Denver Appreciation Over Next 5 Years

10 Replies

@Brian Bellew Anything can happen but my take was Denver had some run ups in previous decades that were maybe not exactly warranted. This run up looks like it is more than warranted compared to those past run ups. The momentum to carry on seems fundamental now and for sure deserved with the new demos currently. Like number one city for millennials and more. But IDK Denver in person so this is my Cali speculation at best and compared still dirt cheap.

@Brian Bellew Crystal ball is a little fuzzy =/

I think anyone who tells you they know anything with any reliable degree of certainty 5 years out is selling something.

Generally, it seems the new rules in place will prevent a major depression like the one we just had.  Beyond that, prices could keep climbing or they could level off.  Isn't that helpful?  =)

Brian,

As much as I agree with @Adrian Tilley , I think it's a fun to make predictions. What makes them fun is going through the exercise and come up with your prediction that is backed historical data or your own theory. 

With that said, is your housing market cyclical like our CA market? What is driving your housing market? How cyclical is that sector? What's the expansion life cycle of that sector, etc...? 

If your market were similar to our market, my prediction would be 15% to 25% lower home value from the peak, which likely happens in 2017 +/- 1 year. I think it's a worthy exercise to go through and compile the data going back 30-40 years. It will likely shows you the peaks and valleys of your market. Then overlay it with the HAI (housing affordability index), interest rate, rent/own ratio and whatever parameters that you believe relavent, the answer will come to you. As they say "a picture is worth a thousand words."

If you're willing to put in the time and effort to understand your market, I can almost guarantee it will pay you 100X in the future. It's like farming. You have to till the soil, fertilize it, plant the seeds and water them before you can pick the harvest. It has been a very fruitful exercise for me. The knowledge and understanding you get from the exercise alone is worth its weight in gold IMO. Of course, this is only one man's opinion. Just don't forget to send me some royalties once you made it big.  :>)

Best of luck. 

@Brian Bellew there are several factors pushing the Denver market over the past 4-5 years. The major factors as I see it is growth in population. We (Denver Metro market) have grown about 20K people per year from the birth rate exceeding the death rate. We have also grown about 30K people per year from people moving here from outside the state. Net growth of about 50K per year. Over the past 7-8 years we have not built enough homes to house the new people moving here. The last two years we have ramped up quite a bit. This year it looks like we will build about what we need for this year but will still have a large deficit from the past years. Wages have not grown much over the past few years but we have seen a nice run up in the home prices. So what does the future hold?

To start with, I voted for @Adrian Tilley post. At the same time, past performance is the best indication of the future. Historically Denver real estate has appreciated about 3% per year over the long haul. That factors in the peaks and valleys. The past few years have been pretty crazy but the data I have seen indicates it's more from what is behind us and not so much speculation about what is in front of us. The overall housing numbers indicate that we have at least 1-2 years more of this exuberant appreciation (8-12%) remaining. This is primarily based on population growth (demand for units) and new construction (supply of units). A balanced market is considered to be 6 months supply we have about 20 days supply. The number of units being sold is actually declining slightly which is also indicative of a supply side issue. As I said before, the supply side is just about even with demand (we are building just about the number of units that we need for growth). We have several years in the past of severe under-supply so we have not reached the balance point just yet. After the 1-2 years of a similar market we should see a leveling off to more historic levels (3% growth). I see five years out as potentially being an inflection point. That could be the time where supply and demand meet. If we then continue increasing the supply, we all know where that lands us. If building tracks growth then we could see steady growth well beyond 5 years.

Now for all the qualifiers.

1) Interest rates - if we see a rapid increase in interest rates and we already know that the FED has stated an increase is coming, we could see a huge rush as rates begin to increase and then a big lull while people adjust to the new norm. This could impact the 5 year picture simply from a timing perspective (it could land on the lull) but beyond that data says that people typically buy about the same number of homes per capita no mater what the interest rates. This would impact the prices and definitely hold them down unless wages started to grow in response to increased interest rates. At the same time increased interest rates shouldn't cause a decrease in prices because many properties are locked in and demand is still pretty high.

2) Wages - if wages in the area begin to increase then that could really extend the growth cycle for years. If wages stay flat, then the affordability will decrease which will eventually (with-in five years) put a lid on growth.

3) Market efficiency - There is almost no new construction below the media price for either apartments, condos or stand alone homes. This means we could see segments of the market out or under perform the market as a whole. For example, if you own a class A apartment complex in the urban core you might see some really stiff competition which would mean your rents would stay flat or even dip over the next 5 years. Where as if you own a small SFR in one of the emerging areas around the urban core you could easily see the value and rents double in 5 years.

4) Condo construction - the Colorado construction defects laws have scared insurance companies for builders and for a period of time it was impossible to get builders risk insurance for condos being constructed for sale. I have heard that is changing a bit. If this comes in line then I would expect the condo price growth will take a hit. It has outperformed the SFR price growth for the past couple of years.

5) World Geo-political events - As we have seen in the past these can really cause our overall economy to take a dive. For example, if foreign cash stopped purchasing our debt and our government was forced to live on what comes in while paying higher rates on the debt we currently have.  

6) Price of oil - If the price of oil were to go over $100 per barrel and look like it was going to stay there for an extended period of time, then the boom could take off again.

So, my advise? Make deals that make sense for you now where you are now. Don't be controlled by fear but don't be foolish either. I can't really see you going wrong by purchasing something you can afford now and locking in with the current low rates. 

@Bill S. I think your analysis is really on point.  As long as population growth continues on the path it is on demand for Denver will continue be strong.  On the supply side, the building that is happening seems to be higher end properties at the urban core.  I wonder in the next few years if we will have an over supply of these properties?  

@Bill S. Agree with your points and qualifiers.  Population growth is a factor of economic growth so as long as the Denver job market stays robust, company's want to move and expand here, and respective salaries increase, the housing market will follow.

Now for a question:  If it's possible that the 5 year growth projections could be another 17-21%, will rents increase accordingly?

@Kevin Greer IMO if property values increase your 17-21% over five years (3.5-4% per year). Then rents will also track that. Examples being the average $400K home (average price for Denver) becomes a $480K home and $1,200 (average rent in Denver) a month average rent becomes $1,450 a month average rent.

As I said before the new build is all in a very narrow segment of the market (Class A). That will impact rents in that market segment in the form of higher vacancy rates and flat rent growth. The impact to Class A will cascade down the chain to others but I think the building in Class A will slow when the vacancy rates there start to climb. Vacancy rates impact cashflow from property. Owners will see that and back off. They will overbuild the Class A, and may have already, but there is still a very healthy demand for everything below that and no inventory being added there. Rents below the median will continue to climb while the rents above the average will stagnate. This will push up the average up but the increase will be very segmented by property class. 

Another item that will come to play is condos. The building started 3-4 years ago. When Class A rents start to flatten we will see some of that market segment turned into condos which will siphon off supply of for rent properties. If the demand for homes remain but rents don't continue to increase then condo conversions will take away some of the for rent supply. This will tend to support the for rent market prices. 

All of that said, if that kind of appreciation makes or breaks a deal for anyone, they are skating on thin ice. While I consider the above to be the likely scenario, there are many other things that can happen that would completely change the outcome to the downside.