Bursting Denver’s Housing Bubble: Navigating Denver’s Real Estate Statistics

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For two years, everyone has been asking me whether I expect a housing bubble to occur in Denver. Like any market, it will have to drop or plateau eventually. No commodity enjoys a steady increase until the end of time.

In the meantime, I come across a lot of articles and blog posts making some pretty broad claims about the Denver real estate market. The ideas are not necessarily wrong, but there’s more to the story.  

So, why should I just read this stuff over breakfast and roll my eyes, when I can share what I know with all of you?  I’m going to burst some of these bubbles, but not without a quick review of Economics 101.

Supply and Demand – Part 1: Denver’s supply of homes for sale is still very, very down. As long as this continues, Denver’s supply of homes for sale (or lack thereof) is a major contributor to our current seller’s market. Think about it… if, all of a sudden, the amount of homes for sale on the market increased by 500%, that would decrease the competition amongst buyers. If competition amongst buyers decreased, prices would go down. 

Supply and Demand; Part 2: We still have a lot of demand. People are moving to Denver at record rates. Denver consistently is rated as a top city for job-seekers, a top city to start a business, a top city for IT job-seekers, a top city for young people, and the list goes on. Based on historical trends, the U.S. Census Bureau estimates that an average of 50,000 people will continue to move to Denver on a yearly basis.  Demand isn’t likely to go down; there is a limit to how quickly builders can build and many builders won’t want to over-speculate this soon after the recession. Therefore, we are likely to continue to have a demand greater demand than supply.

Our Local Economy: The Denver metro area economy is diverse and consistently growing. I read a blog post recently saying that “Denver is just a boom town and will fail like Detroit.” Doubtful. Detroit depended primarily on the auto industry; they did not have a diversified economy. Denver has a variety of industries which are flourishing.

As mentioned in every article about Denver for the past few years, we have weed. We have tourism, for the mountains… and for the weed. This keeps our restaurants full, our hotels full, keeps people shopping in our stores, drinking in our bars, and smoking our weed. We have tons of tech companies, most of which are growing, including a new Google campus which is coming soon in Boulder. We have an ever-growing clean energy industry. (On the flip side, we have a quite a lot of oil and gas companies here in Colorado, although, this industry has recently taken a major hit and people have been losing jobs in oil and gas. Note: oil and gas only accounts for about 10% of our total industry.)

National Interest Rates:  They’re still pretty low. A lot people, including myself, thought interest rates would rise by the end of last year. We were wrong. As long as interest rates remain low, it will keep mortgage rates lower, even if the home price is higher, so people are still very interested in buying now. The Fed has been meeting to discuss raising interest rates and although a couple of folks are bulldogging to raise them, most members of the Fed are interested in keeping interest rates low for a considerable amount of time. If there is a rise in interest rates, it’s not expected to be a major rise for at least several years.

*Note: although this is dependent on your home price and monthly mortgage payment, overall, you will save a lot more money over the course of a 30-year-loan if you buy at a lower interest rate than if you wait around for home prices to drop. The highest likelihood of Denver home prices dropping is if interest rates rise, and that doesn’t necessarily mean that you will save money.

Got it?  

I’m ready to get really dorky. Let’s analyze some Denver real estate statistics, so I can justify that Master’s degree that’s stashed in my closet…

Here’s one I saw recently from a Denver real estate authority…

In 2015, 10% less units sold under $500,000, while 34% more units have been sold above $500,000 compared to 2014.” It goes on to say that this indicates an overall price appreciation…

Here’s the thing… Sure, any Realtor working in the front lines of our local market will acknowledge that prices have been rapidly increasing. However, you can’t use that statistic to necessarily indicate an overall price appreciation. It could simply mean that less properties went to market under $500,000… If less properties go to market under $500,000, then less properties will sell under $500,000. It’s simple. If we are staying abreast of real estate statistics, we know that properties are generally being absorbed into the market within 4-6 weeks… Therefore, what is released into the market will be absorbed. If properties over $500,000 are being listed, they will likely be sold.

It’s likely that people with properties under $500,000 heard the news about how competitive it can be to find a home under $500,000; therefore, they are choosing not to sell at this time because they believe it will be difficult to find a replacement home. People selling properties over $500,000 don’t face as much market competition if they purchase a similarly priced replacement home in the Denver metro area, so perhaps people at that price point are simply selling their homes at a higher rate than people with homes priced under $500,000.

(This would explain a lot, because if these folks are simply moving within the metro area, then the seller’s home will go on the market, be purchased by a new buyer, and then the seller will buy a new home which likely also costs over $500,000, therefore resulting in two homes over $500,000 being sold. Generally, someone purchasing a home over $500,000 is less likely to be a first-time home-buyer, whereas someone purchasing a home under $500,000 is more likely to be a first-time home-buyer. A first-time home-buyer is someone who is no longer renting or living in mom’s basement, so they are only taking place in ONE real estate transaction. Buyers and sellers over the $500,000 price point are more likely to be participating in TWO real estate transactions, as such, creating a higher statistic of homes being sold over $500,000. In any case, although rapid appreciation is certainly real – we cannot simply assume that this statistic is indicative of purely of home price appreciation.)

I mean, hey… murder rates and ice cream sales both rise during the same time of year, but should we assume that ice cream causes murder?

Lets talk about some more statistics I’ve seen out there…

Another real estate agent/blogger calls himself “The Denver Expert” and encourages readers to “outsource their nerd.” Excuse me while I outnerd this guy and not break a sweat in the process… The “Denver Expert” posits that areas with higher home prices appreciate less than areas with lower home prices, while areas with the lowest average home prices are experiencing the highest rates of appreciation. The 5 areas listed with the lowest home prices are San Rafael, Clayton, Wash Park South, Whittier, and Cole, and it is reported that these neighborhoods are appreciating at a rate of around 19% per year. I live in the zip code of 4 of these neighborhoods and sell properties in these neighborhoods regularly.

What I can tell you is that, yes, the neighborhood has appreciated… a lot! But it has not truly appreciated at a rate of 19% per year. If it were unadulterated appreciation, the homes would have just increased in price with no outside forces at play —–> which means you could have purchased a home five years ago, done absolutely no upgrades beyond necessary maintenance, and had your home value increase by 19% each year.

That would be awesome, but that’s not what’s happening here… I can tell you from living and working extensively in the 80205, this phenomenon can largely be explained by a human species called “A Fix-and Flipper.” As the traditionally posh neighborhoods in Denver remain out of reach for many, people move to up and coming neighborhoods where prices are more affordable. Home-flippers get hip to these trends and they start flipping in these neighborhoods knowing that they can make money on their investment.

I purchased my home in July of 2013 and in that time, 5 homes have been fixed and flipped within 2 blocks of my home. Therefore if someone bought these homes at $350,000, put some work into them, and sold them for $500,000 within the same year, it looks like prices are increasing rapidly. The statistics don’t control for fix and flips; they only show the overall numbers. When you see these dramatic statistics for Park Hill, Whittier, City Park West, and so forth… you’re not getting the whole story.

Similarly, when you purchase a home in Wash Park East or Country Club, that home is already going to be outfitted with luxury upgrades. There isn’t a whole lot one can do with a such a property to add value. It’s already a luxury home. It already has Viking appliances, a top of the line bathroom, and maybe a heated garage. It already has the best roof that money can buy. Therefore, the value increases for these homes will not be nearly as grandiose.

All in all, my advice is to not be too scared of the market. It possibly will plateau or maybe even drop at some point. (A lot of people who were afraid to buy two years ago, but if they would have bought then, their home values would have appreciated during that time. In the meantime, their rents have only gone up.) All commodities drop. And they usually go back up. If your home value drops, treat it like a stock and don’t sell when the market is down.

As a final note, from everything I’ve seen, I do expect rentals to continue to rise. If you are renting, but are fearful of buying a home, you should probably fear the opposite. Home prices may drop at some point, but rentals are likely to go up and up and up. In fact, if you’re looking to invest some money, I would strongly consider getting a rental property in Denver.

If you have any questions about the Denver housing market, are interested in buying a home, or would like to find out your home’s current value if you are considering selling, please call Allison Parks at 303-908-9873 or email her at [email protected]. We are Conscious Real Estate – the brokerage that loves our local and global community – contributing 10% of all realtor commissions to the nonprofit of our client’s choice in our efforts to change the world through real estate. 

How Will Legal Marijuana Affect the Colorado Real Estate Market?

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Marijuana Questions

Whether you voted to legalize marijuana in the state of Colorado or not, it happened – and the business of legal marijuana is a large enough industry to affect our local real estate market.  This blog is not intended to be political, I simply consider it my job to stay on top of all aspects of real estate and our local economy.  So, how can we expect legal weed to affect our local real estate market?

All in all, marijuana equals more money.  In Colorado, 5 million dollars was generated in sales tax from medical marijuana in 2011.  The state of Washington estimates that legalizing marijuana will create $1.9 billion in additional revenue in the next five years.  The city of Oakland raised $1.3 million in tax revenue in 2011, which accounted for 3% of the city’s total business tax revenue.

Those numbers aren’t bad.

CNN Money quotes Alec Rhodes, managing director at Cassidy Turley Commercial Real Estate Services in Denver, estimates that marijuana growing operations occupy at least 1.5 million square feet of commercial real estate, which contributed to the local economy to get us through the recession.

So, if someone were relocating to a new city, what might they look for?  Strong economy.  Good schools. Colorado governmental regulations seek on the legal marijuana industry seek to provide this.  In fact, the first $40 million of sales and excise taxes on newly legalized recreational marijuana has been earmarked as revenue for public schools.

All in all, it is likely that the legal marijuana industry will positively affect the Colorado housing market over the next ten years; home prices probably wouldn’t skyrocket due to the industry, but the additional reinforcement to our local economy will likely add benefit.  The revenue generated from marijuana will redistribute into other local non-marijuana related businesses.  Folks who work in the legal marijuana industry will need to buy homes, eat dinner at local restaurants, acquire legal counsel, hire employees, and so forth.  With our nation’s economy still not up to full recovery, we can remain optimistic about maintaining our economic strength in the state of Colorado.

How To Choose a Home That is Likely to Increase in Value

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house and money on scales. Isolated 3D image

A lot of people have expressed concerns to me about buying a home in the Denver market, as the rapidly increasing prices have raised concerns about a housing market bubble.  If you would like to learn more about current economic trends affecting the Denver market, click here.  For now, let’s consider some good maxims for buying a home in any city and any market.

Your home is one of your greatest investments.  There is absolutely nothing wrong with buying the home you like, wherever you like, BUT if you prioritize your home increasing its value, consider these following tips:

1)  Seek homes in walkable neighborhoods.  Walkable neighborhoods are becoming a high priority for home-buyers.  With increases in gas prices, people are moving back in from the suburbs and finding that its often more pleasant to walk to work, to the store, and to dinner.  A home in a walkable neighborhood will be more likely to maintain and increase in value.

If you are looking for a home in a new city, check the walk score.  Neighborhoods are rated from 0-100, with 100 meaning that multiple neighborhood businesses and parks will be within a stone’s throw.  The Riverfront neighborhood in Denver boasts some of the higher home prices in Denver and has a walk score of 98.

2)  Look for homes near parks and public transportation.  Homes that are near parks and public transportation are more likely to maintain or increase in value.  Once again, it’s where people want to be.  Location, location, location.

In Denver, an area which will likely increase considerably in value in the future is near the future lightrail extension by 38th and Blake.  If one were to purchase a home in this area now, in 3-10 years after construction is completed, the home value would likely have increased significantly.  Note:  choosing a location based ONLY on projected increases can be risky.  I recommend that you appreciate the location you choose as it is, in case projected improvements to the area never happen.

3)  Stay abreast of new developments that will make a location more desirable.  Glendale is already a desirable neighborhood to many, but when the Riverwalk is completed, homes near this development will likely increase in value because the neighborhood will be even more enjoyable.

4)  Learn a bit about the rental market in your area.   If rents on comparable properties are going for equal to or higher than your mortgage, this is good. If the vacancy rate for rentals in your city is low, this is good.  So, if, in the words of Kurt Vonnegut, the excrement hits the air conditioning and you no longer can afford your mortgage, you could likely cover your mortgage (and maybe even make money) by renting out your home and keep yourself out of foreclosure.  This could also benefit you if you have a job transfer to another city, while your current city is in a down market.  You could cover the mortgage (and maybe even make money) by renting out your property until the market improves so you don’t lose money when you sell your home.

Renting out your home may not be for everyone… Being a landlord contains its share of headaches, but if remaining financially strong is your primary goal, the ability to rent out your home can be a major asset.  Real estate markets aren’t so different from stock markets, and the mistake a lot of people make in stocks is selling when the prices are dropping.  Sometimes this can save you, but most markets will rebound and make their way back up.  Do what you have to do to weather the storm and wait it out.

5)  The home that is generally the best investment is the worst or smallest one on the block.  The home that is generally the worst investment is the biggest and best one on the block.  There can be some wiggle room on this… If , for instance, someone famous once lived in the biggest home on the block, that will be intriguing to future buyers.  If the worst home on the block needs major foundation work, a roof, and windows and would cost a great deal to get it up to snuff, it might not be the best investment.  If you are savvy about finding good contractors and can do some work yourself, consider purchasing and renovating the icky house in a great neighborhood!

6)  Choose a home that has eco-friendly features and make eco-friendly renovations.  From the tree huggers to the penny pinchers, home-buyers are increasingly desiring green homes.  Green homes sell for more than conventional homes; they sell more quickly and closer to asking price.  So, if you view your home as an investment, greening your investment will likely get you more green (money) when you sell, as well as saving you money while you live in your home.

If you are ready to buy a home and want to make sure you get the most bang for your buck and security in your financial future, let Conscious Real Estate guide you through the home-buying process. Call 303-908-9873 to reach one of our agents or email our owner, Allison Parks, at [email protected].

Denver Housing Bubble – Fact or Fiction?

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Energy efficient house graphics with question and percentage marks against grey background

Is the Denver housing market is in danger of a bubble?  If someone you know has purchased a home in the Denver metro area this past year, you will certainly have heard about skyrocketing home prices, bidding wars, and properties often selling for higher than the asking price.  Considering that the home prices have quickly been rising while our nation’s economy still feels shaky, this is an understandable concern.

As with any bubble, real estate, stock market, or otherwise, a bubble can only be predicted in hindsight.  We don’t know where the peak (or the crash, for that matter) will hit, until we are past the hump or slump.

It’s worth mentioning that the Denver real estate market was not as negatively affected as many parts of the United States during the recession.  The subprime mortgage game wasn’t as prevalent in Denver, our economy remained stronger than many major cities, and our percentage of foreclosures was considerably lower.  The Case-Shiller Denver Home Price Index reported that metro Denver home prices have met and exceeded the pre-crash peak in 2013.

Much of the price appreciation has been due to the drop in interest rates.  During the recession, interest rates have been at an all time low, in the Fed’s attempt to keep money in the system and create more consumer confidence in home-buying.  Whether the attempt was psychological or not, when you buy at a low interest rate, as long as you can make your mortgage payments, you will greatly benefit in the long run by saving a boatload of money throughout the years on interest.

Denver, depending on which statistics you read, historically has had a 5% appreciation on home values.  (I have seen statistics reporting this number as high as 9%, but for sake of being conservative, I will report the lowest number I have seen.)  Most investments won’t yield more than 10% per year on average, and let’s face it – you can’t host a holiday party in your mutual fund.

Overall, the Denver economy is pretty strong.  Even if home prices drop for a bit, they most likely will recover and continue to rise.  Our state’s population has grown at almost double the national rate over the past few years.  State Demographer, Elizabeth Garner, states that of this growth, 55-60% of people are moving here due to a job change, indicating that Colorado is showing job growth.  Also, many young families are eschewing the coastal cities for Denver for lower taxes, lower cost of living, access to parks, and sunny days.  The Denver economy continues to grow with diverse industries – natural gas, mutual funds, clean energy, technology, and well… marijuana.

So, what do I recommend?  If you’re financially and emotionally ready to purchase a home, do so.  Interest rates are still low enough that even if home prices drop after you buy, you will still save money in the long run.  The Denver economy has remained strong and shows no indicators of slowing down.  The population keeps growing in Denver, and increasing demand for homes will keep prices up.

If you think you may be ready to talk a real estate professional about purchasing or selling your home, please contact Allison Parks at Conscious Real Estate at 303-908-9873 or [email protected].

Metro Denver Rents Still Rising – 2013

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illustration of board for rent

Denver rent averages have reached levels not seen since metro Denver’s apartment boom days in the dot-com era.  A report released in October 2013 from the Apartment Association of Metro Denver and the Colorado Division of Housing states that the area’s overall vacancy rate is 4.4 percent, which is a pretty tight market for renters.  Ryan McMaken, an economist with the Colorado Division of Housing, believes that many apartment units are sitting longer than normal only because they are being updated, repaired, or renovated.

Supply of rentals from new builds is finally beginning to push up the vacancy rates a bit.  However, even with 2900 new units, rents continue to rise.  Average rents are currently at $1,049, up 6.3 percent from Q3 2012.  2014 is expected to bring 10,000 new units, which may slow rent growth.  However, population growth hasn’t slowed much in Denver, so we will see how the numbers even out, if at all.

While interest rates remain low, it may be a great time for you to buy.  Through much of Denver, if you were to purchase the exact same property that you’re renting, your mortgage payment would likely be lower than your monthly rent.  Contact us at Conscious Group to see if buying in Colorado is a good move for you!

Denver Housing Market – Summer 2013

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The houses

As our much anticipated summer kicks off, the Denver housing has become increasingly hot! 

Anyone currently buying a home in the Denver market no doubt has noticed how quickly things are selling, with multiple offers being made and accepted within a day of two of listing.  Many recent home sales have sold above asking price as the result of bidding wars.  All of this is the result of an influx of new home buyers and a shortage of sellers within the local market.

Denver’s Chief Economist, Jeff Romine, reports that 12,250 new jobs were created in 2012, unemployment has dropped almost 2% since 2011, construction is on the upswing, and consumerism has shown significant evidence of an increase.  Oh yeah, and he reports that Denver’s housing market is among the strongest in the nation with home values up 8.3% from last year.  Yes, Denver’s economy has improved. 

In fact, Denver’s economy never took as hard a hit as many U.S. cities during the recession.  Couple this with the fact we have a fun, healthy city adjacent to the majestic Rocky Mountains attracting a population of active professionals, and it should be no surprise that housing demand has been on the rise. 

So… what does this mean for home buyers and sellers?

For buyers, “sleeping on it” may not be the best approach to deciding on whether to submit an offer on your dream home.  I have had recent experiences with clients who saw a home they loved only to have missed out on the opportunity by simply taking a night or two to think things over.  It is imperative to be pre-qualified for financing and have earnest money available to submit an offer immediately when the right home presents itself.  Buyers will also gain a huge benefit by having a realtor represent them who has access to industry databases that provide immediate updates with new listings and comparable sales data that may not be available on public sites.  To the extent that bidding wars have become commonplace, having a realtor advise you utilizing their familiarity with market statistics may also prove key in making a reasonable and successful offer.  Buyers should also be aware that mortgage rates have increased recently as a result of a strengthened national economy and that there is speculation the Federal Reserve Board is contemplating an increase to the prime rate, meaning that historically low interest rates could soon increase.

For sellers, the strengthened economy, increase in local housing demand and prices, and short supply has created the most seller-friendly environment Denver has seen in ages!  Yet not many people are selling their homes.  Perhaps Denver’s home-owners haven’t received the memo that housing prices have surged 10-20%, or remain hopeful they will continue to appreciate.  Maybe the recession has made people more cautious, so they are reluctant to sell and upgrade to a larger home and mortgage payment.  Maybe folks finally got the color of that accent wall right and they don’t want to mess with a good thing.  Whatever the case, prices have continued to rise and comparable statistics from recent sales over the year or so may not be applicable to current valuations, making it important that you work with a knowledgeable real estate professional.  It is also possible that rising housing prices could eventually plateau given the influx of new large scale construction occurring in the Denver metro area, such that increased housing prices may not continue indefinitely and there has never been a better time to sell.

If you are considering buying or selling, I’d look forward to discussing your situation and assisting you in any way possible. Please call Allison at 303-908-9873 or email [email protected].