Happy Spring: Will the Denver real estate market heat up?

I hope everyone is having a great spring and enjoyed the recent spring snow where the mountains got over 2ft.  With spring in the air, will the real estate market in Denver start heating up or has the snow put a damper on things?  I’ve predicted the past year or so that the Denver market was somewhere near a “plateau” regarding appreciation.  Recent economic data seems to back up the “slowdown” in the front range.

There was a recent Well’s Fargo report titled “red hot housing market may be cooling down”.  From the title alone it doesn’t sound good.  What is really happening?  In a nutshell, prices are rising faster than wages pushing many buyers out of the market.

According to the report, “The bulk of Denver’s job growth has occurred among lower paying occupations, while the bulk of available for-sale housing inventory are higher priced homes. This mismatch is evident in many other rapidly growing markets. Denver is worse off than most others, however, and this is already beginning to chip away at the region’s competitiveness.”

What should you do?  I don’t believe the sky is falling by any stretch of the imagination, but as I’ve mentioned before, the torrid pace of increases will moderate substantially (especially at high price points).  Here are four items to watch:

1. The fix and flip game gets riskier: A flip is predicated on a fast appreciating market.  With the decline in appreciation rate, the flip becomes even more difficult as margins are further compressed.  For example, in the past if an investor bought a property, without doing anything over a year the investment was worth 10% more so it wasn’t that difficult to at a minimum make a little money.  As the appreciation rate lowers, it is considerably more difficult to make money.  Let’s assume a historic 3% rate of appreciation, after capital costs (time value of money, mortgages, etc..), realtor fees, hold costs (taxes, insurance, maintenance, etc…) you could easily be underwater if you did not buy at the right price.  The market will not appreciate fast enough to bail people out.
2. Watch the high-end market: The high-end market typically softens quicker than the lower/moderate price points. With wage growth not keeping up with appreciation, the “move-up” market is impacted.  Many people are worried about being able to afford the next price point and therefore decide to stay put.
3. Rents should stabilize and not appreciate like before: in the past with high appreciation also came double digit increases in rent.  As appreciation normalizes (and substantially more multifamily supply comes on the market), the rent rate growth will return to more normal levels
4. Watch your timing: As appreciation rates slow, the market “pace” should also moderate to a more normal level.  What does this mean?  If you need to sell, I wouldn’t hold out for large price appreciations to return.  Now is the best time but make sure you give yourself plenty of time since houses (other than the lower price points) are taking longer to sell.

Sources:

• Well’s Fargo economic report: http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/2/co-denver-20170518.pdf
• Biz West northern Colorado update: http://bizwest.com/2017/05/05/first-quarter-report-housing-appreciation-slows/
• The real estate party ends in Colorado in 2019: https://coloradohardmoney.com/2017/04/16/party-ends-real-estate-2019/

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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