Will Denver home prices burst?

Are gloomy days ahead for  Colorado house appreciation?

It seems like every day there is a different article regarding Colorado’s house appreciation (see a recent Denver post article: Denver Home prices rising faster than other markets). This appreciation is spreading throughout the front range with Denver up over 12% from last year.

So what is driving this appreciation? Comes to the basics of supply and demand

Supply: Not nearly enough: Metro builders not keeping pace with new residents

Demand: Denver was a top draw throughout the country for people relocating

As a result of too little supply and increased demand, it is readily apparent why Denver (and the Front Range house) appreciation continues to surge.

Are we increasing too fast? I’m starting to get concerned that the appreciation is unsustainable. Take CO Springs for example, historically it averages 3-5% annual appreciation, last year prices increased by 11%

This brings the question: what does San Francisco real estate have to do with Denver? Is SF an indicator for times to come in Colorado? Why San Francisco?

During every single previous bubble peak, San Francisco home prices managed to post a 20% annual increase, starting with the dot com bubble in the year 2000, the first (not to be confused with the current) housing bubble peaking around 2005, and then the European sovereign debt. San Francisco seems to be a proxy for many other markets including Colorado.

Watching San Francisco there could be trouble on the horizon according to zero Hedge, a group of former Wall Street analyst that post commentary and predictions. Why? According to the most recent Case Shiller index San Francisco posted the largest drop in home prices (see chart and full article ). This drop should foretell the peak of the market and the beginning of a downward trough.

So what does this mean for Colorado? Colorado is unique in that we have solid broad based market fundamentals (good quality of life, low taxes, good employment, lower cost of living than many coastal markets, etc..). But the drop in California could be a warning for Colorado.

Fortunately I do not think we will have a wholesale drop / burst in home prices in Colorado, but I think that as prices continue to rise, the attractiveness of the metro area could lose its luster and therefore bring supply and demand into closer alignment. With supply and demand becoming aligned, prices will level off back to their historical rates.

Although as I stated above there should not be a huge drop in prices, there is one area to watch that could cause a little hiccup; the oil and gas industry. As commodity prices continue to stay low (which all indicators point to for some time), there will be quite a few reductions in force which could have an impact on the metro area home prices.