What factors caused Denver prices to go up the last 2 decades?
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
Hello fellow Denver investors and agents! For those of you who have been doing this long enough to remember when Denver real estate was still cheap (like back in 2000): what happened that caused prices to continually go up?
Aparently you have so much pressure on the inventory that even rough parts of town gentrify?
Is it a constraint in inventory? What is going on with new construction? With mountains to the west, why is the city not growing to the east, or is that considered too far away from downtown?
I am looking to gain a deeper understanding for the causes and to see if my home market may or may not be on the same path...
Thanks in advance!
I'm sure other people will have some thoughts. I think it's largely driven by demand going up and inventory going down. But there are a few factors
Inventory/Demand
I show these stats in our first-time homebuyer's class, and I think they get to the heart of a lot of the increases.
In 2006, there were:
In 2016, there were:
I'm not an economist, but I can see that homes for sale dropped by 20,000, new home builds were cut in half, and meanwhile the number of people moving in doubled. Demand goes up, supply goes down, prices increase.
Cost of building
Add to that the cost of materials and cost of labor (due to a lack of construction workers) increased the cost of building. (Builders will say it was the threat of lawsuits that made them stop building. I don't buy that.)
Tech influx
I've seen some stats saying that salaries aren't keeping up so at some point there has to be some downward pressure on prices, but I know Denver is becoming a big tech hub, bringing with it high-paying jobs. (We're working with two such people right now, one works at Hello Fresh, the other works at Slack.) You have both people moving here for in-office, high-paying jobs but also people moving here who can work remotely so they're getting west-coast money and living in Denver priced homes, which are still "affordable" compared to where they came from. So I see those people sustaining prices for awhile.
What to do?
This all adds up to fewer people being able to afford. We see it with some of our long-time friends here in Denver. It's also why house hacking is working so well here. So many people are looking for a room to rent. Or we have people barely able to afford who want that house with a basement apartment to rent out and offset their mortgage.
I think it's great to live in such a cool city where so many people want to be. But I know it has some serious downsides for many people as well.
I'm sure other people will have some thoughts. I think it's largely driven by demand going up and inventory going down. But there are a few factors
Inventory/Demand
I show these stats in our first-time homebuyer's class, and I think they get to the heart of a lot of the increases.
In 2006, there were:
In 2016, there were:
I'm not an economist, but I can see that homes for sale dropped by 20,000, new home builds were cut in half, and meanwhile the number of people moving in doubled. Demand goes up, supply goes down, prices increase.
Cost of building
Add to that the cost of materials and cost of labor (due to a lack of construction workers) increased the cost of building. (Builders will say it was the threat of lawsuits that made them stop building. I don't buy that.)
Tech influx
I've seen some stats saying that salaries aren't keeping up so at some point there has to be some downward pressure on prices, but I know Denver is becoming a big tech hub, bringing with it high-paying jobs. (We're working with two such people right now, one works at Hello Fresh, the other works at Slack.) You have both people moving here for in-office, high-paying jobs but also people moving here who can work remotely so they're getting west-coast money and living in Denver priced homes, which are still "affordable" compared to where they came from. So I see those people sustaining prices for awhile.
What to do?
This all adds up to fewer people being able to afford. We see it with some of our long-time friends here in Denver. It's also why house hacking is working so well here. So many people are looking for a room to rent. Or we have people barely able to afford who want that house with a basement apartment to rent out and offset their mortgage.
I think it's great to live in such a cool city where so many people want to be. But I know it has some serious downsides for many people as well.
@James Carlson thanks for the insights! I see similar numbers here with inventory snapshot, but when I look at the overall number of houses sold per year, I see its about the same, even slightly more.
So when you have low inventory, but same number of sales, it's just the velocity that has increased. Same number of houses available for sale, you just have to be quick. It's like catching fish with your hands lol
Your cut in inventory is dramatic. What happened to overall home sales?
Do you have 2019 numbers?
A lot of builders went out of business around 2010 and you can't just flick a switch and turn that back on. 2016 was slow here as well, but the number of new construction has been steadily increasing since. They are just expensive. 400-600k easy.
One of the problems we have too is the cost of new construction; about $160-200 per SF. Existing inventory is about half the cost.
And we have no more land within the city limits and a lake on one side. Do you have buildable land for sale? New subdivisions to the east?
I've been out here since 2002 permanently(seasonally since the late 80s), and have obviously seen a ton of change. Unfortunately, people found out that Denver isn't a frozen tundra in the winter. The tech boom and bust put a lot of eyes on our market in the late 90s and early 2000s. More tech came back in this current run up. The mountains/outdoor life, weed thing, and location in the center of the US are other reasons that come to mind to drive up demand for housing.
Having lived in Denver since 2000, I feel like the last 5 years have felt particularly pronounced as far as builds and transplants. Honestly, I'm excited to see people recognize what a wonderful city Denver is (nice people, great weather, wonderful recreation) and when people complain about the traffic/new additions, I like to point out that it's a compliment to live in a city that other people want to be in.
Unfortunately, the flip side of this is the lack of inventory and the housing market, which unfortunately, is starting to feel out of reach for some people. Someone once said to me a lot of things can be changed (kitchen, bathroom, yard, etc) but what can be changed is location. For that reason, I think metro Denver stays very expensive for the long-term (also, because as @James Carlson mentioned more tech money with bigger salaries continues to dominate the market), but I feel like there are still a lot of opportunities up north (Westminster, Thornton, even Commerce City) and east (Aurora). Colorado Springs is also cheaper than Denver.
Anyway, when people ask me if it's going to get cheaper or better any time soon, my answer is usually that it seems unlikely. Denver has a diverse economy, a lot of educated people, great weather and a good business climate. Until someone can tell me what would slow down the rise in prices, I anticipate we'll be Seattle expensive soon.
Interesting conversation. I'm a recent transplant from Wisconsin and I can tell you that in my neighborhood of Arvada the same house that sold for 240k when I moved here in 2014 is now selling for over 400k. Currently looking for a house myself and it's amazing to see the over priced boxes of crap that are out there that sell in a matter of days because of location.
The metro area is growing in all directions and my business is based on infill new construction. I can tell you that I can't afford the houses that I build... Not yet anyway... :) and that the cost of land is a huge driver of the cost of new construction. In order to get "affordable" housing from new development. The locations of subdivisions are pushing the limits on a commuter. Mead, Dacono and Firestone to the north, Parker, Elizabeth and Castle Rock to the south. If you're living in one of these bedroom communities you have an hour drive or more during rush hour into the north center or south center part of Denver proper. So older neighborhoods that are closer to Denver are seeing all kinds of new development and gentrification.
Another issue is water. With the rocky mountains and elevation of the state in general, all the water flows away from and out of the state. There is no lake michigan... :) So new development also means accounting for that infrastructure. People who are buying houses in new construction subdivisions are paying double the taxes that other folks are paying in older established neighborhoods because of the cost of the new infrastructure. The cost of a new water and sewer tap is very expensive with Denver being the cheapest at around $12k and all of the neighboring areas coming in anywhere between that and $35k. Doesn't include the actual connection itself. This is just the fee to the government to connect to the city sewer and water main. This is on top of permitting costs, impact fees, affordable housing fees, and plan review costs.
Cost of construction has mirrored this growth in demand. 4500 sf house that I could build in 2016 for 550k is now costing 800k. Everything has gone up. The price of materials, the price of labor, the price of land. Maybe only the cost of money has stayed relatively the same. And this is all driven by population growth. What's driving that growth? On top of all the items mentioned above, Colorado is a very cool place to live.
@Erin Spradlin Wow I completely agree with your comment.
I have friends that moved there two years ago. They're married with large incomes and couldn't buy anything near the Denver metro area. They ended up purchasing in Erie, CO because prices were lower. It's a beautiful place to live. I'm from the Midwest and wanted to move there. Some of my college friends already did but I fear they struggle financially to do it.
While my experience was in Fort Collins and Greeley, I see the same. A $400,000 home is quite the low price point if one is coming from San Diego or SF. It is a beautiful place to live from a weather standpoint and natural beauty. That being said traffic is an absolute nightmare on I-25, I-70, and most cities along the Front Range. I just moved back to WI after 5 years in CO as I was looking to reinvest in Milwaukee and seek other opportunities. I was able to catch some nice appreciation in Greeley and move back. A big part of the move as was mentioned before is water. There simply is not enough water in the West to sustain the growth.
After the DNC this summer Milwaukee is going to be put on the map as an affordable city with water and great culture. Certainly we have our problems, as does every major city.
@Marcus Auerbach
When we decided to focus on syndicating deals in Denver multifamily 5+ years ago, we were attracted to the diverse economy, strong job market and income growth which were all contributing to population growth that was outpacing the national average. I looked back at our original investor proposal to pull some of the macro trends that we were following to give you a sense of what drove our thinking at the time and which ended up paying off for our investors. Perhaps you can apply them as a framework to regions your are studying in Wisconsin and beyond
We also liked that Denver offered many of the high quality jobs and amenities -restaurants, nightlife entertainment - that made cities like San Francisco, Los Angeles, New York, Seattle, Austin attractive destinations in recent years, combined with the lifestyle benefits that come from living close to amazing, year-round outdoor activities.
However, the leading indicator that informed our thesis was Denver’s growing concentration of college-educated millennials, which is a proven catalyst of regional economic growth. Employers are attracted to cities offering a young, educated, tech savvy workforce. These high-wage jobs stimulate growth for surrounding metro areas and lower- income residents which mattered to us because we were investing in workforce housing outside of the downturn, urban core.
I hope this helps shed some light on the impressive growth that Denver, and cities with similar fundamentals, have experienced in recent years.
@Emilio Ramirez I apreciate your input as a builder - no other professional is looking at the market more through the lense of cost per sqft and supply and demand for additional housing; your lifelyhood depends on it.
The cost of connecting water and sewer is highlighting the difficulty to support the growth from a municipal side. Here it's cheaper to connect to city water and sewer, if you have to dig a well and build a PWS its usually about 30k.
However, overall building cost does not scare me - $177/SF is pretty much average for Milwaukee as well (160-200). It's jusy that nobody is building 4500 SF houses. 2200 to 2600 is a very popular size, plus perhaps a finished basement. Or does the 4500 include a lower?
@Emilio Ramirez hi Emilio that’s a great overview of what’s going on in our market area. In addition to the tap fees you mentioned, raw water cost is a big problem. Firestone charges are $58,000 per unit which makes affordability a non-event. Water has been, is and will continue to be a major issue and challenge to be met here in Colorado and the Western States for the rest of our lifetimes.
@Tom De Napoli that is IMMENSELY interesting and helpful! Thank you for sharing your processing here and why you felt confident scaling in Denver!
@Emilio Ramirez - I always cite Arvada as the ideal place to be on the front range: between Boulder/Denver, adorable downtown, lightrail access, progressive city council. You see a lot of families with decent incomes moving in. This article also discusses how Arvada was recently listed as a top 5 city in the US for living. https://www.9news.com/article/life/style/colorado-guide/west-arvada-denver-colorado-neighborhood-guide/73-69200d21-8b1a-4fd6-9fcf-a5c15e75dd27
@Tom De Napoli that is IMMENSELY interesting and helpful! Thank you for sharing your processing here and why you felt confident scaling in Denver!
@Marcus Auerbach 4,500 sf includes a finished basement. Typical Denver infill lot is 6250 sf and 4500 sf of house usually is maxing that out for allowable building coverage area. Realtors around here list the price on total finished sf, including the basement, which caught me by surprise when I first moved out here. Above grade you'll be about 3k sf. Plus a detached garage is included in that number. Every time I visit Milwaukee I wonder how it would work out there. Have you looked at the north shore to do infill housing targeting the higher end of the market?
@Tom De Napoli - very intersting information and comments! I have been following most of these indicators casually, but never compiled them in a formal way.
Current population numbers are hard to come by - looking forward to the 2020 census. The data I have shows that Milwaukee County population has been growing only marginally, however the 4 surrouning counties did grow substanially, some in the double digits, and they are all part of the metro area. It is no surprise that that Milwaukee propper has not been growing, because the city is practically built out with basically no new SF construction.
I suspect that the 2020 census will show some growth, we have seen and continue to see a lot of high rises going up downtown. Total construction completed and under way comes to about 5 billion dollars, which no doubt will have cascading effects. It also shows the confidence of institutional investors. The DNC in July will bring a lot of attention.
Milwaukee is also ranking really well with Millennials and young entrepreneurs; Milwaukee ranks among the top 50 cities in the US to start a new business. The city of Milwaukee ranks No. 29 in the what is called the Surge Cities index. Airbnb reported 722% growth in 2019 and predicts a strong future, which it seems to me from my own anectotal evidence that some of that is atributed to temporary housing for people moving here.
It remains to be seen how much of a factor practically unlimited fresh water supply will be in the future, but I am certain it will be a contributing factor.
Comparing all these indicators, I don't think Milwauke can quite meassure up to Denver or Austin, but I see a lot of similar trends.
@Marcus Auerbach jobs and population growth are the number one drivers of housing demand. If you have it then great. If not then the outlook is not so good.
I would add that in 2010 Denver (City and County) did a major overhaul in their zoning code and state legislation passed legislation regarding builders' liability for new condo construction. This dramatically changed product that could be delivered to the market. That along with demand to live in the urban core has made a huge difference in the demographics of construction here. It basically focused all a huge chunk of the development in the City when coupled with some of the local small town politics regarding growth.
@Marcus Auerbach jobs and population growth are the number one drivers of housing demand. If you have it then great. If not then the outlook is not so good.
I would add that in 2010 Denver (City and County) did a major overhaul in their zoning code and state legislation passed legislation regarding builders' liability for new condo construction. This dramatically changed product that could be delivered to the market. That along with demand to live in the urban core has made a huge difference in the demographics of construction here. It basically focused all a huge chunk of the development in the City when coupled with some of the local small town politics regarding growth.
Of course once you have population growth reflected in the census numbers, there is no question anymore about the impact on the housing market. The new guys need a roof too. But there are leading indicators to population growth, which I think are increadinbly interesting. I have for example several clients right now who are moving to Milwaukee for no reason other than they love the vibe and relativley low cost of living.
There is also a lot of talk about the cost for startups and the general incubating climate for entrepreneurs. While Milwaukee does not score a number one place in different rankings, it scores pretty good and in combination with other favorable factors, like lifestyle, cost of living, education, schools, employment etc..
I am curious, what was the zoning code change in 2010. And how did it impact new condo construction?