One of the most common questions I get asked, “Are we in a bubble?”
I’ve put together some facts, graphs, and input from local and national economists to help put things into perspective:
The fact continues to remain: DEMAND IS WAY UP. SUPPLY IS WAY DOWN.
FACTS ABOUT DENVER DEMAND:
- Metro Denver’s current population is around 3 million and is predicted to grow by 50% in the next 25 years (or 50k each year)
- Denver has added 210,000 new jobs since 2011 (65,000 jobs were added in Metro Denver within the last year alone)
- Denver’s unemployment rate is currently at 2.9%
- Denver’s Job Growth Rate is 6th highest in the country
- In 2015 average apartment rents rose 10%
- Vacancy rate has dropped to 5.1% in this 3rd quarter, down from 6.8% at the end of 2015
- So far this year builders have added 7,222 new units, but tenants have rented out 12,493 apartments that were vacant 9 months ago.
- Rents are expected to increase another 5.9% in 2017. It is still cheaper to buy versus rent and it’s going to remain that way for the foreseeable future.
FACTS ABOUT DENVER SUPPLY:
- Over the last 30 years we have had an average of 14,426 homes and condos for sale, now we have 70% less!
- Homeowners are not selling because they are scared they won’t find a new home to buy.
- More financial responsibility: families are focusing on paying off debt, rising cost of college for their kids, etc
- New Home Construction (starts & closings) are down 55% since 2005.
- Builders sold over 15,000 new homes per year between 1997 and 2006
- Builders built just 6,516 new homes in 2014 and 7,835 homes in 2015
- Big Production home builders are taking on average 9 to 14 months longer to build a new home than it took 10 years ago
- Construction Defects Law (builders need to be more cautious)
- Lack of qualified contractors and labor
- Not enough builder financing
- In 2014 and 2015 builders have built a total of 30,388 new apartments and homes. In the last 2 years metro Denver has grown by about 120,000 people, which requires at least 48,000 new homes and apartments. Denver built 18,000 less units than needed.
- Between 2013 & 2015 metro Denver added 125,892 new jobs, but only built 24,353 homes: a ratio of 1 home to 6 jobs.
- A long standing stat says we need to build 1 new home for every 1.6 jobs created
- National Association of Realtors concludes that we needed 67,403 MORE single family homes to have been built in the last 3 years!
- Denver Post stated on 11/6/16 that Denver has 3,500 fewer construction workers today in CO than we did in 2001. But 1.1 Million MORE people live here.
WHAT WOULD IT TAKE FOR PRICES TO DROP IN THE NEXT 5 YEARS?
- Builders would need to build 150,000 homes and apartments
- If our population only grew by 100k or less (it’s expected to grow by 250,000 by then)
- Job growth slows dramatically
- Construction Defects Law is reformed
- Mortgage rates increase to well over 5%
- Major recession locally and nationally
COULD 2008 HAPPEN AGAIN?
- In the years leading up to the last housing market bubble, you could buy a home with no money down with a 580 FICO score
- Those with a 620 FICO score didn’t need income verification (WTF!?)
- Most of these loans were 2 or 3 year ARMs (Adjustable Rate Mortgages)
- In more recent years since the last housing bubble, average LTV on conventional loans have been about 80-85%, average credit scores are 760+, and 90% of loans are fixed rate
- Who is winning the bidding wars these last 3 years? Buyers with great credit, large down payments, lots of money in savings and low debt to income ratios.
WHAT WOULD IT TAKE FOR DEMAND TO DECREASE?
- Heavy out-migration/people stop moving to CO
- Job growth slows, unemployment goes up
- Soaring interest rates
- Mountains to disappear
- No more 300 days of sunshine
- Are any of these things likely in the next few years?
WHAT LOCAL ECONOMISTS ARE SAYING:
- The economics behind why we have seen such strong increases are very sound.
- We have strong demand for houses from new residents moving to the area, from people moving from existing houses, and from Millennials forming additional households.
- Builders are unable to bring new homes on the market fast enough to meet our surging demand.
- We are benefiting from low unemployment and new companies moving and growing here. – Patti Silverstein
WHAT NATIONAL EXPERTS ARE SAYING:
- “Don’t expect Denver home prices to go down. Everybody wants in. It isn’t a bubble and it will continue to be like this.” – Ralph DeFranco, Global Chief Economist for Arch MI
MORE FUN FACTS:
- In the last 5 years, Denver housing demand has increased by 37.4%
- In the last 5 years Denver housing supply has decreased by 55.9%
- Thus, prices have risen 48.9%
- Foreclosure filings are down 80% from the peak in 2009
- Veros Real Estate Solutions predicts the 3 strongest real estate markets for the next year:
#1 Denver (expected appreciation rate of 10.8%)
#2 Boulder (expected appreciation rate of 10.5%)
#3 Ft. Collins (expected appreciation rate of 10.3%)
- Why are home prices so fast in CO and in many cities in the West? -Low housing supply, an influx of population, and low unemployment rates continue to be common characteristics of the top forecast performing markets.