrated in the Denver suburbs, with counties of Broomfield, Adams, Arapahoe, Douglas and Elbert accounting for 69% of total housing production, compared to 64% a year ago, Covert said. Add in southwest Weld County, and nearly 80% of housing production takes place on the subway periphery.
"The uncertainty surrounding the COVID-19 pandemic has not reduced the demand for new homes and has in many ways increased home buying activity thanks to the growing importance of where we live and the way we live," said Larry Mizel, Executive Chairman of MDC Holdings , a Denver-based national home builder, told analysts during an earnings call on October 29th.
Net new home orders in the third quarter rose 89% year over year to $ 1.65 billion and the average sales price rose 10%. Robust sales contributed to a backlog of $ 3.1 billion, up 47% year over year.
Basically there just aren't enough homes for sale to meet demand. Hamill said the perception is that new home builders are competing against each other, but in reality they are mainly competing against the existing home market.
According to the Denver Metro Association of Realtors, buyers had an average of 15,577 offers to choose from between 1985 and 2019. There were just 4,821 listings for homes and condos last month, down nearly 44% year over year and a record low for October.
"Low inventory forces buyers to consider newer developments outside of their original target location, even if it means waiting for the homes to be completed by signing month-to-month leases or postponing a closure," said Jenny Usaj, a Denver real estate agent.
When inventory is tight, buyers face bidding wars and have to work harder to get a deal. Signing a contract for a new home can be a lot easier. But the tradeoff is a much longer wait that can feel like an eternity to shoppers looking to escape the confines of a tight space during the pandemic.
According to Hamill, Oakwood Homes will take 6 to 9 months to complete after purchase. MDC Holdings reports that the time from sale to close averaged 215 days in the third quarter, up from 198 days last year. Of this, the construction time averages 142 days compared to 132 days.
Although new home sales have increased significantly, the number of permits drawn for single-family homes this year is about 4% lower than last year, said Rich Staky, interim CEO of Metro Denver's Home Builders Association.
Part of this reflects obstacles created by the outbreak. Governments are slower to give the necessary permits. In anticipation of a sharp decline in construction, the timber factories were shut down, creating significant bottlenecks when demand recovered quickly.
"I've been in this business for 30 years and have never seen the price rise that we've seen in sawn timber," said Hamill. He notes that devices take 10 to 11 weeks to arrive. Even lights were harder to come by.
Skilled workers are still in short supply, a problem that has plagued building owners for several years. And while service workers displaced by the pandemic may be more open to moving to higher-paying careers in construction, their training takes time.
"A lot of sales have been written but there has been a delay in starting. The builders are going fast and furious and starting new homes," Staky said.
He believes that the gap between sales and permits will narrow as builders get a better grip on the backlog. However, don't expect builders to try to get one step ahead with speculative building, which they did with disastrous consequences for the industry in the mid-00s.
This downturn has wiped out the more aggressive builders, and those who survived are left with deep scars. They may enjoy an unexpectedly strong market, but they still don't fully trust it.
"MDC's policy as a concept is not to create specifications, and the specifications that are created during the build period are strategic in terms of specific breakdowns and failures. We think it is very beneficial to our business model, the number of specifications keep it down, "Mizel said on the company's earnings call.
According to Hamill, Oakwood pre-sells 99% of the products it builds, trying to keep a handle on the direction of the market. When the new coronavirus first appeared, he feared it would be again in 2008 and the Great Recession.
Some houses under construction went without buyers because people had lost their jobs, but those were quickly claimed as soon as the economy opened up again.
Builders have enough backlog to keep them busy, even if new shutdown jobs keep buyers away this winter, which is usually a slower time to shop.
"They'll be adjusting construction in line with sales rates. I don't think builders are going to be taking much risk with these issues. There's not much exuberance in the housing community," said Stacy.
And Hamill said he remained concerned that what happened this summer and fall might be the anomaly, not the new normal.
"I think we will face headwinds as we go on. You still cannot put 22 million people out of work without having problems at some point," he said.