What factors caused Denver prices to go up the last 2 decades?

Question

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!

James Carlson · Answer

@Marcus Auerbach

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/DemandI 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:

• 24,000 homes on market at any given time (like a snapshot of the market)
• 19,500 new homes built
• 19,000 net migration into Denver metro

In 2016, there were:

• 4,500 homes on market at any given time (on average)
• 9,000 new homes built
• 38,000 net migration

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 buildingAdd 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 influxI'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.

Erin Spradlin · Answer

@Marcus Auerbach

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.

Emilio Ramirez · Answer

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.

Tom De Napoli · Answer

@Marcus AuerbachWhen 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

• From 2005 to 2015, population increased in Metro Denver by almost 500,000 people or 18%, from 2,582,000 to 3,054,000.
• As of Oct 2015, Denver had an unemployment rate of just 3.1%, lower than Austin at 3.3%, or Washington DC at 4.3%
• At 2.4% population growth, Denver was the second fastest growing large city in the U.S., trailing only Austin, Texas (period July 1, 2013 – July 1, 2014).
• Job Growth in 2014 was over 34k jobs, a 2.5% increase; outpacing Austin in overall growth, but trailing it’s rate of 3.5%.  Job Growth since the bottom of the recession was 16.1%, 10th out of the 100 largest metros.
• Per Capita Personal Income: Denver $58K vs. U.S. $32K
• Median Household Income: Denver $79K vs. U.S.$61K

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.

• Ranked 5 of 62 for best large city economies (Source: Wallet Hub)
• Ranked 8 of 100 best cities for an active lifestyle (Source: Wallet Hub)
• Colorado is ranked #2 in the country as most attractive states for employment and #1 for job opportunities (Denver Business Journal)
• Ranked 12 of 62 for best large cities to live (Source: Wallet Hub)

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.

• At 12.8% growth, Denver had the 3rd fastest growing population of young adults (18-34) in the country between 2010-2015 -- over 8 points above the national average(Brookings)The number of college-educated 25-34-year-olds in Denver increased from 163,000 in 2000 to 240,000 in 2012, a 46.6% increase (source: The Young and Restless and the Nation’s Cities).
• Out of the 51 largest metros studied, this percentage increase trailed only Houston, San Antonio, Oklahoma City, Nashville, Salt Lake Vity, and Las Vegas over the same period.
• Out of the top 15 metros with the largest populations of college-educated 25-34-year-olds,
• Denver’s growth rate was second behind only Houston at 49.8% — 17.5% above the national average
• With 240,000 college-educated 25-34-year-olds, Denver ranks 11th out of the top 51 largest Metros for total population.
• Denver has 4 of the top 20 zip codes with the Highest Increase in Millennial Populations in the US (source: Rent Cafe)

I hope this helps shed some light on the impressive growth that Denver, and cities with similar fundamentals, have experienced in recent years.

Matt M. · Answer

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.

Andrew J. · Answer

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.

Erin Spradlin · Answer

@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

Barry Ruby · Answer

@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.

Marcus Auerbach · Answer

@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?

Jaron Walling · Answer

@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.

What factors caused Denver prices to go up the last 2 decades?

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