I’ve struggled with the theme of this recap. It’s such an interesting time where on one hand it feels like the market could crash. But on the other, it could keep rising. Now I can’t say for sure what will happen. But I did make some guesses early this year on where the market is headed. And now that Q3 is in the books, it’s time to find out if those guesses are still on track or not.
But first, let’s take a glimpse of the magical transformation thats occurring around Pagosa Springs right now.
Earlier this year, I mentioned that the name of the game is supply and demand. But to me, supply matters more than demand. Because no matter what the current economic conditions are, people will always need a place to live, a place to move to.
So I like to pay careful attention to the amount of new listings coming onto the market. And at the beginning of 2023, new listings were significantly down compared to not only the covid years, but also the pre-covid years. It was so shocking that I mentioned I’d be hard pressed to see new listings surpass 600 this year.
Well, now that we’re through Q3, it’s time to see how that prediction is holding up.
Like Q2, Q3 definitely made up some ground. But still under the average pace of the last decade.
For Q3, new listings were still down about 8% from the prior three years. To date, we’re at 496 new listings, 23% below our usual pre-covid pace. Usually, we’re already over 600 new listings by this point of the year. But since Q4 historically averages about 100 new listings, I don’t think there’s much of a chance we’ll cross that 600 new listing barrier this year.
And this is the exact reason why the market has not crashed. 75% of America is locked into interest rates lower than 5%. So they’re hesitant to put their home on the market and move into something new. In fact, even the amount of time a homeowner stays put is increasing compared to prior years.
But what about demand? Could that demand be even worse than our current supply situation?
While the number of sold listings was down 18% for Q3 compared to the Covid averages, it’s actually up 3% when compared to the five year period before Covid. So it was actually a good quarter for sales when compared to a normal, pre-covid market. And this is the reason why our real estate market hasn’t crashed. Because demand is holding up much better than supply.
Now last spring, I was of the opinion that this year is shaping up to be just like last year. The market rises in the spring. Peaks in early summer. Cools off in the fall. Only to rise again after Thanksgiving. But take a look at this chart.
This chart shows the price per square foot growth from the beginning of each year. If we take out the crazy Covid years, you’ll see we’re right in line with the three years prior to Covid. So instead of this year looking like last year, it’s starting to look like a pre-covid market. So I’m shifting my expectations of price declines this fall to the market remaining relatively flat.
Now there still is quite a bit of inventory just sitting there. And some of it is indeed overpriced. But sellers are receiving a higher percentage of their asking price than they were a year ago.
More importantly if you look at historical trends, we typically start to get quite a bit of cancellations this time of year. Especially during the covid years. Sellers are sitting on record amounts of home equity. So it’s no risk to them to price their property high. And if they can’t get it, they can always cancel. And I expect this trend to continue. Which will help keep our prices stable.
So overall, I’m slightly positive on market conditions right now. And that surprised me as the data came in. I thought the market would gradually increase this summer. And it did. But it actually surpassed my expectations.
But the last thing I want to be is that realtor that tells you “now is a great time to buy” no matter what conditions are. At Team M-Squared, we’re always gonna be honest with you. We don’t hand out unrealistic valuations just to get your listing. And we won’t you force you into a home that’s overpriced just to get a commission check. We’ve told certain clients to take their homes off the market till valuations start rising again. Our focus is on what’s best for you. Not what’s best for us.
So I like to pay careful attention to contrarian viewpoints. I want to be challenged in hopes to reveal any weak spots in my thought process so I can better inform our clients. But one of those contrarian viewpoints is that the AirBnB bust will cause a market collapse, flooding the market with new listings.
And since we live in a tourist town, short term rentals matter. So let’s take a look at the data. Because we now have a perfect example to pay attention to.
New York City proposed a law in November 2022 that essentially bans all STR’s unless the host lives in the home and is there during the duration of the visit. This law was supposed to go into effect in March 2023. But due to lawsuits, it wasn’t enforced until Sept 5th. STR owners have now had about a year to prepare for this.
Now I think most folks would’ve thought that many of these STR owners would put their house or condo up for sale given that their income stream was essentially taken away from them. But take a look at this chart.
I grabbed the annual change in the amount of new listings and compared New York City to the rest of America’s metro areas. And as you can see, NYC actually had a decent amount of growth at the beginning of 2022, outpacing other metro areas. But by the time they announced the new STR law, new listings plunged below the metro average. Once the law was supposed to go into effect, NYC followed the exact same path as the rest of America. And once the law actually went into effect last month, NYC dipped slightly below the metro average.
So far, there’s hardly been an impact to the housing market because of this law. No it’s still early. This could change. But when you really think about it, these numbers make sense because the number of active STR units compared to overall housing units are too low to make a large impact.
But what about Pagosa. After all, we are a tourism town that in large part depends on a healthy STR industry for our local economy.
According to AirDNA, there’s a little over 1,000 available STR’s here in Pagosa Springs that are currently available to rent. There’s actually more STR’s than that. But they aren’t taking reservations. They block out their calendar and only rent to their friends or family, etc…
But out of those thousand active rentals or so, only 34% are considered full time STR’s. Meaning they’re available to rent for more than 270 days a year. Most STR’s here are basically future retirement homes or long time family vacation homes meant to be passed down from generation to generation.
But out of these full time rentals, they make up only about 2.6% of our total Housing Units here in Archuleta County. Again, too small to make a meaningful impact to our market.
And here’s the thing anyways…attitudes on STR’s are changing among local governments who imposed caps and restrictions during the pandemic. Check out what’s happening in Telluride with the battle for affordable housing.
Local council woman Adrienne Christy, who supported the original cap on STR’s in 2021, recently said in an emotional and tearful exchange that, “The only way we are going to solve this problem is to build affordable housing and in order to do that we need to make money. I don’t feel I need to soapbox anymore. I am not in favor of a cap. I’m ready to make some money — more money — and put it in our affordable housing fund from licenses and fees.”
And you know what…she’s exactly right. As proven so far by New York City, banning STR’s will not cause a flood of new listings to come on market and cause valuations to crash in hopes of making housing affordable again.
And with sales tax receipts starting to take a dip, I think you’ll see more cities and counties reverse their course and embrace the STR model rather than try to depress their income sources.
Think about it. Here in Pagosa Springs, the average STR is only occupied for about half the year. But the average spend in our local economy from the average STR is nearly double that of the median full-time household here. And that’s not including the payments to STR owners. That’s purely what’s spent towards our local businesses.
Where else can you find that kind of a deal…half the impact on infrastructure yet twice the impact on our local businesses. Local governments would be foolish to restrict this. So I think there’s a real chance that the town of Pagosa Springs will come to their senses and rescind their restrictions on the most impactful sector in our local economy.
Alright, time to bring this to an end. There’s certainly some concerns from the contrarians that give me pause. Home affordability is incredibly low. Credit card debt is at a record high. Property taxes are putting a strain on homeowners. But so far, the market has remained strong despite all these indicators. Unless there’s a big event or recession that causes home owners to give up their cheap mortgage rates, I just don’t see the market significantly crashing. But who knows. These are unprecedented times and absolutely anything can happen. If you think I’m wrong, let me know in the comments below. I always value a well reasoned viewpoint. With that said, it’s time to go enjoy these beautiful autumn days here in the mountains.
Cheers!
