Core Logic, the leading data provider in the real estate industry, recently predicted that Denver home prices will tumble by 9% by May of 2021 placing it in the top three of most overvalued real estate markets.  How realistic is this prediction? Is there a flaw in the predictions? What does this mean for the rest of the state’s real estate?  Could the opposite occur and prices continue to appreciate?

 

What was in the data?

For years, the Denver area housing market was so scorching that it seemed nothing could dial down the heat — and prices haven’t dropped thus far, despite the local impact of the global pandemic. But a new report by Core Logic contends that metro home prices are seriously overvalued and predicts that they’ll decline nearly 10 percent by the spring of 2021.

The CoreLogic study predicts that 125 metro areas in the U.S. have at least a 75 percent probability of a price decline by 2021, and the nationwide falloff is expected to be 6.6 percent, on average. According to the study, Denver

How were the predictions made?

According to CoreLogic, “CoreLogic HPI Forecasts are based on a two-stage, error-correction econometric model that combines the equilibrium home price—as a function of real disposable income per capita—with short-run fluctuations caused by market momentum, mean-reversion, and exogenous economic shocks like changes in the unemployment rate.”

The primary driver of their forecast is income.  With the coronavirus, income has taken a large hit for many with tourism substantially reduced.  Unfortunately, there is a major flaw, not all income is the same.  For example, someone working in a restaurant as a waiter might not own a property or be in the position to buy a property.

The group of people most impacted by the pandemic are less likely to be property owners or be prospective property owners so as their income declined, the average wages declined leading to an incorrect prediction on prices.  If you removed this group from the analysis, I would assume that highly educated knowledge workers have not had a major impact on their incomes.  Focusing on income as the primary driver of predicting housing prices is going to lead to incorrect conclusions due to how skewed this recession has been towards lower wage earners.

Why focus on Denver for real estate predictions throughout Colorado?

Although Colorado is a big state, the Denver Front Range is the primary driver of Colorado’s economy.  As the market in Denver changes, ancillary markets are impacted from Fort Collins to Steamboat. A good example is the second home market, if Denver real estate declines, there is less demand for second homes like a ski home.  Furthermore, the rest of the state follows Denver economically so if Denver struggles the rest of the state also is likely struggling.  We have seen this correlation in every recent recession.

Will prices in Denver actually fall?

I’m very doubtful there will be much change in prices in the Denver metro region and I am even more skeptical there will be a correction in prices.

  1. No inventory: There is little available inventory and there is no way to substantially increase the inventory due to lack of land and high building costs.
  2. Desirable place to live/relocate to: The pandemic has made smaller second tier cities like Denver even more attractive to buyers coming from coastal markets. This trend will likely accelerate as Denver is considerably less dense than many other major cities and has world class amenities.
  3. Employment: Ironically the Core Logic study highlighted wage declines as one of the drivers of house price declines. This couldn’t be farther from the truth as Denver has an abundance of highly educated knowledge workers that have not had much impact from the pandemic as they can work from home.

Summary

Since the pandemic, Denver’s prices have continued to increase and inventory had continued to fall as Denver remains a desirable place to live and has an abundance of well-educated knowledge workers.  The core logic study failed to differentiate pay amongst homeowners versus other groups which led to improper conclusions on a decline.  The opposite is occurring in Denver and looks to continue.

Additional reading/resources

 

 

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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 Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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