Nationally we still seem to be in a Goldilocks economy. The Beige Book evidenced positive economic indicators; The Federal Reserve indicated due to the continued momentum of the economy an increase in the Fed Funds rate is imminent. Interest rates on mortgages continue to bounce around yet continue to hover at historic lows.
So what is happening in Denver?
Well, a lot. The Case-Shiller Index advised the Denver area has fallen to #4 concerning price appreciation behind Seattle (12.3%), Portland (9.2%) and Dallas (8.6%). Of note Denver’s Year over Year appreciation was 8.4%. This is a positive as gains are still above national averages yet the cooling off concerning appreciation may indicate movement towards a market more oriented towards equilibrium.
For homeowners price appreciation may be a positive, yet when we have a continuing disparity between average income/wage growth coupled with higher prices; this is not sustainable and leads to potential corrections down the road including housing prices and employment attraction as many businesses will reconsider relocation if the cost of living is excessive.
And yes I have been told by some to look at New York (4.1% Year over Year) and San Francisco (5.1% Year over Year) as markets, which historically continue to increase in value. However both those cities have geographic constraints and higher demand leading to exorbitant pricing by Denver standards and strict rent-control programs, which impact the market, issues we do not have in locally.
While statistics can be interpreted any which way one desires; readers of my blog know I focus on the upscale neighborhoods of Denver. Specifically I believe the upscale neighborhoods are a leading indicator of the future of the overall market. Granted not scientific concerning methodology yet anecdotal evidence coupled with 20+ years as a broker makes me a bit concerned.
I have been keeping my eye on the Country Club Neighborhood of Denver, specifically are area bounded by Downing on the West, University on the East, 8th Avenue on the North and 1st Avenue on the South. While historically expensive the neighborhood has been the pinnacle concerning prestige and address within Central Denver for generations.
Suddenly there seems to be an increase in available inventory. Couple this with a section of listings that have endured price adjustments between 10%-25% to the downside, what is going on?
Granted some of the listings may have been overpriced to begin with. As brokers we advise our clients pricing options based on past sales, demand and other factors. Yet at the end of the day it is the seller who dictates the asking price. Thus some listing may have sellers believing their residence is valued higher than the market would dictate and thus the price reductions.
Yet there is another factor, which I call irrational exuberance of investment gains. A few listings I have watched include a selection that are asking 50%-100% return over their purchase price within the last 3-5 years. Granted some have been renovated/updated yet others are in similar condition when last sold and are asking for returns which are just not rational. Granted if the seller gets the asking price, all of a sudden it is rational.
However let me use the example of a home within the western section of Country Club south of 4th Avenue, a prime neighborhood that sold within the last 12 months and is NOT presently on the market.
The house sold in late 2001 for between $310,000 – $330,000
In early 2002 the home resold for $530,000 – $550,000*
Thus in real #’s gross #’s not taking into account commissions and closing cost the house appreciated $200,000+* or over 60%
*During that short period some improvements were made to the house yet far from a full gut renovation, mostly cosmetics and some mechanicals.
The next resale of the home was in early 2006 for between $640,000 – $660,000
Between 2002 and 2006 (4 years) the house appreciated $100,000 or approximately 19% still quite respectable for housing, on an annualized basis 5%, which was below gains in the stock market during the same period.
The new owners who purchased the home in 2006 bought at the pinnacle of the housing market during that period of expansion. Within 1.5 years we would witness the bubble burst with the shut down of Lehman Brothers and the subsequent Great Recession and Housing Crisis, which were soon to follow.
In late 2016 the house sold between $745,000 – $765,000, an approx. 16% gain yet took 10 years for this gain to happen.
Overall the home in the above example has done well yet also provides insights concerning timing and overall market conditions. In pure #’s between 2002 and 2016 the home went from between $530,000 – $550,000 to $745,000 to $765,000 or approx. $225K or 40%, quite respectable and beating inflation yet also took 14 years to achieve the 40% gain or under 3% annualized which matches inflation which housing (beyond select coastal markets) usually mirrors.
Are we to assume Denver is now suddenly an outlier like New York, San Francisco and Los Angeles OR are we in a period of concern as our housing appreciation historically matched those of other inland regional cities.
To be honest I do not know but as many clients are sitting on the sidelines waiting to see what the market does. My view is business cycles have not ended and while not in a bubble, if I were looking to buy and resell within 12-36 months, I would be a bit hesitant to sign the mortgage.