According to a recent article in the Denver Post, the real estate party ends badly beginning in 2019! According to the study of housing trends during the last downturn, the northern front range (Denver to Ft. Collins) are in for a doozy. This will be worse than the last recession in 08 with prices falling substantially. What is the driver of this downturn? How bad will it actually get?
According to the study, the Northern Front Range will decline 20% (see full article) over a few years beyond 2019. This will be due to the growing gap between wages and housing prices. In essence wages are not nearly keeping up with home appreciation. Due to this gap, prices will fall to come more in line with historical averages. The trigger for this event will be interest rates. As rates hit around 6 percent, the increased payments “price out” more potential buyers creating a “snowball” effect.
Will this actually play out? One of the issues with economic models including this one is the assumptions/input for this model. There are a myriad of options that can be chosen. Based on what inputs are chosen will drastically alter the model.
Based on the model’s inputs, I’m not convinced that the market will tank over 20% as suggested in the study for two primary reasons.
First, the model assumes a rapid climb in rates. This expectation of a rapid increase has not materialized and may never. Why, growth has not increased nor has inflation radically increased. There is a high correlation between oil prices and inflation. Oil remains low and appears to remain low for the foreseeable future. Along with weak commodity prices, wages are also not increasing much. In the last labor department report, wages increased by a very small amount. In essence there is no huge driver of inflation and therefore rates will rise much more modestly.
Second, the model does not factor in the continue in migration to the front range that likely will not stop. The Denver front range is attracting transplants for three primary reasons: good jobs (companies are relocating to Denver for low taxes and high quality employees), high quality of life (great location with easy access to recreational opportunities), and finally low cost of living (although it has increased it is still substantially cheaper than the NE or west coast). None of these factors above are going away which will continue demand.
What will actually happen? Even though we are heading into the next cycle (see article discussing this more) , I don’t think prices will tank. It is impossible to continue the torrid appreciation the front range has had over the last 8 years or so. Prices will likely taper off in the short term and we might have a small “bump” down when we enter the next cycle. In summary the front range will be flat or slightly down for some period of time.
Sources
- Denver Post: Front range real estate slump: http://www.denverpost.com/2017/04/16/denver-northern-front-range-real-estate-slump-2019/
- Fairview Commercial Lending: You have 12 months before the next cycle: https://www.fairviewlending.com/blog/12-months-ready-4-steps-take-today/
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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