The last five years have produced significant development in the Denver metro real estate market as record number of buyers look for homes, causing house prices to surge. The surge in our real estate market has been so profound that many people are wondering whether we’re headed toward another bubble.
Bubble or No Bubble?
While no one can ever predict the future, I detect no evidence that we’re slated for a dramatic downturn in the real estate market anytime soon. Here’s why:
- Even with the steady increase in metro Denver home prices, the average inflation-adjusted PITI (Principle, Interest, Taxes, and Insurance) payment made in metro Denver is almost exactly at the 35-year average. This signifies that although home prices continue to rise, buyers are still able to afford their monthly PITI payments, thus providing plenty of room for home prices to continue to increase. The clear evidence pertaining to this is the significant number of buyers still making offers and closing on properties.
- The number of transactions relative to the population of metro Denver is approximately at the 25-year average. At the peak of the bubble in 2006, the number of transactions was about 20% above the historical average. When we see the number of closed transactions well above our historical average, it indicates an overheated market (as it was in 2006). In the past year, the number of closed home sales is only 1% above historical average due to the low inventory. No sign of a bubble here.
- Today, mortgage underwriting standards are among the highest they’ve been in decades. In 2006, many of the deals were closed with low or no documentation mortgages (“no doc loans” or better yet “liar loans”). The Federal Reserve says the single family residential default rate peaked at 11.4% in 2010 thanks to loose lending standards. In 2016, the default rate was only 4.3%, largely due to tougher lending standards that have been implemented since the downturn. These tougher lending standards prevent unqualified buyers from purchasing property, which mitigates the chance of the market overheating. Fewer buyers means fewer purchases which greatly reduces the chance of home sales soaring above historical averages.
- As a result of relatively high home affordability, it’s a lot cheaper to buy than rent in our market. This would not be the case if we were approaching another bubble. Metro Denver home prices and wages have increased approximately the same amount in the past 45 years and interest rates are still very low. For housing price affordability to return to the levels that we saw in the years between 2000 and 2004, either home prices would have to increase an additional 25% or interest rates rise to 6.25%. Neither is going to happen anytime in the near future.
- The imbalance between buyers and sellers we’ve seen the past few years in our housing market is due to a lack of inventory, not because of illogical/unrealistic/unsustainable demand from buyers. “Much of the price increases we are seeing are the result of rising demand among investors and homebuyers for a still-limited supply of homes for sale,” said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a natural correction from years past when we had too few buyers in the market.
- Rising mortgage rates will help to temper the possibility of a bubble as well. Although rates are still near 50-year lows, they are expected to rise… eventually. “History shows that a sudden increase in interest rates tends to have little correlation with home prices. Rather, rising rates are more likely to contribute to a decrease in home purchase volume,” wrote Mark Palim in a Fannie Mae commentary. The benefit of a rise in mortgage rates is that it will actually reduce the number of buyers, therefore lowering the chance that the market will rise out of control and end up collapsing like it did in the bubble years ago.
As you can see from our monthly market snapshot, the inventory of metro Denver homes for sale is still near all-time lows (5,922 homes on the market where about 18,000 is a balanced market). Since the inventory is still extremely low, I am confident the demand will still exceed the supply for the next few years and prices will continue to rise for the foreseeable future.
If we’re not headed for a bubble any time soon, what does that mean for you as a buyer? It means you should consider buying a home if (and only if!) it makes sense for you to do so. Are you running out of room at home? Expecting a baby? Have an awful commute? Want to live in a nicer neighborhood? Looking for a better school district for the kids? There are a lot of great reasons to move. Don’t wait to buy a home when the market is “just right;” buy because it’s time for a new home. Get in touch with us anytime to discuss what is right for you in our current market.
If you’re looking to sell your home, there couldn’t be a better time. The inventory of homes on the market is at an all-time low, meaning sales prices are high. Get in touch with us and we’ll be happy to run a complimentary Comparative Market Analysis on your home to let you know what it might be worth. It’s valuable information and costs you nothing!
Landlords couldn’t be more pleased in our current renting environment. The most recent “Metro Denver Area Residential Rent and Vacancy Survey” for 1-4 unit properties shows good news for landlords. According to the report:
“The overall vacancy rate for the metro area for the first quarter of 2017 was 2.8 compared to 3.2 percent for the previous quarter, and 1.8 percent for the first quarter of 2016. It was 1.5 percent in the first quarter of 2015, 1.5 percent for the first quarter of 2014, .9 percent for the fourth quarter of 2013, 1.6 for the fourth quarter of 2012, 1.4 for the fourth quarter of 2011, and 3.1 percent for the fourth quarter of 2010.”
In the U.S., more millionaires owe their wealth to real estate investments than any other single source of income. Today’s market could not be better for long-term, buy-and-hold investors. Call or email us if you’re interested in discussing this further!