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July 8, 2013

Why Is Denver Real Estate Going Up In Value And Where Are We Headed?

Given the rising home prices, constant bidding wars and frustrated buyers in our Denver market in 2013 it’s understandable that I hear the following two questions quite often:

1)  Why are Denver real estate prices rising so fast?

2)  Where are values in the Denver real estate market headed?

So I’m happy to chip in with my two cents regarding these two issues but I first have to qualify my opinion.  It’s just that…an opinion.  I can’t predict the future with any more accuracy than the next guy.  (If I could I wouldn’t have been buying rentals in 2007!)  All I can do is provide my thoughts based on what I see and experience in the market.

So why are Denver real estate prices rising so fast?

  The main driver of Denver’s home values being up about 10% from last year is housing inventory is extremely low.  The financial meltdown and the years that followed it (2007 – 2011) caused new home builders to fail at a tremendous rate and buyer demand was at very low levels.  This caused builders to pull in the reins on new home production and they were not building near as many homes as needed to keep up with our needs.  Not only were builders not building but even if they wanted to banks were also troubled or failing; therefore rendering many of them unable to lend money to home builders.  So in short we got way behind on building new housing inventory and fewer available homes equals buyers fighting over homes and driving up prices.

Another driver of increasing home prices is the return of consumer confidence based on an improving economy.   The tough economy during the recession stifled buyer demand and home values.  Now that the economy is improving consumer confidence is up and people are feeling more secure in their ability to afford a home.  This change in mindset has increased the pool of buyers, again increasing demand and values.

The last major reason I see for increasing home values is the lack of rental housing at prices that are less than the cost of owning a home.  People who need housing weigh what it costs to rent versus what it costs to own and because of the high rental rates buying a home has been the more attractive option lately (for those that have the credit and down payment needed to buy).  Like new homes, in the past few years apartments weren’t being built much either and so supply was low.

The good news to me about this recent pop in home values is that it’s not being driven by crazy loans like it was last time the market heated up.  In the last cycle the huge increase in home values was largely driven by easy loans that were made to almost anyone who wanted them.  (In my opinion borrowers, banks and Wall Street all share the culpability here but we’ll save that for another day).  Since everyone could buy there was  huge demand, the problem was not everyone could actually pay their mortgage which is where things fell apart.  I’m not seeing these “no doc” or “stated income” loans being made and that gives me a lot more confidence that we’re not being as crazy as we were in the last go round.

So where is the market going from here?

Again, I don’t know the future but here is what I’m expecting from the Denver market.  (Keep in mind, real estate is local and every neighborhood has its own dynamics so I’m just speaking in general here)  I think we’re pretty early in the recovery cycle after 4+ years of a “buyer’s market”.  That makes me think we have some more market appreciation to come before things start to cool off.  That said, I don’t think we’ll maintain the 10% per year appreciation and I really hope we don’t!  I have rentals and I love to see the values going up but if we keep up a 10% annual appreciation rate we’re going to quickly outstrip what buyers can afford to pay without getting into debt troubles.  I think the market bounced back once the consumer confidence changed but the appreciation rates will slow down to more “normal” levels.  If I had to guess I would say appreciation rates in Denver will be around 5% in 2013 and even less in 2014.  At this point I would tell anyone looking to purchase a home that they should not try to time the market.  Like the stock market, the real estate market can be unpredictable and people should focus on buying a home that will suit their needs and that they can afford.  As prices rise or fall buyers who have purchased homes that work for them and that they can afford will be ok, it’s those that are speculating on the market buying homes using too much debt that will be in trouble if life throws them a curve ball.

Here are 3 things I’ll be watching as we move forward that will affect real estate prices. 

Apartment Construction:

First, have you noticed all the apartment buildings being built lately?  The cranes are back up around town and new apartment construction is booming.  This sounds good when we need more rentals but my gut says we’ll over-build the rental market and end up with too many apartment units.  (As an investor I already seeing apartment buyers paying way too much for the cash flow they receive)  It takes time for projects to go from an idea to an actual building (it takes years!) so by the time these all get built I think we’ll find we built too many.  It seems like developers build in a vacuum, running their projections as if no other apartments are being built and demand is endless.  So if we over build apartments the cost of renting will go down (more supply equals lower rents) and the rent vs own comparison will start to steer more people to rent which will dampen the housing prices.  This might take a few years in my opinion but my guess is it’s coming.

Interest Rates:

Second, interest rates are on the way up.  They were as low as 3.5% but lately they’ve been in the low to mid 4% range.  Still historically amazing rates but as they creep up buyers will begin to lose purchasing power (their money doesn’t go as far) and this will start to cool off home values.  My guess is they continue rise but again I wouldn’t bet a nickel on my ability to accurately forecast interest rates with any consistency.

New Home Builder Production:

Third, new home builders are doing their best to fix the low inventory problem by building new homes.  They are developing new lots and building new homes as fast as possible.  In the short term this is good.  I’m working with more new home buyers than ever because my buyers aren’t finding what they want in the resale market.  (Not sure how building a new home works…click here for a video series I did on every step of the process)  Eventually though the builders will get enough supply built that it will meet and likely exceed the demand.  More supply equals lower prices…so eventually this will slow down real estate values but again I think this may take a few years.  In Denver’s Stapleton neighborhood, where I live and where many of my buyers are looking, the new home builders have buyer interest lists with well over 200 people on them.  One of my buyers recently received an offer of $14,000 to hand over a contract on a new home the day they signed the contract!  Those are just a few examples of how hot the demand is for new homes now which is why I think the demand will last a few years before builders catch up.   Lawrence Yun, National Association of Realtors (“NAR”) chief economist, said “if home builders can continue to ramp up production, then home price growth is expected to moderate in 2014.”  I think appreciation will still exist, it will likely just stop going up as quick as it is now.

So that’s my two cents on Denver’s market and what to watch for as we move forward.  The most important thing to remember is your home needs to suit your needs and you need to be able to afford it.  If you buy with those things in mind you’ll be in a good position regardless of where the market takes us in the years to come.  Please feel free to chime in below with your thoughts about where we’re headed in this market and if I can be of service to you as a Realtor please feel free to contact me.

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