Is Metro Denver’s Housing Market Failing?

This was the headline in the Denver Post last Tuesday after a report from HSH.com, a mortgage research firm showed that the median price of a home was $414k in the 4th quarter and a borrower needed to make $79,181 to qualify to buy that home with 20% down, assuming that their house payment doesn’t exceed 28% of their gross monthly income, which is ideal.

The most recent U.S. Census Bureau estimates median family income in metro Denver at just above $80k, thus a little more than half of households could afford to buy a median priced home. This isn’t bad. Thus, I wouldn’t say that our housing market is failing; but it is getting more unaffordable as builders have fallen so far behind demand.

As I study the chart from the State Demography Office further showing the number of new households formed and the number of new housing units built since 2001, you see this GLARING FACT—new households absorbed all of the extra home inventory that was built from 2001-2006 (62k extra homes) by 2012. And when did home prices start rising substantially—2012.

And we saw the beginning signs of rising prices in 2011 when we saw existing home inventory levels drop by 40% from December 2010 to December 2011! And then our supply of homes for sale dropped another 30% in 2012.

So, I went back and read my newsletters that reported on our local housing market for December of each year—

• 2010—average price of a detached SFR was $274,625 with 6.3 months of inventory.
• 2011—average price of a detached SFR was $253,986 with just 3.9 months of inventory.
• 2012—average price of a detached SFR was $289,926 with just 2.3 months of inventory.

We need home builders to dramatically increase the number of new homes they build so that supply can reach at least 3 months again, so that price increases would slow down or even stop. Home builders have failed to keep up with demand; but it’s not all their fault. What’s holding them back?

• A record low supply of existing vacant buildable lots. This is partly due to the fact that it takes too long to get new neighborhoods approved by the local city or county.
• An incredibly limited worker pool due to society changes and school changes that keep young people from learning the construction trades and stigmatizes those people who work with their hands.
• Bank financing is drying up. First, banks prefer lending on apartments. Second, smaller banks are running out of capital to lend on with the higher capital requirements that have been placed on them by Dodd-Frank.