No one can deny that the Denver Real Estate market has changed dramatically over the last decade. Consider this drastic example: the median sale price of a home in Metro Denver in 2012 was $231,500. Fast forward to 2022 and the median sold price jumped to $585,000 (Data courtesy of Megan Aller | First American Title and includes the counties of Adams, Arapahoe, Broomfield, Denver, Douglas, Elbert, and Jefferson).
In this look back at the past 10+ years of the Denver Real Estate Market, we examine a few particular questions:
- How have housing prices trended in Denver over the past 10 years?
- It’s been over 14 years since the housing crisis, are we due for another one soon?
- What is the story behind the low inventory in Denver?
- What are the seasonal trends in the Denver housing market?
What caused the increase in Denver’s home prices?
Low Inventory Plus Incredible Buyer Demand
It should come as no surprise that there is an extremely low supply of inventory. Denver has struggled with a lack of inventory since 2011. Strong demand throughout the pandemic drove intense competition among buyers, causing homes to sell incredibly fast and pushing prices higher.
The pandemic brought two record numbers to Denver: the record number of showings and a record number of homes sold.
For comparison, at the end of 1990, there were 11,839 homes for sale in Metro Denver, and in 2021 there was an all-time low of 1,477 (DMAR). And more homes sold than ever before in a calendar year as well, decreasing the supply of available homes. Homebuilders have been unable to keep up with supplying new homes at the rate they are needed.
At the end of 1990 there were 11,839 homes for sale in Metro Denver, and in 2021 there was an all-time low of just 1,477 homes for sale.
The Great Economy + Lifestyle Found in Denver
Low unemployment for the past decade, lifestyle desirability, and a strong economy also contributed to the rise in home prices. Since 2010, Denver has had a 25 percent increase in employment.
Of course, 2020 and COVID-19 threw a wrench in that, with unemployment jumping from 2.7% in 2019 to 7.4% in 2020 (First American). Luckily that number plummeted to 3.6% for the state of Colorado in April 2022.
New companies continue to move to Denver,bringing along relocated employees and attracting new ones. Colorado offers tax incentives to attract large employers, plus Denver is a great place to live thanks to its plentiful sunshine, invigorating outdoor activities, strong neighborhood character, and a myriad of independent businesses, including tons of coffee shops, restaurants, and breweries.
Unemployment Rates in Denver
This representation is based in whole or in part on content supplied by REcolorado®, Inc. REcolorado®, Inc. does not guarantee nor is it in any way responsible for its accuracy. Content maintained by REcolorado®, Inc. may not reflect all real estate activity in the market. Dates shown on graphs for timeframes included. Adams, Arapahoe, Broomfield, Denver, Douglas, Elbert, Jefferson. Data courtesy of Megan Aller | First American Title
Ability to Work Remotely + Population Growth
For over a decade now, Denver has been consistently growing in population. Between 2010 and 2020, Denver’s population grew by almost 20 percent,with 115,364 new residents moving in. Compared to nationwide statistics, Colorado continues to be popular as a work-from-home destination with 46 percent of the population reporting that they telework compared to only 35 percent of adults nationwide.
Luckily for Denver’s economy, it was identified early on as a friendly city for telecommuters and the city’s population actually grew. Between April and October of 2020, for every one person who moved out of the Denver Metro area, 1.34 people moved in. A recent U.S. News & World Report ranked Denver as the #2 best city to live and Boulder #1. As more people move here and there continues to be a housing shortage (with no end in sight), there will be a high demand for real estate.
Historically Low Interest Rates Drove Demand in 2020 and 2021
The U.S. saw record after record break in 2020 when it came to interest rates, encouraging buyers to get into the market. And the changes in rates are significant for home buyers’ ability to “buy more house.” As a general rule of thumb, you can estimate each half a percent increase your payment by about $100 a month.
Average Interest Rates in Denver
Six Indicators We Are Not in a Bubble
Inflation is at its highest point in 40 years and this daily reality has home buyers concerned. If you want to buy or sell this year but are worried about what could happen to the market, it’s important to think about the following six signs that indicate we are not in a housing bubble:
- Foreclosures are at an all-time low. ATTOM Data recorded only 151,153 home foreclosure filings last year, the lowest number since it started recording in 2005. This means that homeowners are not being forced out of their homes due to inflation. The 2008 housing crash was a foreclosure crisis, and are we are nowhere close to seeing that happen again.
- Equity is at an all-time high: If prices were to drop (which is not expected), Americans would have lots of equity to protect themselves and could still sell their homes to pay off their mortgage debt. According to Business Insider, “the average mortgage borrower currently [owns] about $185,000 in tappable home equity — the amount of money a homeowner can access while retaining at least 20% equity in their homes.”
- Savings are at an all-time high: During the pandemic, U.S.households have collectively gained about $2.5 trillion in excess savings and more than half of U.S. states recorded their strongest-ever personal income growth just last year.
- Homes are expected to continue to appreciate, even if it’s no longer at the breakneck pace of 2021-2022’s numbers of 15+% each month. Fannie Mae recently forecast that U.S. home prices will rise 10.8% in 2022. And in April 2022, we still had a 19% gain from April 2021 for the median sale price of all homes.
- Lending standards are much more strict today than they were before the 2008 crash. The Dodd-Frank Wall Street Reform and Consumer Protection Act has helped to prevent some of the predatory lending practices that spurred the subprime mortgage crisis. Borrowers have to go through larger hoops to qualify for a mortgage and bring more money into a down payment than in 2008. According to Money.com, “The median FICO for purchase loans is 40 points higher than the pre-housing crisis level of around 700.”
- Inventory levels are still not close to keeping up with demand: According to a recent article in the New York Times, the lack of home inventory will continue to keep home prices at lofty levels. “The problem is there are so few homes for sale that even a slower market is unlikely to create enough inventory to satisfy demand anytime soon. For years, the United States has suffered from a chronically undersupplied housing market. Homebuilding plunged after the Great Recession and remained at a recessionary pace long after the economy and job market had recovered. Even today, the pace of home building remains below the heights of the mid-2000s, before the 2008 financial crisis and housing market crash.”
After taking these factors into consideration, it seems more reasonable to think that inflation and rising rates will cause more of a slowdown in the market rather than a full-blown crash.
How is Today Different Than 2008?
What makes today different than the pre-housing crash of 2008? Well, we do see some factors in the national market that are similar to what preceded the crash: rising prices, buyers aggressively pursuing homes, and yes, lots of flipping. However, there are notable differences as well.
What Caused the Housing Crash?
As cited by a Realtor.com analysis on housing and economic data, today’s scenario indicates prices are not rising as a result of the expansion of mortgages to high-risk borrowers like in 2007. During that housing crisis, there was an influx of home buyers on the market in a short amount of time and the increase in demand synchronously increased prices. Thanks to readily available subprime mortgages, the number of homeowners shot up at an unusually high rate. Before 2007, “homeownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income,” (Federal Reserve History).
The subprime mortgage problem was exacerbated when lenders began to repackage the high-risk mortgages into private-label securitizations and sold them in high volume to investors. For example, “Before the financial crisis, Wells Fargo packaged over $1 trillion of mortgages into private label securitizations. However, since the crisis, investors lost interest as large volumes of risky loans went bad.” (Housing Wire).
Then vs Now: Today’s Housing Market
Loan Standards Have Changed
For one, we have much more stringent mortgage criteria today than back in 2007. Sustainable income and stable employment history are just two of the measures required to obtain a home loan today. The Dodd-Frank Act, passed with the intention of protecting consumers, has “rules like keeping borrowers from abusive lending and mortgage practices by banks.” (CNBC). The median 2017 home loan FICO score was 734, significantly up from 700 in 2006. The low end of the range has pulled up as well. The bottom 10% of borrowers had an average FICO of 649 in 2017, up from 602 in 2006. Licensing is also a widespread state requirement for loan originators, officers, directors, and servicers, and those in the loan industry receive continuing education and can be audited by the state regulators (Housing Wire).
Product risks like balloon payments and teaser rates made up 40 percent of the mortgage market in 2004, 2005, and 2006. Today, those risky products only make up 2 percent of the market, according to Morgan Stanley.
According to Realtor.com, “In 2006, the share of flipped homes reached 8.6% of all sales, exceeding 20% in some metros such as Washington, DC, and Chicago. Some of those flippers took out multiple loans to afford their properties. With today’s tight lending environment and limiting borrowing power, however, flipping accounted for a more reasonable 5% of sales in 2016.”
Demand and a Lack of Inventory
A decade of growth in the national economy (prior to the 2020 pandemic) caused record low unemployment, resulting in more steady jobs. However, home construction has not been able to keep up. Millennials are reaching their peak homebuying years and now make up the largest swath of home buyers at 43% – an increase from 37% last year.
Colorado Public Radio states that builders have lagged significantly behind population growth in the state. “Colorado still hasn’t eclipsed the home building levels from before the Great Recession more than a decade ago, though there are signs that’s changing with home construction permits rising quickly in recent months. Metrostudy found a 22 percent increase in single-family home construction starting last year.”
But don’t expect the new construction to make a big dent in prices or inventory with demand being so high. The uptick in new housing starts in the Denver metro area may signal that homebuilders are getting serious about resupplying the market with new homes, despite ongoing issues with the supply chain and persistent inflation. It goes without saying that existing home sales alone cannot fill the demand of people wanting to own their own home.
A balanced market in Denver would be a six-month supply of homes for sale. That number would be 23,868 active units (Land Title Guarantee Company). In May 2022, the Denver metro had just over 3,652 homes for sale. The last time Denver had over 23,000 listings was almost a decade ago in December 2011 (REColorado).
Equity is at an All-Time High
According to ATTOM Data, “44.9 percent of mortgaged residential properties in the United States were considered equity-rich in the first quarter, meaning that the combined estimated amount of loan balances secured by those properties was no more than 50 percent of their homes estimated market values.”
Metro Denver Appreciation from 2009-2022
What Changes Are on the Horizon For the Denver Housing Market?
There is no denying there is a shift in the market. The Washington Post writes that “The rapid rise in mortgage rates and inflation since the beginning of 2022 is roiling the housing market and the stock market. Fears of a recession and general uncertainty about the economy mean that economists are adapting their forecasts for the year to take into account these changes.”
Mortgage Rates Surge on Inflation Expectations
Realtor.com revised its 2022 housing forecast and now predicts that mortgage rates will average 5 percent for 2022 and rise to 5.5 percent by the end of the year. But just this week, on June 14th they jumped to 6.28 percent.The volatility of rates and the stock market will have a dampening effect on home buyer activity.
Below is a chart from Freddie Mac showing interest rates over the last year:
Investors Will be Keeping a Close Eye on Recession Indicators
According to a New York Timesarticle released this week, “Investors are worried that rising prices could trigger the biggest interest rate increase by the Fed since 1994. Last week, the World Bank issued a dire warning that global growth may be choked, especially as the war in Ukraine drags on.”
Further, it stated that “There is still some hope the Fed can strike the right balance between curbing rampant inflation and applying the brakes too aggressively on the U.S. economy. And it would be unusual for a recession to start at a time when unemployment is near its all-time low and demand keeps pushing prices higher. But right now, many are predicting a Fed overshoot, and eventually recession.”
Demand Likely to Return to Pre-Pandemic Levels
Record low interest rates, a pandemic that had everyone stuck at home, and record low inventory levels fueled the flames of a relentless housing market full of multiple offer situations and buyer burnout. We had a record-breaking number of home sales in 2020 and 2021. As average interest rates surpass 5 percent, we are likely going to head back into 2019 and 2018 levels of demand for the housing market.
Pending home sales fell for the sixth consecutive month in April and are now at the slowest pace in nearly 10 years, the National Association of REALTORS®reported recently. As you can see in the graph below, the Denver metro has not yet felt a slow down in any pending activity:
Housing to Grow More Unaffordable
Without more supply, demand is nowhere close to being met and this will cause prices to continue to rise. New construction is expected to continue to increase and will help slightly with the lack of supply but home builders continue to cite labor shortage and rising rates as a deterrent. While appreciation will most likely return to pre-pandemic numbers, we don’t expect to see homes losing value any time soon.
New Construction Should Help Inventory Levels
Lumber prices have fallen 47% year to date and are down 65% from 2021’s record high of $1,733 per thousand board feet. According to Realtor.com “The big drops should help ease inflationary pressures in the housing market, and the costs to build should come down, Markets Insider reports.”
Even with an increase in new construction over the past year, markets across the U.S. remain under-supplied, according to data collected for Mansion Global by Realtor.com. The data is based on sales from November 2020 through October 2021, and new construction permits for the 2021 calendar year through November. The article states that of 338 U.S. metro areas analyzed, only nine (2.6%) showed construction permits outpacing sales, including Austin, Texas; and Provo, Utah.
Colorado Continues to be the Home State of Choice
As homes became our offices, gyms, schools and so much more, the definition of ‘home’ has evolved. For those with the privilege and opportunity to work from home, new flexibility has been born out of the pandemic. Colorado’s population is up 7.4% to 331.4 million based on the 2020 Census. The population of the Denver, Lakewood, Aurora area as grown to nearly 3 million residents, according to FRED Economic Data. Furthermore, a study by LendingTree shows Denver ranks #1 as the most popular city for millennials to buy homes.
Employment Rates Are on the Rise
Unemployment rates in Colorado fell to 3.6 percent in April of 2022, marking the state’s highest rate of employment in over a decade — a good sign for the economy. Of course, inflation and wage stagnation have harmful effects on the economy and overall affordability.
This article was originally published on Jan. 3, 2018 It was updated on June 17, 2022.