Denver’s Impending Housing Bubble: Fact or Fiction?

In the late 90’s we saw the unprecedented rise in Dot-Com boom – the age of the Internet exploded into our lives. Stocks skyrocketed and investors of every type couldn’t wait to fund the next Internet based start-up. It was a time of extreme growth and excessive speculation. In 2000, the bubble burst and the country fell into a recession.

Fast forward to 2008 and the sharpest recession since the great depression. This time an $8 trillion housing bubble sent the country into a tail spin. While there are many factors in the cause of the recession, it is agreed that one of the key issues was a housing bubble with falling home values combined with rapidly increasing interest rates from sub-prime loans.

Variable interest rate loans caught many homeowners by surprise. The ridiculously easy to obtain loans often came with a brutal punch, hidden like a time bomb. Automatic interest hikes built into the loan suddenly made the home unaffordable to the people who owned it. This nasty surprise put many homeowners under water, having mortgages larger than their home value, and the wave of foreclosures began.

Denver Feels the Crunch
Although the 2008 housing bubble was felt nationwide, different cities felt the impact at various levels and times. Las Vegas saw home pricing increases of 80% leading up to the crash, while Denver remained at a moderate ten percent. As the country sank into the recession, Denver felt the crunch, but didn’t experience the depth of the crisis in the same way as other cities.

The Denver real estate market slowed to a crawl. In August 2010, there were 45,165 active listings with a median price of $218,250. By comparison, in January 2018 there were 6,710 active listings in Denver’s MLS with a median price of $375,000. The difference is further exacerbated by the addition of 600,000 new residents in a seven year period.

The New Bubble
One of the most prominent questions around Denver these days is, “Are we on a housing bubble?” With record-low inventory and record-high prices, it is easy to conclude we are teetering on the edge of a bust, barreling towards another crisis. But this time, things are a little different.

From 2000 to 2010, Colorado added 700,000 new residents. While it seems people are flocking to Colorado faster than ever today, statistically the rate is only slightly higher than the norm. The population growth isn’t the root cause of the rising prices, it’s the lack of housing. There are a couple of factors.

Buyers vs Inventory
First, anyone who lost their home in the crisis around 2010 very likely moved to a rental. These former homeowners who now had bankruptcies and foreclosures on their credit reports, were out of the housing market for the next 4 to 7 years because they couldn’t qualify for a loan. The market picked up in 2014, which coincides with this timing, bringing renters back to into home ownership.

Second, back to 2010, with a strong buyer’s market and 45,000 listings in the Denver metro area, builders were on the sidelines. It wasn’t until 2015 that we saw new construction really start to kick in, but then it would be an additional 9 to 12 months for new homes to be completed and ready to sell.

The lack of inventory has pushed prices up, merely by the law of supply and demand. To compound this, people are hesitant to move. It’s easy to sell a home today, but buying is tough, so current homeowners are staying put. Now add to this the ultra-low interest rates, which puts even more buyers into the market, creating additional pressure on the current inventory levels.

Is There A Bubble?
With a strong economy, low home inventory and the continuing population growth, it is unlikely we’ll see a correction, much less a crash in the near future. When speaking to lenders, real estate agents, title reps and appraisers, the consensus seems to be we are not on a bubble and there is little expectation of change in the next year.

Expect home prices to continue to creep up, but at some point buyers will look for alternative housing markets, which could be other cities in Colorado or even out of state. Nonetheless, Denver is currently one of the most sought after places to live in the US. Add in an Amazon or Google headquarters to the area and the seller’s market rolls on even longer.