January 7, 2015

Will Home Values Continue To Rise? By Dan Lucchesi, Total Realty Advisors

Friends and clients occasionally ask me if I think the recent increase in home values is sustainable and whether or not it is leading towards another crash in values. While I don’t have a crystal ball, to answer a question like that it is important to look at the fundamentals at play in our housing market.

With rental rates near record highs, the availability of financing still near record lows and our economy continuing to improve, many qualified renters are making the move to home ownership. The Denver housing market is without question a seller’s market; homes are often under contract within 48 hours of listing. This level of demand in the market has pushed home values up 36% over the past three years, since a low in November 2011, according to Zillow also forecasts a 3.6% increase over the next 12 months. Historically, a sustained trend of value inflation will eventually lead to overvaluation and an inevitable resetting of values. However, there are other fundamental factors at play in our market.

First, home ownership is correlated, among other factors, to the rental market. Metro Denver has seen gross rents increase 5.3%, 6.5%, 7.8% and a record 10.7% through the 3rd quarter for the preceding year, each of the last four years, respectively. Denver has also seen 17,839 units of new Class A multifamily since 2012, with 19,846 units currently under construction, pushing top market rents to new record levels for Denver. Denver Mayor Michael Hancock recently released a new five-year housing plan, citing an immediate need for approximately 27,000 affordable housing units in Denver, with only 700 recently constructed. He stated, “While the city’s population growth has spiked, our housing stock is simply not keeping pace with the community’s needs.” Apartment vacancy remains at frictional levels below four percent (3.92% – 3Q 2014), supported by a strong influx of educated, highly skilled young workers.

Secondly, home ownership is tied to the availability of affordable financing. Financing is readily available for qualified buyers, through Fannie Mae lenders and banks as well other programs like the VA and HUD. First mortgage rates remain near historical lows. For qualified buyers, this leads to a value prospect of leaving their rentals to become first time home buyers.

With these fundamentals in our market, we are likely to continue to observe increasing values in our housing market until the demand in our rental market begins to be met, and we see a plateauing of rental rates. If the economy remains on its modest but positive trend, we should eventually see a plateau on the supply of new rental housing hitting the market as supply meets demand, and a stabilization of home values in the market. If the economy sees improved job creation and the increased wages, which have been elusive thus far, then we may very well see continued growth in home values into the foreseeable future.



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