Denver real estate has peaked

Has Denver Peaked? Denver’s Mojo is lost!

I’ve predicted for a while that Denver’s torrid appreciation pace was unsustainable (see Has Denver lost its Mojo?).  In the past week we have seen new indications that Denver has likely peaked.  As many markets continue their upward trajectory Denver seems to be cooling off a bit (the Denver Post states that “Demand has plummeted in June even with a rise in inventory”) with inventory rising and days on the market increasing.

Mark Boud, chief economist at Real Estate Economics, has stated that Denver has hit a “high plateau”.  What does this mean for the market and your real estate investment?  What caused this abrupt cooling of the market?

Don’t worry, the sky is not falling in Denver’s real estate market but a large unsettling change has occurred.   According to a recent Denver Post Article, “Demand has plummeted! “while at the same time inventory has increased substantially.  This is typically a setup for an economic correction.

First what caused the recent change in demand?  In essence prices got too high compared to incomes.  One of the largest expenses in a family budget is housing. Housing throughout the country has gone up exponentially, especially in places like Denver with an 11.7% increase just last year (see Business Journal article).  Unfortunately, the average wage growth according to a Denver post article is expected to be only about 2.8%.  Wage growth is clearly not keeping up with the large growth in housing expenses which in turn makes it harder for people to qualify for mortgages.

With the large increase in prices and decline in affordability there are less prospective buyers which means demand will level off or decrease.  This is exactly what occurred according to a recent Denver post article that shows inventory is up and yet demand has declined.  Real estate is like other markets, there seems to be a “herd mentality”.  So people see houses sitting on the market longer and start dropping prices and on the flip side buyers see more inventory and therefore get more aggressive on lower offers.

The sky is not falling!  Although Denver has hit a “high Plateau” (see full article) it does not mean that we will experience a correction like 07/08.  Basically many economists feel that the market will basically “normalize” and return to a more balanced market with nominal appreciation in the 3-5% historical average.  This is typical as Denver appears to follow a step pattern in real estate where basically Denver has large appreciation (like we recently experienced) and then hits a plateau (a virtual step) for a number of years until the next cycle begins.  This step could be 2-7 years depending on what happens in the overall economy and in the Denver economy.

What does this mean?  Appreciation will normalize and the market will shift to a balanced market.  You will likely not see the crazy bidding wars and houses flying off the market in under a week (although this could continue for the low end of the sales range, in Denver this is anything under 250k).  Sellers will need to reset their expectations and their pricing in order to adapt to the new market.

References:

1. Will the real estate bubble pop?  Fairview Commercial Lending
2. Has Denver hit “High Plateau? Denver Post
3. Demand for Denver homes Plummets in June despite jump in listings Denver Post
4. Has Denver lost its Mojo? CO Biz Magazine
5. The Housing Market is waving a red flag Bloomberg news

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.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).