The Denver area Real Estate market has been so hot the past few years and especially in 2015 that many consumers and even industry professionals are wondering whether we are setting up for another bubble that will inevitably burst, similar to the mid 2000’s.
While whispers of a bubble are being heard, Denver Real Estate Watch recently commented that what is occurring is definitely a “boom,” and part of an upcycle but not a bubble, and the two are very different things. Why would there even be worry of a “bubble?” Well, home prices in the United States have now increased in value for some 40 months straight, and Colorado home prices, including the Denver metro area are at all-time highs.
Unlike the bubble that occurred in the middle of the last decade, this time is different. The previous bubble was created in large part by very lax lending standards. Little to no income, employment, or credit documentation and verification was common on many loans, and some loans were even 100% Loan to Value, meaning that many borrowers had little to no equity in their homes. Many homes being sold nowadays are owner-occupied, and all buyers undergo strict underwriting standards.
The supply of homes is still less than a two month supply, making it a great seller’s market. A six month supply of homes is considered an even or balanced market. This tight supply has pushed up prices (combined with low interest rates), and naturally more homeowners will decide to sell as their values rise, creating more supply and stabilizing prices. This is all part of a normal real estate cycle.
Even though the volume of real estate being transacted is up 5.9% year over year according to the article, this is very much in line with the population increase we have seen in Colorado. In fact the number of transactions relative to the population is just about at the 25 year average, where in 2006 it was 20% higher than the historical average.
Moving forward there are a few thing to keep an eye on. One is the overall economy but more importantly the local economy, where the Denver metro area continues to impress with low unemployment and job creation. The booming economy fuels migration to Denver and therefore continued housing demand. The next is mortgage interest rates. They are not expected to go up drastically when they do, but they will impact home affordability and could affect prices.
At the end of the day, it sounds cliché but it all comes down to supply and demand. Supply is still extremely constrained and looks to remain so in the near future. Demand is very healthy and also looks to remain that way as renting can still be more expensive than buying, and Denver and Colorado remain very desirable places to live.
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