Corelogic recently highlighted 4 cities at risk of a bubble. Denver was prominently mentioned with recent appreciation of 8.7%. Is there really a bubble? What is driving the “bubble? Should you panic and sell today?
If we look at the last collapse in real estate in 07/08 there were unique drivers for the markets that tanked (like Las Vegas, Phoenix, etc…) These markets were gangbusters with supply right before the crash. Why did Denver not crash hard like some other markets? In the Denver metro, there has been restrained supply coming on the market while at the same time demand has increased. Even though, Denver has appreciated rapidly and is no longer a value, I don’t see signs of a bubble today due to supply and demand.
Although I don’t believe Denver metro is in a bubble, it is ripe for a correction/slowdown. The costs of housing has far outstripped the income required to purchase them. A city cannot maintain this imbalance for long. Eventually prices and/or salaries will have to meet in the middle to create some sort of equilibrium in market.
What do I think will happen? If we look at the last real estate correction, Denver went down modestly compared to other markets. The restrained supply due to various factors (land costs, building costs, supply of land, water, etc… ) will keep the downside of any correction in check.
When do I think this will happen? Everyone I have spoken to (bankers, developers, builders, etc…) think that 2018 will be the year of reckoning with some sort of a slowdown. If you look at the various economic data it also points to 2018 as banks begin tightening lending. (see recent Wells Fargo commentary on the Late Credit Cycle).
What should you do today?
Nothing! In summary, I wouldn’t be too concerned about the current “bubble calls” in the Denver front range. Denver has strong economic fundamentals along with supply constraints that should keep the values in check. If the huge increases continue the discussion of a bubble could change, but currently I would sit back and enjoy the ride 😊
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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