A new report from CoreLogic, a national data analysis firm, finds that homes in metro Denver are overvalued even as prices continue to rise. And one of the driving forces behind the study predicts that costs will keep going up through most of the next year.
CoreLogic's latest Home Price Index and HPI Forecast, released on January 5, uses data from November, and the numbers for the Denver area are very much in keeping with countrywide trends, according to the company's chief economist, Dr. Frank Nothaft.
"The CoreLogic HPI for the U.S. rose 8.2 percent in the twelve months ending November 2020, compared with a rise of 7.6 percent for the Denver metropolitan area during the same period," Nothaft notes. "Thus, Denver was similar to the national trend over the past year."
Here's a CoreLogic graphic showing how metro Denver, including Aurora and Lakewood, compared to other major cities across the country:
Nothaft underscores one key aspect of the Denver data: "The CoreLogic HPI Forecast predicts prices will rise 2 percent in the Denver metro area from November 2020 through November 2021." That's a slower pace than the present one, but still significant.
As for why home prices here are considered overvalued, Nothaft explains that "the measurement is based on comparing the Denver metro HPI to Denver metro per capita income currently to a benchmark period — the 1976 to 2003 period. Based on this benchmark, the price relative to income is more than 10 percent above the benchmark" — the standard CoreLogic uses to establish whether home prices are overvalued. In other words, he says, "Prices appear high relative to the income of current residents."
Nothaft offers several possible reasons for this, including "record-low mortgage rates enable local residents to 'buy more house' than during the benchmark period," "new residents who have moved to Denver from elsewhere in the U.S. that may have higher income and wealth than local residents, and home prices are higher as a result," and "there is a price bubble (prices are disconnected from the properties’ intrinsic value)."
In Denver's case, Nothaft believes "the first two reasons explain why prices are high relative to the income of local residents." That lessens the risk of the bubble bursting, causing a catastrophic drop in value that could leave current buyers in a financially untenable position.
In the meantime, the percentage price increase is quite different for detached homes and those that are attached — typically condominiums or duplexes. Detached homes are up 8.3 percent year over year, while attached housing has risen a more modest 5.2 percent:
COVID-19 could play a significant role in the disparity between detached and attached homes; buyers aren't as willing to take on shared spaces that bring close contact with neighbors in corridors, stairwells and elevators for additional room. This phenomenon has been observed across the U.S. since the start of the pandemic, Nothaft says.
But he also notes that "the acute shortage of inventory for sale and rising buyer demand because of record low mortgage rates has led to an acceleration in home price growth in recent months."
And he doesn't see that changing for most of 2021.