Over the weekend the Denver Post ran an insightful article: Metro Denver Housing Remains Constrained and Combustable. While it is no secret the Denver Metro area has experienced a significant uptick since the great recession, there are questions about sustainability, a housing bubble and other concerns. As a broker in the business for a few decades a few personal thoughts:
Potential Bubble: While I truly believe prices at the upper-end of the market i.e. $600K and above are not sustainable; the concern of a bubble is probably overblown. Yes Denver did experience a bubble in the mid 2000’s HOWEVER leading standards were lax, buyers assumed 10%+ annual gains were the norm and housing prices vastly exceeded average incomes. While there are still issues in the market; stricter lending requirements and verifications, appraisal oversight and other safeguards I believe will prevent another bubble in the immediate future.
Housing Type: One concern is the development of apartments and multi-family housing due in part to land being more expensive and thus the need for the end product to justify the cost of the dirt. Three issues: 1) Metro Denver has historically been a region dominated by single family homes as style of choice, 2) the younger buyers of condos will eventually seek out single-family homes once they start families and 3) the glut of deluxe and luxury rentals developed and proposed does not match the demand for more affordable housing throughout the metro area. During a showing last week one of the clients mentioned a standard 50′ x 125′ (6,250 SF) lot in The Highlands is asking $2M. A similar lot in Cherry Creek North is running $1M. While the Highlands is hot and in-demand and may facilitate higher density one must start to question is exuberance trumping location, location, location?
Is Income Sustainable: With the average house in Metro Denver selling in excess of $300K. Most lenders would require an income of approximately $70,000 – $75,000. The average income in Metro Denver for 2014 was $69,000, thus we are bumping up against some thresholds. Assuming income growth matches housing price increases we should be OK however this seldom happens.
Interest Rates: Even with the recent turmoil concerning equity markets worldwide, once growth begins in earnest interest rates will rise. At present we are still enjoying historically low interest rates HOWEVER this too is not sustainable. The low worldwide interest rates were in direct response to the worldwide great recession. When growth happens if not kept in check inflation can be an issue which generally leads to an increase in interest rates as the Fed uses Federal Fund rates to control growth. Rising interest rates usually lead to a reduction in housing prices as the cost of lending is increased. Thus, if I were a buyer in today’s market, capture the 30 yr fixed rate and sit back and know your payments are fixed. Of note, when I purchased a row house in Cherry Creek North in 1989, lending requirements including 20% down as it was an attached house i.e. perceived risk and the interest rate on my 15 yr. mortgage was close to 10%.
Prophecy by So Called Experts: My concern is the market prognosticators are advising 2016 is Denver’s Year. These same pundits advised the same moniker for Phoenix, Las Vegas and other hot markets of years past. Thus that alone gives me some concern.
What am I telling clients? If you are buying for the longer haul i.e. minimum 3-5 years, go for it. If you may be moving sooner, don’t expect the continued 10%+ annual valuation increase as if you must sell within 3 years of purchasing it may be wise to consider renting as equity appreciation is far from guaranteed and when coupled with the fees related to selling one may incur a loss.