Home prices in Denver have risen steadily for about three years. The average median price of a home in Denver topped $400,000 in early 2017, and in many areas prices continue to rise. But as prices increase, has the value of the property increased?
Supply & Demand in Action
We talk about supply and demand in the Denver real estate market a lot. Rising home prices and skyrocketing demand fit the classic model so well. But do rising prices actually equal an increase in value? In other words, does the demand for a home affect the real value of the structure itself? The demand for housing creates an environment where people are willing to pay much more for a home, but it doesn’t necessarily change the value of the home from an appraiser’s point of view.
The Appraiser’s Point of View
Today’s home appraisers are in a tight spot. On one side they have homeowners, loan officers and real estate agents all cheering for ever increasing values to justify the sale price of a home. But higher prices aren’t always a good thing. A home that does not appraise at the sale price, means the buyer and seller need to find a way to meet in the middle to cover the “appraisal gap”. This usually comes in the form of a price adjustment or the buyer bringing additional cash to the deal.
On the flip side, appraisers have to appease the lender, and often the Federal Government, with an accurate valuation of the property. No matter what the sale price may be, the appraiser’s ultimate responsibility is to the lender to assure the value of the property does not exceed the buyer’s loan amount. They must stay true to the real value.
Taking lessons from the 2008 mortgage meltdown, home loans have become far more difficult to obtain and lenders are taking no chances when it comes to securing their assets. For the lender, the appraiser is the guarantee to their investment.
Are Prices Really Rising?
Since 2013, prices and home values have clearly increased across the board in the Denver real estate market. In every price level and neighborhood, the influx of new residents and lack of inventory has created a feeding frenzy of buyers.
In late 2016, appraisers were suggesting areas of Metro Denver had leveled off and in some cases even decreased in value, yet we continue to hear about the bidding wars and housing shortages. Is it possible we can see rising prices but flat-lining values?
Probably not. The continued pressure from an increasing population and inventory shortage keeps prices edging upward. While appraisers will push back on the extremes, the demand is real and they will continue to adjust values upward with the rising prices.
Does it Ever End?
Statistics from RE Colorado continue to show high demand for homes, keeping the Median Days On Market (DOM) to six days and the number of sales increasing each month. Part of this is due to the higher demand in the summer months, but nonetheless, the Denver housing market is still smoking hot.
It will end at some point, but predictions have been in the neighborhood of 24 to 36 months, with no major changes this year. Denver is hot spot of the nation, which keeps the population growing and the real estate market buzzing with activity.