Are We In Another Housing Bubble?
*I am indebted to Lonnie Glessner at Nova Home Loan for much of the data presented below.
As Denver’s home prices have continued to rise 10-12% each year since 2012, many buyers are wondering if we’re in a housing market bubble. Those who were burned by the crash in 2007-2008 are especially wary. The term ‘bubble’ is used thrown around a lot but what is a bubble? A bubble is an increase in the price of an asset that is not justified by the fundamental supply and demand factors for the asset.
Are our current home prices in Denver justified by supply and demand?
Lets start with demand. Denver’s population has grown dramatically in the last 5 years. In 2016, we added 90,000 new people. Our local economy has also grown. We have a well balanced economy anchored by various industries including IT services, renewable energy, aerospace and aviation, beverage production and a myriad of professional services. You’ve probably seen headlines in the local news about businesses that are moving to Denver.
On the other hand, our supply of houses, known as inventory, is very low. A balanced housing market has 6 months of inventory meaning without adding any new listings, it would take 6 months to sell all the listings on the market. Our inventory in metro Denver is 5 weeks.
To top it all off, for a variety of unresolvable reasons, home builders are unable to keep pace with demand. The story the data tells is that our robust housing market is soundly rooted in the basic principles of supply and demand.
“(Denver) is driven by solid underlying economic fundamentals like strong job and wage growth, true housing demand and limited supply and not rampant speculation..." -
Svenja Guddell, Chief Economist for Zillow
Could we have another housing market crash like the one in 2007-2008?
With our current market and economic conditions, it’s just not likely. It would take significant, rapid changes. Today's demand is driven by rising rents, population growth, and job growth. in 2008, artificial demand was created when 1) home builders over built and did not stop building when demand decreased and 2) anyone, regardless of credit or income, was able to obtain a loan. In 2008, many bought homes with a 580 FICO score and no money down. Buyers were given “stated income loans” from lenders and Nehemiah gifts from sellers. The buyers that are winning bidding wars today have credit over 800, are putting 20% or more down, and have low debt to income ratios.
Foreclosure sales have decreased in Colorado every year from 23,891 in 2010 to 4,209 through 2015. In the years leading up to 2008, foreclosures were trending up as were sub prime loans. Currently, Colorado has the nation’s lowest foreclosure rate at .5%. By comparison, in 2010, it was 2.7%.
If you’re worried about another crash, track the following:
1) Weeks of inventory (supply)
2) Population and job growth (demand)
3) Foreclosure rate
4) A rise in sub prime loans
One final though to consider: Real estate markets tend to be cyclical. Since 1970, the Denver real estate market has experienced two 16 year bull markets. From 1971 to 1987, home prices increased 320%. Then from 1990-2006, prices rose another 193%. Since 2011, home prices have increased 57%; we’re entering the sixth year of this current bull market. If history repeats itself, we could have another 10 years of rising home prices ahead. All indications are that 2017 will be another year of positive growth. Click here for Denver's 2017 Market Outlook.
Want more details? Keep reading:
Comments from the experts:
- “Don’t expect Denver home prices to go down. Everybody wants in. It isn’t a bubble and it will continue to be like this.” - Ralph DeFranco, Global Chief Economist for ArchMI
- “(Denver) is driven by solid underlying economic fundamentals like strong job and wage growth, true housing demand and limited supply and not rampant speculation..." -
Svenja Guddell, Chief Economist for Zillow
- “Low housing supply, an influx of population, and low unemployment rates continue to be common characteristics of the top forecast performing markets.” - Veros Real Estate Solutions (predicted Denver as the #1 market in the nation in 2017 with forecasted 10.8% appreciation)
- “...not worried at all about any kind of housing bubble. We have strong demand for houses from new residents moving to the area, from people moving from existing houses, and from Millennials forming additional households.” - Local Economist Patti Silverstein
Facts and Data:
Sources: Colorado Division of Local Government, Denver Metro Association of Realtors, U.S. Bureau of Labor Statistics, Development Research Partners, Lonnie Glessner Nova Home Loans.