State of the Market Address | February 2018

My fellow Coloradoans, let me take this opportunity to share with you the state of the real estate market.

State of the Union & State of the Market

In President Trump’s recent State of the Union address he stated:

“Over the last year, we have made incredible progress and achieved extraordinary success. We have faced challenges we expected and others we could never have imagined. We have shared in the heights of victory and the pains of hardship. We have endured floods and fires and storms. But through it all, we have seen the beauty of America's soul and the steel in America's spine.”

The President went on to point out several other positive economic indicators, citing new jobs, rising wages, record gains in the stock market, rising equity in homes, retirement and savings accounts and even tax cuts which should provide relief to the middle class. These indicators have lead to more consumer and small business confidence. It stands to reason, of course, that the outlook is still positive for the 2018 housing market that correlates to the current economic climate of our country.

In 2018, as with any given year, there are several factors that could have an impact on the local real estate market.  However, the common belief is that the pace of growth in home values will slow a bit this year. At the end of 2017, we saw an over 12% increase in median home values compared to 2016, but many are predicting more modest growth in home values closer to 5% for 2018. That may represent a cooling of market condition as compared with more aggressive market conditions seen in recent years, but even 5% growth still outgains inflation.

The Inventory Story

So what could slower appreciation be attributed to? For one, there’s an imbalance of available home occurring over various price ranges. For instance, from a price distribution standpoint, more than half of available homes can be found in the top third portion of the market while the bottom third of the market is comprised of only 15% of available homes.

New construction is responsible, in large part, for creating better balance in inventory. However, builders are mostly focusing on higher priced homes.  The issue is that the demand for the most affordable homes is still greatly outpacing supply. That, naturally, results in higher gains in home values due to more competition and greater/more widespread unaffordability. That coupled with the face that Denver is experiencing a population boom has compounded the situation.

New Home Construction

New home construction is one of the sure-fire ways that the inventory crisis will be solved, especially if new homes are built for entry-level buyers. A recent article published in the Denver Post describes the new construction scene in the Metro area this way:

“Colorado builders are expected to pull 23,700 single-family permits in 2017 and 26,000 in 2018, according to the University of Colorado’s Colorado Business Economic Outlook.

While that looks robust compared with the sluggish pace of homebuilding seen after the recession, the CU forecast notes that builders pulled around 40,000 permits a year in 2004 and 2005, when there were 1 million fewer people living in the state.

Only a quarter of new home starts hitting the market in the third quarter were priced under $400,000 and the average price of a detached new home is $536,584, according to Metrostudy.

Assuming a 10 percent down payment and a 4 percent 30-year mortgage rate, a household would need to earn $100,000 to qualify, according to Bankrate.com.

To keep costs in check, builders have increasingly turned to townhomes, which accounted for 26 percent of the new homes added in the third quarter, the highest share on record. Condo construction is also expected to ramp up next year.

Oakwood Homes, one of the largest builders in the region, is returning to its roots with a greater focus on starter homes in its Green Valley Ranch and Reunion communities, spokeswoman Wendy Aiello said.

Multifamily developers, dominated by apartments, are expected to add 17,000 units this year and 17,400 in 2018. If that happens, it would be the third year of an unprecedented streak."

Rental Rates

Any time you have new supply, it directly effects property values as demand is met, at least to some extent. In this case, the new supply is helping to slow rental rates, which felt unsustainable anyway. According to ApartmentList, the median apartment rent in Denver only went up by 1.6% in 2017. Broomfield is still experiencing faster gains, close to 6% year over year, but rent rates have been nearly flat across much of the city.

How Denver Compares Nationally

For the first time in recent memory, Denver no longer makes everyone’s top 10 list for hottest markets across the US. Statistics show that migration to the state is slowing, due in part, to higher housing costs. Over the past several years the housing market has seen unbridled growth in the double-digit percentages, which often lead the nation, but with projections closer to 5%, that would bring the Denver market to just slightly lower the national trend for 2018.

Tax Reform

The impact that tax reform will have on real estate markets can be debated, though most experts agree that the impact is not likely to be adversely felt by most. Practically speaking, “the tax reform bill should put more money in the pocket of the median buyer in 2018, though it could add additional pressure at the top of the market where buyers are more likely to rely on deductions that were curtailed in the law,” Aaron Terrazas, a senior analyst for Zillow said.

Further, only 14 percent of U.S. homes will carry a value high enough to make it worth taking advantage of the mortgage interest deduction under the changes, compared with 44 percent under the old rules, Zillow estimates.

Rising Interest Rates

Interest rates have actually increased twice already since the Presidential election last November and they’ve recently reached a 5-year high. Some see rising rates as a force that would curtail our market’s growth, at least to some extent. It most certainly will have a direct effect on home affordability. While rate hikes were hinted at in 2017, they never really did rise to an impactful level. This year already seems like that story has changed.

Of course, all these factors may play a role in the housing market at one point or another this year. Right now, as spring approaches, the inventory story may prevail yet again. Levels are historically low once…again. For the first several months of 2018, we could see market conditions that mimic conditions previous years, meaning a return to those oft-despised high-demand conditions for buyers. That spells good news for sellers, however, even as increases are projected to slow, on average, compared to recent years.

Untapped Equity

No matter if you’re a homeowner or looking to be a homebuyer in 2018, homeownership is woven into the fabric of the American way of life. It means more than just a roof over head; it represents freedom; it can be a tool for building wealth; it can be a source of revenue.

Because of steady performance of real estate markets across the country, including ours here in Denver and surrounding areas, more people have untapped, unrealized equity in their homes that could be used to build wealth, invest in other properties, afford to move up to a dream home, or retire in style.

If you’d like to know more accurately how your home’s equity can be put to work for you, click here to see where you stand.

We realize that everyone’s situation is unique. Please call Matt Thomas at (303) 269-1617 or Chad Schneider at (720) 767-2423 to find out how today’s real estate market may be beneficial to you.