Denver Housing Market - 7 Factors to help buyers decide
In speaking with buyers over the past several years, there has been a common thread in the reasons people are putting off buying a home in Denver. Many are waiting until the market corrects or crashes, while others have simply been scared off by the most recent buying frenzy (which arguably started in April 2020 and has gained steam ever since). There is a general disbelief that this can’t go on forever so surely the crash is nigh.
“‘We are just going to hold off until next year’, is one of the most heartbreaking things I hear and I want to make sure that buyers are armed with the information to make their decisions based on sound data and not scary national headlines chasing clicks.”
It’s early May 2022, and I can certainly sympathize with the buyers that have stood on the sidelines, paying increased rental prices as home values continue to skyrocket, and the dream of homeownership gets further away.
But as often as I have these types of conversations, I also receive messages from past clients, thanking me and their lucky stars for buying when they did, even amongst the scary bidding wars and headline horror stories.
Essentially, if you want to live in Denver and set down roots, your options are to rent or buy.
So where does this leave us all? As the market starts to shift and for the first time in years we see rates start to creep up above 5%, inflation on the rise and a recession on the airwaves, are buyers finally going to be rewarded for their patience on the sideline? Is it their time to step out of rental purgatory and find that ever-elusive deal?
Let’s break it down and read between the “headlines”.
I thought it would be worth looking at two main factors that might influence buyer appetite - home values and rates. We can plot four combo scenarios, and break down an “if this, then that (ITTT) scenario” for each.
In addition to rates and values, several other market factors play a crucial role in determining what the market is likely to do in each scenario.
Remember we are looking at the Denver Metro specifically - not national headlines. I see these factors including:
Supply and Demand
Covid19 and its repercussions
The Millenial Generation
Interest Rates
Equity
Loan Applications
Denver’s Home Values for the past 50 Years.
Let’s dive right in.
Supply and Demand
This is probably the most significant contributing factor affecting market value. In Denver, there has been a relatively predictable pattern of seasonal supply and demand which from late 2014 to early 2020 has followed a fairly balanced pattern. In April 2020, there was a tipping point where month-end closed listings outpaced month-end active listings. This has yet to correct.
This is best reflected on page 13 of the DMAR Market Trends Report (snapshot below). This chart also shows that while buyer demand has remained fairly steady at between 4000-6000 closings during the highest summer months, the uptick in closings (demand) in 2020 to above 7,000 (record high closed) has far outpaced the active listings (supply), which has continued to remain below supply.
A reminder, in Denver, a balanced market would need have about 12,000-15,000 homes on the market (something we have not seen in Denver since 2011). OK - so we need more supply, which brings us to the next point.
Covid
Yes, we still need to talk about Covid and its impact, because it’s been far-reaching, extreme and multi-pronged. The most obvious was the sudden halt on inventory as people did not want to make any moves in the uncertainty of the pandemic. This seizing up of usual market movement (upsizing, downsizing, snow/sun-birding) has extended beyond the initial halt in inventory in the following ways:
the lack of inventory available made sellers hesitant to sell for fear of being unable to buy on the other side and risk being homeless - we became stuck in a “chicken and egg” scenario.
older home owners who would usually downsize to a condo (thus freeing up a single family home for a new buyer) have chosen to age in place and avoid the risks of covid exposure that comes with closer living quarters.
the almost overnight work-from-home-revolution, and inability for people to travel meant that people invested in their homes (hello 2019, 2020 low interest rate re-fi boom) and stayed put. In an article from Fairway Lending, “the average time someone spends in a home has increased from 8.7 years in 2010 to over 13 years in 2020; a whopping 50% increase”.
In relation to this work from anywhere trend, Denver also saw a huge migration of coastal money (California, Washington and New York) away from the big cities and to more regional centers like Denver where the skies are blue, powder is fresh and the homes are a fraction of the cost in comparison. Which segues nicely into the next topic - Millennials and their movement.
The Millennial Generation
In a report by Freddie Mac, “Millennials at a population of 72 million, are now the largest demographic in the U.S., and they are at their peak first-time homebuying age – the age where homeownership soars the most”. And the number one ranked state for Millennial migration? In a study by Smart Asset from the 2019 Census, you guessed it - Colorado.
And what a perfect time in history to be buying your first home! When rates are as low as they have been in history. Let’s look at that, shall we.
Historically Low Interest Rates
Since around 2009 rates decreased to 5% and continued to decline until they hit an all-time low of 2.65% in January 2021. This, obviously caused a huge uptick in demand, that combined with the low inventory saw the biggest year-on-year increases in property values in Denver. The average closed price as of April 2022 was up 16.41% (’22 vs ’21), 14.86% (’21 vs ’20).
This meant that in recent years with average prices of homes increasing by 6-9% per month, and rates starting to climb (as of April 22 currently back above 5%) the buyers who were prepared to play were pulling out all the stops to get in before they were priced out. This equaled intense bidding wars, waived appraisals, new cash buyer programs becoming mainstream and an average price point for a detached home in Denver on track to reach $1M by Memorial Day ’22.
Equity
When we think about a housing market crash, I think it’s important to compare the equity position of home owners in 2007-08 compared to now, as well as other factors at play. In the early 2000’s the “bubble” was brought about by risky lending and overbuilding. There was an oversupply of homes being purchased by people who were unable to make the payments on the adjustable rate loans when they increased.
Today, home buyers are on steadier ground with better credit scores, conventional mortgages at locked low rates and pandemic savings. Generally, the lessons of the 2008 crash has seen people tap into their equity to further their wealth through investing in additional property, reducing their rates or investing in education.
According to the Federal Reserve, homeowners today are enjoying an estimated $6 Trillion dollar gain in equity just over the last two years 2020-2022 and this does to count the equity captured in investment properties.
Locally, at the end of 2021, homeowners in Denver had access to $222,000 “tappable” equity. This is the amount of money they can access from the value of their homes while maintaining a 20% equity position in their home.
Loan Applications
One other factor we can look at to determine the general health of the housing sector is loan applications. This is a lead indicator of the public’s appetite for property.
Below is a chart that reflects the loan originated in the past 12 years. 2022 is on pace to be the third-highest year in the last 12 years. Buyers still want in and are actively pursuing their options.
Ok, so in short we’ve established the following:
Denver is a destination city for the largest population of first-time homebuyers - the Millennial generation.
Our job sector is strong. In a recent report by the Colorado Department of Labor and Employment “Colorado’s labor force grew by 12,300 in March 2022 to 3,211,700. The share of Coloradans participating in the labor force improved to 68.9 percent last month, the highest rate since March 2020. The state continues to experience a faster rate of recovery in the participation rate than the U.S”.
The ongoing shortage of available homes for sale has not kept up with the demand caused by migration, low-interest rates, lack of building, and people staying in their homes for longer.
At the end of 2021, homeowners in Denver had access to $222,000 “tappable” equity.
50 Years of Home Value Trends
I’d also like to take a moment to reflect on Denver’s general trend when it comes to home values, in particular the one most related to housing - The 2008 Housing Crisis.
The chart below shows the general trend of home values in the Denver-Aurora-Lakewood MSA as far back as 1976. That is almost 50 years of historical data.
The shaded grey areas indicate US recessions. According to the National Bureau of Economic Research (NBER) - the body that officially declares recessions - a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
If you zoom into the years just prior (2005) to and after the housing crisis period, the values in Denver only dropped slightly before ticking back up in the first quarter of 2011. During all other recessions, Denver’s property values maintained a positive increase.
Value/Rate Scenarios
The following scenarios influence buyers’ appetite to engage in the market. Given all the factors outlined above, you can make your own decision as to what the likeliest scenario may be, and how it might affect your decision to purchase or wait.
Values Up, Rates Down
This has been the status quo in the Denver market since around 2009 when rates decreased to 5% and continued to fall until they hit an all-time low of 2.65% in January 2021.
As we all witnessed, as soon as the rates drop, we see a huge surge in buyer demand and as a result, increased prices (values), bidding wars, and requirements for buyers to cover massive appraisal gaps and waive inspections. This essentially, means we return to the hyper-competitive extreme seller’s market.
IMPACT: For you, as a buyer, you likely have to bring more out-of-pocket cash to the table to win in this scenario - immediately eroding your equity position.Values Up, Rates Up
This is the territory we are moving back into (and will likely stay in for some time) now as rates climb back up into the 5+% range. This may feel confusing because surely if rates go up, values should go down? However with the severe lack of inventory (remember we need around 10,000 more homes to return us to a balanced market), the supply-demand forces, plus all the other factors I already touched on, I believe we will continue to see values in Denver increase.
What we can’t quite be sure of until we have the benefit of hindsight, is how much values increase under this higher rate environment. But even if we cut value increases by 50% from where they were in 2021 and 2022 down to 9-10%, we are still way above average gains (typically 6% per year) and as a buyer, your pathway to building your generational wealth through real estate begins sooner than later. And if you want to take a more conservative approach and cut the value increases even further, you’re still building your own equity sooner, as opposed to building someone else’s through your rental payments (which are not fixed and will continue to increase).
IMPACT: As a buyer in this scenario, waiting will only see you paying more money for a home at a higher rate. The silver lining of this scenario is that once you lock in price if rates drop significantly, you can always refinance at that lower rate.
Values Down, Rates Down
This is arguably Nirvana for buyers who have been beaten up for years in Denver. Based on all the factors that have been outlined, this is such an improbable scenario that trying to catch the tail of this would be more down to luck than smart moves.
IMPACT: Most importantly, any lowering of rates would be the signal for buyers to reactivate, causing values to go up again.Values Down, Rates Up
And finally, we come to a scenario where if rates were to continue to climb so high we would see a shift in supply-demand ratios to the point that values start to decrease. Again, as with #3 Scenario (value and rates down), the factors associated with the Denver market all point to this being highly unlikely in the shorter term.Even in the worst recession in 2008, the market in Denver bounced back so quickly that the average person (you and me) were either just lucky to be in the position to capitalize or retrospectively looking back and thanking their lucky stars.
None of the factors that caused the 2008 housing crisis (irresponsible lending standards, weak equity positions, variable interest rates, oversupply of housing) are present today - and they’re definitely not in Denver.
IMPACT: In short, as a buyer, if you believe that in the next 12-24 months, we will see a scenario where both rates and values are down, then you should not buy now.
But if you’re looking to invest in property in Denver, hold it for more than a couple of years, protect your $ from inflation, and start building generational wealth, the time to do that is now.
Your other option? Continue to pay rent and get further priced out.
I’d love to help you take that next step.