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Using inventory to assess chances of a “bubble”

Using-inventory-to-assess-chances-of-a-“bubble”

In my last blog post, we explored how understanding housing inventory in specific price ranges and in certain areas is key to understanding the Denver housing market. You can read more here.

Whenever there is a run-up in housing prices, there is generally speculation about a bubble. The concern is understandable after the last financial crisis. Real estate is influenced by the larger economy, but it is still local. That is why you will see some cities doing much better than others and some specific areas within those cities performing even better.

The prediction of an imminent housing bubble is an interesting proposition. Historically, economic cycles include surges and slowdowns; therefore, we can expect that any housing market, stock market or currency market will eventually experience increases and decreases in value. Assessing the risk and potential timing of a bubble will never be an exact science but we gain some insight by looking at inventory in a specific market like Denver. The best predictors will also consider interest rates, employment data and other economic indicators, but for this analysis we will stick with inventory of homes.

In 2010 and 2011 there was an average of 3,000 sales of homes in the Denver area per month. Those years were still very much considered a “buyer’s market.” Last year in 2015 there were just over 4,500 sales per month. March 2016 had 4,641 homes for sale per month. With these figures in mind, what would it take and for how long would it take to return to a balanced market?

Becoming a bubble

In order for a bubble to occur there needs to be a pop. In Denver, there would need to be a series of events, such as those listed below, and the severity of each event would dictate if and when we experience a pop.

  1. People stop moving here – Based on most measures that is unlikely anytime soon and over the long-term the Denver metro area population is expected to increase substantially over the next 20 years.
  2. Dramatic increase in home inventory and supply – Once again this is unlikely. Although the metro area does have land surrounding it, geographically we have limitations. The mountains to the west and water concerns make full urban sprawl improbable. Land costs, traffic and transportation congestion, legal challenges for new construction condos and construction timelines make a large enough increase in new inventory to create a bubble less likely.
  3. People move away – Once again this is an unlikely event anytime soon. The local economy is boasting an extremely low unemployment rate, and many industries and companies are attracted to Denver, realizing that the city has much of the same offerings as a large city, such as a highly educated workforce, but it is still more affordable than many. The opening of the new RTD commuter rail line connecting the metro Denver area and Denver International Airport is also a significant attraction for businesses.
  4. National economic slowdown – Economics are local and national (micro and macro). A large national slowdown would trickle down to Denver. It would probably not be as severe but it would lessen the growth and demand as a result.
  5. Massive increase in interest rates – Interest rates would need to increase substantially in a short period to create an atmosphere where many would question buying a home or making a move. (see article – “Denver Real Estate & Interest Rates 2016” here)

If one or more of these events occurred there would no doubt be a slowdown on some level in the Denver real estate market. The question is would it be a slowdown, meaning price increases slow, or a drop, meaning home prices decrease? There is a large difference. In order to get back to a balanced market at our current rate of home sales (4,500/month), we would need approximately 27,000 homes available for sale. In March 2016 we had 4,461 homes which means we would need to increase our inventory by six times to get back to a balanced market. If demand and sales dropped back to the 2011 average (3,000/month) and suddenly more homes were listed each month it would still likely take the Denver area two years or more of several factors listed above to get back to a balanced market.

We can look at history and know that at some point the Denver real estate market is likely to slow down and maybe even experience lower prices again, but the chances of that happening soon are unlikely and would require multiple factors and influences. Although many predictions claim that Denver real estate will drop or slowdown “at some point,” based on the information and inventory data, that risk is not in the very near future.

Trying to predict that drop – or worse, trying to time it – means  potentially missing out on gains in value in the meantime. Deciding to buy a home is part emotional for your enjoyment of life and part investment. Making smart decisions with real estate involves weighing the factors that affect value over the long run as well as your personal lifestyle and plans. With proper planning and guidance you can make informed decisions and plan for market fluctuations.

*Denver metro area = Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, and Jefferson Counties

2 thoughts on “Using inventory to assess chances of a “bubble””

    WilliamLums Reply May 21, 2016

    I really like and appreciate your forum topic.Really thank you! Keep writing. Weinzetl

      Matt Metcalf Reply May 24, 2016

      Glad you enjoyed it. I am trying to make time to write and add more content on a regular basis. Thanks for reading!

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