Is Denver's real estate market a bubble ready to burst?

Is Denver's real estate market a bubble ready to burst?
Posted at 4:02 PM, May 04, 2017
and last updated 2017-05-04 18:02:06-04

DENVER – Denver real estate is expensive and it just keeps getting more so, which has many people asking: Are we in another bubble that’s about to burst?

Since the last housing bubble burst with the great recession in 2007 or so, Denver's economy has recovered better than most cities its size and home prices have increased by 60 percent on average, with some neighborhoods closer to 200 percent.

The average sale price of a home in the Denver area was $439,161 in April, a new record high that puts home prices at 40 percent or more above pre-recession levels, according to Steve Danyliw, a Denver-area real estate agent and the chairman of the Denver Metro Association of Realtors Market Trends Committee. But he’s not ready to press the “panic” button just yet.

“There’s no bubble or anything like that,” Danyliw said.

Though home prices have been quickly rising, we’re not seeing some of the other warning signs that were present before the housing crash 10 years ago.

“We’re a very healthy market, financially speaking,” Danyliw said. “The underlying fundamentals of the market are different today versus then.”

One major difference is the number of foreclosures. Denver saw a slight uptick in the number of foreclosed homes last year, but we are still far below what we saw at the height of the housing crisis. In 2007, for example, Denver processed more than 8,000 foreclosure cases. Last year, that number was just 720.

“We’re looking at financially healthy homeowners,” Danyliw said. “The number of properties in jeopardy of being potential foreclosures…it’s just not there.”

Though Danyliw doesn’t think we’re in a bubble, he says there are some signs that the market will slow down. The number of sales that make it to closing is down year-over-year and Danyliw said he’s seen an increase in the number of buyers who back out after a home goes under contract.

A big reason for that is the high prices in the market right now and the fact that there just aren’t a lot of homes to choose from. Buyers often feel like they have to settle for homes that don’t have everything they want or need, Danyliw said.

Increases in home prices are outpacing income growth in the metro area and that trend simply isn’t sustainable, as home ownership gets further out of reach for many people.

“At some point, things are going to have to give,” Danyliw said.

A forecast from geographic data company Location, Inc. predicts an average drop in home prices of 9 percent or so over the next five years, starting in late 2019.

Danyliw and others in the real estate industry are hopeful that Colorado’s construction defects bill, which just cleared the legislature this week, could relieve some pressure and bring the market down to a more sustainable growth rate of 4 to 5 percent.

The law as it currently stands makes developers reluctant to build new condominiums because of the risk of a lawsuit if something goes wrong. Many developers opt to build rental units instead.

The price of a condo tends to be less than a single-family home – currently a median of $270,000 for a condo, compared to $420,000 for a single-family home – so building more of them could help with the inventory shortage in the lower price ranges.

“We have a housing shortage and we have a real problem especially in the lower end,” Danyliw said. “We need more affordable housing and we need developers to build more entry-level product.”

The construction defects law passed both the House and the Senate and now awaits a signature from Governor John Hickenlooper.

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