Bubble or No Bubble?
The last six years have seen a surge in the metro Denver real estate market as record numbers of buyers look for homes, causing prices to jump ever higher. The strength in the market has been so pronounced that a lot of people are asking whether we’re setting ourselves up for another bubble. Good question.
While no one can ever predict the future with certainty, I see no evidence that we’re heading for a dramatic downturn in the real estate market any time soon. Here’s why:
- Even with the continued increase in metro Denver home prices (up another 10.8 percent in the past 12 months) the average inflation-adjusted PITI (Principle, Interest, Taxes, and Insurance) payment made in metro Denver is only slightly above our 35-year average. This means that while prices have steadily risen, buyers are still able to afford their monthly payments, provding plenty of room for continued home price increases. The simple and obvious evidence for that is the large number of buyers still making offers and closing on properties.
- The number of transactions relative to the population of metro Denver is just about at the 25-year average. At the peak of the bubble in 2006 the number of home sales was about 20 percent above the historical average. When we see the number of closed transactions well above our historical average that’s an indication of an overheated market, as it was in 2006. The number of closed home sales is actually DOWN 1.7 percent in the past year due to the low inventory. No sign of a bubble here.
- In 2006, many of the deals were closed with low or no documentation mortgages (“no doc loans” or better yet “liar loans”). Because of these types of loose lending practices the Federal Reserve reported the single family residential default rate peaked at 11.4 percent in 2010. Today, mortgage underwriting standards are among the highest they’ve been in decades. In 2017 the default rate was only 4.1 percent, largely due to the tougher lending standards since the downturn. More strict lending standards prevent unqualified buyers from purchasing property, which mitigates the chance of the market overheating (fewer buyers means fewer purchases means less chance of the market frothing into bubble territory like it did in the past).
- Because of relatively high home affordability (metro Denver home prices and wages have increased almost the same amount in the past 45 years and interest rates are still very low) it’s still cheaper to buy than rent in our market. This would not be true in a bubble. For housing price affordability to return to the levels that we saw in the years between 2000 and 2004, either home prices would have to increase an additional 20 percent or interest rates rise to 6.25 percent. Neither is going to happen any time soon.
- The imbalance between buyers and sellers we’ve seen the past few years in our housing market (too many buyers/not enough homes for sale) is due to a lack of inventory, not illogical/unrealistic/unsustainable demand from buyers. “Much of the price increases we are seeing are the result of rising demand among investors and homebuyers for a still-limited supply of homes for sale,” said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a logical correction from years past when we had too FEW buyers in the market. This is how markets are supposed to work, always regressing toward the mean over time.
- Rising mortgage rates will help to temper the possibility of a bubble as well (they are still near 50-year lows but are expected to rise… someday). “History shows that a rapid rise in interest rates tends to have little correlation with home prices. Rather, rising rates are more likely to contribute to a decrease in home purchase volume,” wrote Mark Palim in a Fannie Mae commentary. So the positive side of a rise in mortgage rates is that it will reduce the number of buyers and therefore lower the chance the market will rise out of control and end up collapsing in a bubble.
As you see from our monthly market snapshot, the inventory of metro Denver homes for sale is still near all-time lows (6,158 homes on the market where about 18,000 is a balanced market). Since the inventory is still extremely low I am very confident the demand will still exceed the supply for the next several years and prices will continue to rise for the foreseeable future. No bubble on the horizon yet. Stay tuned!
If we’re not headed for a bubble any time soon what does this mean for you as a buyer? I think it means you should consider buying a home if (and only if!) it makes sense for you to do so. Are you running out of room at home? Expecting a baby? Have an awful commute? Want to live in a nicer neighborhood? Looking for a better school district for the kids? There are a lot of great reasons to move. But don’t buy a home to speculate on the market; buy because it’s time for a new home. Call me anytime to discuss what your options are and how I can help you find a wonderful place to live.
We have been discussing the incredible strength in our housing market. If you’re looking to sell your home this should be very welcome news! The inventory of homes on the market is at an all-time low and prices are up. Call me and I’ll be happy to run a complimentary Comparative Market Analysis on your home to let you know what it might be worth. It’s great information and costs you nothing.
Landlords couldn’t be happier in today’s renting environment. The most recent “Metro Denver Area Residential Rent and Vacancy Survey” for 1-4 unit properties shows the great news continues for landlords. According to the report:
“The overall vacancy rate for the metro area for the first quarter of 2018 was 3.3 compared to 3.3 percent for the previous quarter, and 2.8 percent for the first quarter of 2017. It was 1.8 percent in the first quarter of 2016, 1.5 percent for the first quarter of 2015, 1.5 percent for the fourth quarter of 2014, .9 for the fourth quarter of 2013, 1.6 for the fourth quarter of 2012, and 1.5 percent for the fourth quarter of 2011.”
In the U.S., more millionaires owe their wealth to real estate investments than any other single source of income. Today’s market could not be better for long-term, buy-and-hold investors. Call me to find out more.