Is Denver in a Housing Bubble?

Although most US cities are struggling to satisfy their increasing residential needs, it seems as though Denver’s exponential growth has rung the alarm of a potential housing bubble. CNBC wrote at the beginning of August that home prices in Denver have inflated enough to be considered statistically overvalued. Citing CoreLogic’s data, the problem begins with the overall supply of homes. Once the inventory is depleted, the prices of what’s remaining surge to take advantage of the decreased aggregate number of sellers on the market.

“As of Q2 2017, the unsold inventory as a share of all households is 1.9 percent, which is the lowest Q2 reading in over 30 years,” said Frank Nothaft of CoreLogic. The only thing keeping rents affordable is low mortgage rates. But the sustainability of that process is questionable. Rates are loosely contingent upon 10 Year Treasury Bond prices, but that process is by no means concrete. It’s a constant battle between investors opting to back either bonds or mortgages since both investments attract similar people — those looking for fixed and stable returns and relatively low risk. So right now, since the economy is performing well, the slight rise of interest rates is expected, which means lower prices for bonds and higher yields. But if the economy tanked, or unemployment sparked up, both prices would reflect that change and the housing market would see increased rates and decreased investment.

Even though Denver’s job growth has been phenomenal at 2.9 new jobs for every new housing unit, the fine line between under preparing and overbuilding is never definitive. Unemployment currently sits at about 2.1%, but we’ll likely see an increase in that number when construction stops and workers are laid off.

There are a couple potential outcomes to the current situation as is.

Scenario 1) Denver’s increased construction activity levels off at the perfect time, and the ensuing effect isn’t enough to start an economic crisis. The rates slightly rise to offset the lower level of activity in the market, and the increased quantity of homes lowers overall market prices. The balance between the housing market and the economy is loosely factored by employment. And depending on how the economy is performing when the growth ceases (likely in a slight downturn), the ability for construction and other manual labor workers to find new jobs in a timely manner is up in the air.

Scenario 2) Denver’s increased construction activity goes on for too long, and the result is unprecedented growth in the residential sector. The overall economy takes a significant downturn to reflect investors’ preoccupations. In-state buyers are turned off from selling, and unemployment rises exponentially. However, with this scenario, the overbuilding of houses and apartments would ultimately lead to a decrease in housing prices, which could potentially incentivize out-of-staters who were traditionally worried about living costs to make the move. Don’t forget that Denver’s natural appeal is still a massive anchor to its economy. And its growing healthcare and tech industries continue to bring more and more specialty jobs to the city, meaning higher per capita income. So despite overbuilding and some short-term economic repercussions, the market will likely recover in a few years.

Bubble or no bubble, the behemoth that is Denver’s housing market will likely see long-term growth and stability to replicate its recent success, again solidifying Colorado’s capital as one of the best places to live in the United States.

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