Is the Denver market in a Bubble.....?

Denver, CO · Member since 2016 · 11 posts · 2 votes

New to BP and moving to Denver and hoping to begin my journey in REI.

Does anyone have an opinion on the market in and around the Denver area. My understanding of it is that home values and rent prices have skyrocketed over the past 2-3 years. Is that due to previous undervaluing or current overvaluing? Also, is it a concern the amount of younger people moving to the area that may not be able to afford the increasing prices and eventually start moving away? It appears that the new construction cannot keep up with increasing demand, causing bidding wars and such making it that much more expensive for new home buyers and investors.

Is it wise for someone new to this type of investing to try to get in the game now or wait....?

Thank you in advance.

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Matt M.

Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes

10y

Severe bubble here. Not worth even trying to invest due to prices. People are leaving the city in droves.

PS - Our weather is terrible and our football team sucks. Keep driving to KC;)

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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y
You know what they say about opinions.
But since you asked, I do have some fairly strong ones. Thank you for giving me an opportunity to rant!
Frist, no as far as detached homes go, I think the market is doing just fine and there is room for plenty of growth even at the high prices we see today. If you are looking at properties with yards, there are just not enough being built, given the demand. Fundamental things will have to change, and it won't happen overnight - it will be a gradual reduction in population inflow if prices continue to soar.
Second, yes, probably as far as attached homes and commercial real estate go. Take a drive around downtown, Cherry Creek, the Tech Center, or anywhere else. See all those cranes? They are building apartments. Tens of thousands of apartments. In a period of historically low cap rates. In a period of historically low interest rates. In a period of ridiculous legislation that squashes the ability for new attached homes (condos) to enter the market economically. People are pouring money into commercial real estate development because it's so "safe."
Laws change, interest rates change, and you are going to see tons of these new "apartments" brought to you by all those cranes converted over into condos very rapidly at some point in the next few years. When that happens, a bunch of volatility is going to occur and if you are late to the party, things won't be fun. It's going to be terrible news for folks that are leveraging to the hilt on commercial real estate with other people's money. It's going to be great news for well capitalized folks looking for deals as I plan to be :).
That's my OPINION, at least. Look forward to hearing from other folks.
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Matt M.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
10y
Severe bubble here. Not worth even trying to invest due to prices. People are leaving the city in droves.
PS - Our weather is terrible and our football team sucks. Keep driving to KC;)
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Michael DeFrancesco
Hi Michael
jump onto @mark ferguson website. He has been a broker in Colorado for many years and has a solid grasp on the market.
Gino
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Michael DeFrancesco
OP
Denver, CO · Member since 2016 · 11 posts · 2 votes
10y
@Scott Trench First off, thank you for your insight! So what you are saying is if you have the capital to do so, be prepared to take advantage of converted condos in a few years. You feel that they will go cheap enough to capitalize on them for rental income?......If they had high vacancy rates prior to conversion, why would they suddenly fill up? Because this would cause rental prices to drop in the area to where people could actually afford it? What kind of effect would this have on rental prices for detached homes in the area?
New to this and just trying to get a good grasp moving forward.
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Michael DeFrancesco
OP
Denver, CO · Member since 2016 · 11 posts · 2 votes
10y
Is this explosion of apartments, high influx of people, and low supply spilling over into other areas....Fort Collins, Colorado springs, etc..?
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Travis Sperr
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
10y
I love this question - because from the outside looking in most would probably identify the Denver market as in a "bubble". In less you are very in tune with the local market and data it is hard to see how healthy our market is.
@Michael DeFrancesco I encourage you and anyone else who is unsure about this market to go to a Your Castle Real Estate market trends class. Just google their website and check out the training/events.
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Sean Reilly
Commercial Real Estate Appraiser · Houston, TX · Member since 2015 · 23 posts · 6 votes
10y
You have to look at this in a few ways in my opinion. The Fed is rumored to raise interest rates in June of this year. When this happens historically it makes it harder to borrow money and home sales go down thus the prices will adjust lower. They were also rumored to raise rates last December but did nothing so it could all be talk again. I guess we'll see what happens.
Another concern is the unemployment rate. Clearly the 5% number is a lie to anyone that studies the markets. It's propped up by "seasonal" jobs and other part time work . Also, if you have stopped looking for work for 4 or more weeks the department of labor doesn't even consider you unemployed. They also don't count underemployed people. You're going to see a lot more headlines soon as the market starts catching up to weakness in layoffs, earnings, macro data, ISM/PMI surveys, and retail stocks.
That said, if you spend your life trying to time markets, you will more than likely fail. The people that can time markets become billionaires and have books written about them. If your numbers make sense, I don't see why you wouldn't invest. The good thing about Denver is that it's a destination city so people will always want to come here, either to live or on vacation. Personally I think that there's a nationwide bubble that is ready to burst. But do your own research and again if your numbers make sense go for it.

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Tyler Howell
Property Manager · Denver, CO · Member since 2016 · 107 posts · 43 votes
10y
Sean - I work for a big finance firm, and let me second your comment about trying to time the market.
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Sean Reilly
Commercial Real Estate Appraiser · Houston, TX · Member since 2015 · 23 posts · 6 votes
10y
Yeah, if you spend your whole life playing the what if? game you'll spend your entire life on the sidelines. However, the fact that you're thinking about this really puts you ahead of the game and if you're thinking this way you probably have a good head on your shoulders and will be able to navigate through life pretty well.
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y
@Michael DeFrancesco what I'm doing currently is investing in one property every year or so in carefully selected neighborhoods, making sure that I am well-capitalized, with large amounts of savings and a comfortable amount of equity. I'm doing this with duplexes, triplexes, and quads, on lots with yards and solid zoning, so that if the party continues forever, I can scrape and rebuild, selling at a huge profit, and if the party slows down or we all get a hangover, I can survive on the cash flow until it gets going again.
I think that buying condos will be a tough challenge today, AND when the conversion process happens. I'm personally staying away from them for now. Though, I'm sure that there are other smart people in Denver that are going to make a fortune by playing that game.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y
I dont know the Denver market other than what I read in national news. One metric though I think would be helpful for people to look at is percentage of sales that are all cash transactions, and percentage of sales that are conventional loans versus low down payment loans. I hear people in my own market (DC) saying we are in a bubble, but something like a third of transactions are all cash, and 50 percent are high down payment loans. So our prices are not being driven by leverage or low down payment borrowing.
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Tripp Howell
Real Estate Agent · Denver, CO · Member since 2016 · 58 posts · 24 votes
10y
In my opinion, the best time to invest was a few years ago, the second best time to invest is today. With demand as high as it is and rates as low as they are, we are in a great time to buy. If you wait around a couple years, you'll most likely wish you jumped in today. Don't you wish you invested a couple years ago? Even if the market takes a dip after you invest, it'll eventually correct itself and increase again. We have already surpassed the prices before the crash in '06/'07. Russel Brazil has a great point, prices aren't being driven up by leverage. People want to move here and that's not going to change.
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
10y
@Matt M.'s response made me laugh out loud! No one is mentioning it, so I feel compelled to.
I am a transplant to Colorado, Like many other people who live here right now. I'm from the Midwest, and after living here for one winter, I never wish to return to those 7 months of winter the Midwest has every single year.
We are not in a bubble - we are experiencing the Laws of Supply and Demand in action. There is low supply and high demand, thus prices rise.
He is correct that our football team will probably suck next year, though... And you will probably have better returns in KC...
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Jim Tiernan
Wholesaler · Denver, CO · Member since 2013 · 126 posts · 39 votes
10y
I agree with @Travis Sperr, check out the Your Castle Real Estate market trends class. Travis, I don't suppose anyone taped Lon Welsh and Charles Roberts on this subject at the recent Pine Financial Summit?
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Travis Sperr
Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
10y
@Jim Tiernan unfortunately no recording but the presentation is offered frequently. Our events are too low budget to record the presentations - we have to leave room in the budget for free coffee and beer!
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Jacob Pereira
Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
10y
I don't know the Denver market, but I do know the Austin market, and I see a lot of similarities. Both were sleepy mid-sized cities a few years ago and have seen explosive economic and population growth in the last 10 years and are now considered major destination cities. There's a lot of talk in both places by investors about housing and tech bubbles and lack of affordability. So with that caveat, I'll give you my opinion:
What I can tell you is that house pricing doesn't drive population and job growth in a city; rather the opposite is true. The fact that people are moving in, and there are jobs that can sustain the market is the reason prices are so much higher than they used to be (still much lower than such major metropolitan areas such as New York, DC, or pretty much the entire West Coast). Once the new jobs and population growth slow down, you'll see prices flatten; what you won't see is that people suddenly decide it's too expensive and that prices fall through the floor.
It reminds me of the oft quoted line from Warren Buffet, "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." I simply am still seeing too much fear and not enough confidence to believe that people are taking the kinds of extreme risks they were in 2007-2008 to cause a major crash. I can't tell you for sure that the boom won't end soon, but what I can tell you with relative confidence is that there are still plenty of good deals to be had.
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Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
10y
You just have to be strategic. A few years ago you could buy anything and get cash flow, and that property's probably doubled in value by now. Those days are gone, but if you are savvy about the path of progress you can make some good choices. I actually see some good entry options for beginning investors in the current condo market- there are so few places that are affordable for first time buyers that those are going to be in demand for quite awhile. And one effect of the "luxury apartment" boom is that it starts making higher rents elsewhere seem reasonable in comparison. In the longer run I think we'll see those apartments just lowering rents as they age, rather than a mass conversion to condos. but who knows?
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Bill S.Pro Member
Moderator
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
10y
@Michael DeFrancesco so this is talked about every month or so here on BP and usually at every Denver BP meetup. Use the search feature and you can see the same basic ideas posted over the past 2-3 years. Right now we have a couple imbalances IMO. There are not enough SFR near the urban core and there are too many Class A apartments being built. How all of that works out remains to be seen. Certainly if the over supply of apartments continues it will put pressure on prices in that segment and presumably in the market as a whole. Condo conversions can happen 7 years after construction is complete so perhaps we will begin to see those properties come to market as condos. On the other hand, those same units have seen the most rent growth from the proforma so they would be the ones least likely to have to convert and would be the most profitable for the original owners.
Changing the construction defects law does not appear to be happening in the immediate future so the current trends should remain in place for at least the next year. Right now the appreciation is about 9% for SFR and 12% for condos. That gives you a pretty good cushion for the next year or so. Trends usually don't just end over night (barring some major event) so the data says there are probably 2 years and it would not be unreasonable to assume 3 years of at least some form of positive price movement on the sales side. Rents have topped out in Class A apartments and vacancies are growing. If you are competing for those tenants you should be prepared to see downward pressure on your pricing for rentals and most definitely lower on your net rents. Outside of that segment the trend is following the sales trends (upward).
Right now the economics mean that there is little to no supply being added to the segment of the market below the median for either rent or purchase. That will continue to push the averages up.
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Jim Tiernan
Wholesaler · Denver, CO · Member since 2013 · 126 posts · 39 votes
10y
There is a front page Denver Post article today about this topic:
http://www.denverpost.com/business/ci_29915780/more-people-than-places-census-says-colorado-population
Bottom line, construction is a long way from keeping up with demand.
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Tim Milosich
Denver, CO · Member since 2016 · 6 posts · 1 vote
10y
Originally posted by @Jim Tiernan:

There is a front page Denver Post article today about this topic:
http://www.denverpost.com/business/ci_29915780/more-people-than-places-census-says-colorado-population
Bottom line, construction is a long way from keeping up with demand.
I'd honestly be okay with the supply would balance out a bit. Meaning, I'd be perfectly okay with the amount of people moving to this state to diminish substantially. Traffic is a nightmare.
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Jim Tiernan
Wholesaler · Denver, CO · Member since 2013 · 126 posts · 39 votes
10y
@Tim Milosich I certainly wouldn't mind if the lift lines were a little shorter.
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Michael DeFrancesco
OP
Denver, CO · Member since 2016 · 11 posts · 2 votes
10y
These are some awesome insights. I really appreciate the feedback you guys have given me into the Denver market. @Travis Sperr I will definitely make it a point to attend one of these classes. @Sean Reilly Good insights. Thank you. Finance major here so completely understand how detrimental timing the market can be, just have to be cautious going in for the first time. I am moving to the area cause I am done with this East Texas mess. Just hoping to start with my first investment property in that area(or somewhere around there) and don't want to lose my shirt on my first deal. @Scott Trench Thank you for sharing a little of your strategy with me. Is there anything that you would recommend to a first time investor moving to an unknown area(other than read, read, read, cause I am gobbling up as much as can) @Russell Brazil I will do some research into this and determine what the Denver market looks like from a leverage standpoint. Thank you!
@Tripp Howell Completely agree with you on that. I wish I did a few year ago down here in Houston. Home values have shot up a ton, but I also dont want to always be saying "if only" either. Eventually you gotta jump in.
@Mindy Jensen & @Matt M. Haha. Football team may suck for a little while, but hey....They're the freakin Broncos(I will always be a Texan fan though. I got high hopes for Osweiler.
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Michael DeFrancesco
OP
Denver, CO · Member since 2016 · 11 posts · 2 votes
10y
@Jim Tiernan great article. Thank you
1 Reply
Sean Reilly
Commercial Real Estate Appraiser · Houston, TX · Member since 2015 · 23 posts · 6 votes
10y
@Michael DeFrancesco nice man. I'm a Texans fan out in Broncos country too.
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Matt M.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
10y
I feel I must be clear here now in defense of my Broncos pride. I used sarcasm before to convince the OP to move on past Denver and keep on truckin to KC. I'm a firm believer that the Broncos will be great this year and repeat as Champs.
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