Denver market opinions - is it about to burst?

Question

I am looking into purchasing a new home most likely out in the Green Valley Ranch area. We are pre-approved up to 275k and looking at houses in the 250-270k range. This will be our primary residence for at least the next 3-5 years. I'm worried about the long term ability to profit off the home after that 3-5 years and the likelihood of ending upside down in the home. With the amount we have for down payment and closing costs we are looking at around 4.2% for FHA and 4.5-4.6% for Conventional.

Let me know your thoughts.

Micki M. · Answer

@Christopher Smith

If you have serious concerns about a 3-5 year timeline, then you need to buy with that in mind.  Exit strategy, even for primary home buyers, is important.

If your priority is to have lots of space in your family home and live comfortably for 3-5 years then buy or rent in a way that makes that possible and understand the risk you take if you have to exit quickly in unknown market conditions (even if you take a loss, you still may break even compared to the rent you would have paid).

If your priority is making "safe" financial decisions, then buy something that is below your budget and/or that will produce income if you have to leave and don't want to sell.  Either it has a second unit (or option for one) that you can rent while living in the property, or will rent for enough to pay for itself should you move out.

Fear is not a good place to make decisions from, rather it's improtant to wisely consider your needs and mitigate your risk while still living life in a way that works for you.

Travis Sperr · Answer

Don't wait to buy real estate, buy real estate and wait.- T. Harv Eker

I love the conversation of about Denver being a bubble. There is no indication of a bubble in Denver, when you look at the data - there has been about the same amount of closings each month, year over year since 2008 - what has changed is the inventory. September 2007 there were 30,000 listings in Denver - January 2015  there were just over 4,000. People are paying over asking, waiving appraisals and inspections because there is nothing available - supply and demand.

Denver is a great place to live, unemployment is low, lifestyle is great and we are recovering quickly. What most don't, realize, remember or know is that Denver was one of the 1st markets in the country to get hit in 2007 - so it is one of the 1st and strongest in the recovery. If you are investing for the long term the market doesn't matter - for example do you stop contributing to your 401k because the market is at the highest levels ever?

Bill S. · Answer

@Christopher Smith I think your biggest variable is interest rates. Buying now with a historically low interest rate and locking it in for 30 years is great IMO. Home prices could decrease when interest rates increase. I don't see that happening on the average in Denver. There is currently a massive lack of supply in the SFH market. In the price point your are looking it does not make economic sense to build more. The building costs are too high and the entitlement costs for the land are so high that the risk/reward is too low for builders to jump in. That said, I'm not a big fan of GVR. Most of the area homes are built with a 20-30 year life in mind. That means the area will begin to look a bit drab in 15 years or so. People will need reinvest significantly in their homes or the area will begin to decline. It will be hard for people in that price point to come up with those kind of funds IMO.

Regarding interest rates, if you are using a low down payment program you will likely end up with Private Mortgage Insurance (PMI). Once you build enough equity to get rid of that, then you will need to refi and your payment will go down. Of course if interest rates go before you are able to refi, you could be on the short end of the stick there. Assuming you can get a lower payment, that increases your ability to rent and at least cover your payments if you have to go somewhere else and can't sell without a loss. In addition, rents seem to be climbing and I don't see that changing anytime soon so you should get some help there as well.

The bottom line is, what is your opportunity cost. If you don't buy. You will pay rent and that money will be gone. It's a sure thing. If you do buy, there is risk but there is also reward. You can't know what the future holds. If you rent figure on your expenses going up for the next couple of years.

To me, if you are going to be somewhere more than 3 years you should buy. There are exceptions to this but you haven't raise any of those.

Jon Holdman · Answer

When you buy with a low down loan (e.g. FHA) and want to sell in 3-5 years, you're going to be just about break even if you sell.  That's because selling costs are a minimum of 8% of the selling price.  So, if pay $260K, borrow $250K, and pay on that loan for three years, you will owe about $237K.  If you sell for $260K, you'll net $237K on the sale.

Now, maybe you'll get appreciation on those houses.  Those houses were selling for half their current values in 2008-2009.  So, if you bought then and sell now, you'll make a nice profit.  OTOH, if you bought in that area in 2002-2006 and had to sell in 2008 you would have taken a big loss.  Because values in the boom years were about what they are now.

IMHO with this statement:

You're on the wrong track.  A residence is not an investment.  Its an expensive liability.  Spend as little as possible on the minimum house that meets your needs.  Maybe you'll turn a profit when you sell.  Maybe not.  But either way you need a place to live.  I've bought and sold three residences and never made any profit on any of them.

Matt M. · Answer

Did you end up buying? Have you seen the price change in the past year?

Christopher Smith · Answer

I'm focusing on GVR because I want to buy a newer home (2005 or newer) over 1500 sqft under 275k. It's definitely the suburbs but the area is growing and the drive to where I work in Glendale is about 30 minutes in rush. Other areas where I found homes that match my specifications far South East Aurora and some areas fairly far North of Denver Metro were not much better for drive distance or convenience factor.

Matt M. · Answer

We are not in a bubble. People are moving here in droves, supply is nonexistent, and rates are low. They will tick up later this year probably, but that won't slow us down too much.

Why do you like GVR? If you are in IT, is your location flexible? I've been in several of those homes from my foreclosure days and wasn't impressed at all.

Dan Mackin · Answer

It is true that GVR is in the middle of nowhere, but that is also relative to what you do. As @Jean Bolger said the train will be a great boost for the area. Compared to some other "Out There" areas GVR is pretty close to some good business. That area is going to fill in. The Anschutz campus is expanding steadily and if the VA hospital ever gets done it will give a decent boost to employment for the area. From GVR to the campus is about 10 minutes or less which is an awesome commute compared most of the Denver metro. I have 2 relatives who now rent their homes in GVR and have been content with their tenant options so far. At the moment I look at 470 as the cusp of where the building in the area will eventually fill out to. GVR is within that border and I would consider it myself if I needed to live down that way.

Jean Bolger · Answer

Green Valley Ranch is still seen as way the heck out in the middle of not much- which is why you can still get a house at a decent price. It fell really hard during the crash. However that area, and everything around the airport, is going to be seeing major, major growth in the next decade. The new train (airport to downtown) won't hurt either. @Jon Holdman is right that you may not see a big gain in such a short time, but I would really doubt you'd be risking a loss or a situation where you'd be stuck.

Bryan O. · Answer

As far as a bubble in Denver goes, the house prices are rising along with rent prices. That means that it is overall growth. OTOH, houses have recently been selling for above appraisal, cash, inspections waved, etc. so I think we're starting to get into a small bubble. I also just had a nice mailer show up to refinance my home into an ARM. Looks like the cycle is just about to trend up for the risky loans and a crash in 3-5 years.

Denver market opinions - is it about to burst?

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