Man…I don’t even know how to start this off this time around. This is a different market.
Every January I love to watch these little year in review videos. One of my favorites is by Vox Media. Being the video nerd I am, I geek out on well done pieces like this. And as I watched it this year, I was reminded of how sheltered we are here in Pagosa Springs from the chaos of the world. From the chaos of crowded cities and surburbia.
The mountains here in SW Colorado have become this escape from that chaos. It’s a place of refuge, peace and fulfillment. The beauty here slows things down and helps us reflect on what’s really important in life.
So before we get into the chaos of the real estate market, let’s escape a for a moment.
This is why we live here! I know many of you agree and want to know more about buying a place here in Southwest Colorado. So let’s jump into it.
I do need to say from the start that we are a very different market than the major cities and suburbs.
We don’t have many first time home buyers. Only 40% or so of our homeowners actually live here full time. And a lot of our deals are cash instead of loans. Add in our small data set and it’s difficult indeed to get an accurate picture of what’s going on. Because as I watch what’s happening, I’m having a hard time believing these numbers myself.
If you remember my last report in early October, I mentioned that come December, we’d start to see the effects of 7% interest rates on the market. And here’s what happened.
The number of buyers dried up. Which is why we only had 17 closings in December. A drop of 53% compared to last year. And a drop of 58% compared to the previous five year average. In fact, it’s never been this low for the month of December.
Usually when buyer demand starts to dry up, sellers start to lower their prices. And they are. From our peak in May of 2022, sellers are now receiving only 95.5% of their list price. Currently, 67% of active listed homes under a million dollars in PLPOA have reduced their prices.
But that doesn’t necessarily mean that values are falling. It could be that sellers simply overpriced their homes. Which many did. So let’s take a look at the median price over the course of 2022.
In February, we hit a record low for active inventory. Which caused the median price for a home here to peak at 720,000 in May. It was here where the market started to drastically change. Mortgage rates rose at their fastest pace ever. Nearly doubling in just a few months.
As a result, the median price dropped from 720 thousand to 557 thousand in just five months. A decrease of 23%. But then something interesting happened in September. Many of us expected the market to continue to drop. But instead, the median price began to rise. And in December 2022, we landed at a median price of $680k. Only 6% lower than our peak in May. And 6% higher than December 2021.
So how do we explain that? At a time where interest rates caused mortgage payments to increase over a $1,000 a month for a median priced home here. Shouldn’t the median price be dropping since this effectively forces buyers to seek out lower priced properties? Certainly a lower volume of homes play a part.
But let’s see if Price Per Square Foot shows the same pattern.
Our most reliable data set we have is 3/2/2 Single Family Homes under 2,000 Square Feet in the PLPOA area.
In January, we started out at a PSF of 345. We reached a peak in April at 389. It quickly dropped to 306 in September. And then reached 354 in November, which had 7 closings for this category whereas in December, we had zero closings, which should tell you something…
My initial thought was that new builds caused the recent rise in PSF since they typically finish up in the fall. But only two of those seven closings in November were built in 2022. And if we take those out, the average PSF drops to 349. Still showing an increase over September.
So what gives? Two theories…
First thought, New Listings.
New listings reached a record low in 2022. In fact, during the month of December, there were only 8 new house listings. We’ve never been in the single digits over the past twelve years for single family residences. So let’s dig in further.
For 2022, we had 458 New Home Listings. Down 4% from our previous low in 2012. And over the past three years as a whole, new listings are down 8% compared to the five year average before covid started.
So if you’re a buyer and you’re waiting for prices to come down, it’s crucial to see new listings make up that 8% drop. That means an average of about 605 new listings a year for the next three years. Or 694 New Listings in just one year. If the market is flooded with that many listings, then prices will really start to drop.
But I have a hard time seeing that happen. Keep in mind that home owners are hesitant to give up those super low mortgage rates. And most of our homes here have no mortgage at all. Which influences their need or desire to sell.
So let’s move on to my second thought…Condition of the Home. I’ve stated this before but decided to pull some data on it.
The newer the home, the better the condition it tends to be in. The big problem here in Pagosa is that there are too many homes that are outdated.
During the first three quarters of 2022, recent builds in PLPOA under a Million made up only 14% of all sales. But during Q4, they made up 19% of all sales.
There’s currently 38 active listings and 13 listings Under Contract in this category. The homes under contract have a 15 year gap compared to active listings and have a 11% higher PSF.
Now that buyer demand has slowed down, this allows buyers to be more meticulous about what they want. And they’re choosing updated homes that allow them to move in and not have to spend time at the hardware store. Which helps bump up that median price.
So…the big question is where do we go from here in 2023. I’ve heard some pretty good arguments from both sides. Those that think the market will crash in 2023. And those that think the market will rise in 2023.
My gut is telling me that prices will head lower even though the data is telling us we’re on the rise again. There’s too much current inventory on the market that is outdated. And it’s going to take some price reductions to get those to the closing table. So for buyers, the key is to be patient. The problem though is that there’s many investors waiting on the sidelines. And once prices get close…they will pounce on it. In fact, over Christmas Break we had a buyer lose out in a bidding war to two other offers over a home that sat on the market for five months and finally came down to a more realistic price. I honestly couldn’t believe it…
So I think there’s a definite floor to this market. And what could help sustain prices in our market is our local government. Let me explain…
There was a big article from Bigger Pockets the other day titled, Air-b-n-bust, the Fall of Short Term Rentals. And in this article they claim that the supply of STR’s this past year increased enough to offset the rise in bookings. Which means more competition. Which means lower occupancy rates. Which means lower nightly rates. Which means less profits. Which leads to losses. Which will eventually cause a bust, with many owners having to sell their STR. Which increases the supply of homes for sale. Which overall lowers the price of these homes in a buyers market.
What’s interesting to me about this is that our local governments have already stepped in and prevented this potential AirBnB bust form happening. The Town of Pagosa capped their density limits over a year ago at 10%. No more new STR’s in Town. And Archuleta County currently has a moratorium in place since September. No more new STR’s…
Let me ask this…Is it a coincidence that prices started to rise again once they did this? I don’t think so…it’s too soon to tell. But this Spring, new STR regulations will be put before our Commissioners. And it’s my suspicion that two of them, Warren Brown and Ronnie Maez, will end up voting to enact similar density limits as the Town.
So instead of allowing the free market to play out and letting investors fail, our local officials will solidify current STR investments. Which not only increases occupancy rates and profits for current STR’s, but it also reduces housing inventory for sale. Which helps increase housing prices. One only has to look at what happened in Durango in 2014. They basically banned future STR’s with their low density cap. It strengthened their real estate market and Durango continues to be about $200 grand more than the median home here in Pagosa Springs.
With all that said, STR’s do only make up a small percentage of our overall housing market. Somewhere around 10% to 13% depending on who ask. So if a big enough recession hits in 2013, which many are forecasting, then our market will not be immune to that. It will affect our housing market.
But I’m also one that tends to think if everyone is looking one way, you might want to personally look the other way.
So overall, here’s how I would sum it up for buyers and sellers. Updated homes should have no problem selling at a fair price in this market. Especially those with views or on water. Outdated homes need to start reducing their prices to sell in this market. Not just or two percent. But ten or more percent.
But there is a floor here. Due to the housing shortage and builders pulling back, one the market corrects itself and interest rates fall back into the low 5’s, this market could reverse and act like a sling shot, rising very, very quickly. But that’s nearly impossible to time right. Could be this summer. Could be a year or two from now. No one really knows.
Alright, I want to end on this. I know I brought up the chaos of our world at the beginning. But I also want to bring up the good. And another video I like to watch every year is Google’s Year in Search. And it showed so many people, like you and me, quitting their jobs and pursuing their dreams.
I know there’s many of you sitting at home watching this market recap, dreaming of making the move here. And I want to encourage you that you can make it happen. You can quit. You can retire. You can make the move to the mountains.
It was scary as hell to quit my job in Texas back in 2021 and move my family of four to Pagosa and begin the journey of working for myself. But you know what? I didn’t die. I didn’t fall into poverty. I didn’t have to move back to Texas. And I can say without a doubt, it was the right decision to escape the chaos of suburbia and sitting in rush hour traffic every day.
So just do it. If you’re motivated enough, you will find a way to make it happen.
If you need somebody to talk to about it, I’m here for you…even if you don’t need a realtor. When it comes down to it, I’m passionate about helping others make the same changes that I did. Because experiences and location matter more than materialism.
With that said, I need to go experience the powder of Wolf Creek.
Till next time…Cheers!
