Is The Denver Housing Market Surge a Bubble About To Burst?

I have been asked a lot recently if we are in a bubble.  I’ll say the answer is NO.  I expect the rate of growth to slow a bit from what we’ve seen in the last 12 months, but when I look into my crystal ball I see slow steady growth in the housing market over the next several years to come.  Here is why:

Missing Households.  One factor supporting long sustained growth is the pent-up demand for housing as a result of what have been labeled “missing households.”  In his Inman News Article, Paul Hagey does an eloquent job of describing this issue.  Essentially, there is currently a huge drop in the amount of households compared to historical norms, especially in young adults 18 to 24.  Before the housing bust, an average of 1.1 million households were formed each year in the U.S.  During the housing bust only about 450,000 households were formed each year from 2008 to 2011.  This created a huge backlog of nearly 2.4 million households.  As we know, household formation is not instant.  First comes job, then comes apartment, then comes a home.  Analysts believe this process of bringing household growth back to normal will be a long process that will support long steady growth in the housing market.

Strong Credit.  Have you tried to get a loan recently?  If so, you understand first hand that today’s homebuyers are scrutinized much more from a credit standpoint.  The credit quality has continued to by very high in comparison to years before the last bust, when fogging a mirror was the primary criterion for a new mortgage.

Aging Population.   As reported by the Harvard Joint Center For Housing Studies, the  size and age structure of the adult population are important factors in the long run housing market.  Households aged 65 and over are projected to increase by 9.8 million over the next ten years.  A large number of those individuals will demand new housing.   The Joint Center estimates that the number of mover households aged 65 and over is likely to increase from 1.2 million per year to 1.6 million annually over the decade.

Rental vs First Time Homebuyer Competition.  The rental market looks to remain strong over the next 5 years or so.  Partly due to the lack of apartment housing, and partly due to the fact that a large part of our renter population were previous homeowners who lost their homes and are unable to purchase until their credit is reestablished.  With a strong rental market real estate investors will continue to compete with first time home buyers for homes in the lower price range.   This healthy competition will continue to support a steady appreciation for those entry level properties.

Denver Population Growth.   Below is a graph that shows the population growth in relation to home sales.  You can see that the home sales graph usually chugs along consistent with the population growth.  In the last hyper-boom period, the home sales spiked way above the population growth.  At present we are coming out of a time with huge dip in home sales and were are just getting to the point of the population growth.  Even if the home sales begin to spike, a historical perspective would support a steady market for at least 3 to 5 more years.