Denver Appreciation Over Next 5 Years

[Brian Bellew]

What do investors believe we can expect for yearly appreciation over the next 5 years in Denver? 

[Bill S.]

@Brian Bellew there are several factors pushing the Denver market over the past 4-5 years. The major factors as I see it is growth in population. We (Denver Metro market) have grown about 20K people per year from the birth rate exceeding the death rate. We have also grown about 30K people per year from people moving here from outside the state. Net growth of about 50K per year. Over the past 7-8 years we have not built enough homes to house the new people moving here. The last two years we have ramped up quite a bit. This year it looks like we will build about what we need for this year but will still have a large deficit from the past years. Wages have not grown much over the past few years but we have seen a nice run up in the home prices. So what does the future hold?

To start with, I voted for @Adrian Tilley post. At the same time, past performance is the best indication of the future. Historically Denver real estate has appreciated about 3% per year over the long haul. That factors in the peaks and valleys. The past few years have been pretty crazy but the data I have seen indicates it's more from what is behind us and not so much speculation about what is in front of us. The overall housing numbers indicate that we have at least 1-2 years more of this exuberant appreciation (8-12%) remaining. This is primarily based on population growth (demand for units) and new construction (supply of units). A balanced market is considered to be 6 months supply we have about 20 days supply. The number of units being sold is actually declining slightly which is also indicative of a supply side issue. As I said before, the supply side is just about even with demand (we are building just about the number of units that we need for growth). We have several years in the past of severe under-supply so we have not reached the balance point just yet. After the 1-2 years of a similar market we should see a leveling off to more historic levels (3% growth). I see five years out as potentially being an inflection point. That could be the time where supply and demand meet. If we then continue increasing the supply, we all know where that lands us. If building tracks growth then we could see steady growth well beyond 5 years.

Now for all the qualifiers.

1) Interest rates - if we see a rapid increase in interest rates and we already know that the FED has stated an increase is coming, we could see a huge rush as rates begin to increase and then a big lull while people adjust to the new norm. This could impact the 5 year picture simply from a timing perspective (it could land on the lull) but beyond that data says that people typically buy about the same number of homes per capita no mater what the interest rates. This would impact the prices and definitely hold them down unless wages started to grow in response to increased interest rates. At the same time increased interest rates shouldn't cause a decrease in prices because many properties are locked in and demand is still pretty high.

2) Wages - if wages in the area begin to increase then that could really extend the growth cycle for years. If wages stay flat, then the affordability will decrease which will eventually (with-in five years) put a lid on growth.

3) Market efficiency - There is almost no new construction below the media price for either apartments, condos or stand alone homes. This means we could see segments of the market out or under perform the market as a whole. For example, if you own a class A apartment complex in the urban core you might see some really stiff competition which would mean your rents would stay flat or even dip over the next 5 years. Where as if you own a small SFR in one of the emerging areas around the urban core you could easily see the value and rents double in 5 years.

4) Condo construction - the Colorado construction defects laws have scared insurance companies for builders and for a period of time it was impossible to get builders risk insurance for condos being constructed for sale. I have heard that is changing a bit. If this comes in line then I would expect the condo price growth will take a hit. It has outperformed the SFR price growth for the past couple of years.

5) World Geo-political events - As we have seen in the past these can really cause our overall economy to take a dive. For example, if foreign cash stopped purchasing our debt and our government was forced to live on what comes in while paying higher rates on the debt we currently have.  

6) Price of oil - If the price of oil were to go over $100 per barrel and look like it was going to stay there for an extended period of time, then the boom could take off again.

So, my advise? Make deals that make sense for you now where you are now. Don't be controlled by fear but don't be foolish either. I can't really see you going wrong by purchasing something you can afford now and locking in with the current low rates.