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CORELOGIC INC (CLGX)
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Corelogic : Housing prices soar beyond income growth in Denver metro area

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06/04/2018 | 06:00am CEST

Housing prices in the Denver area are starting to stretch the limits of what the market can feasibly support, according to new research from CoreLogic, a California-based real estate analytics firm.

Denver's housing stock is "generally overvalued," CoreLogic found, meaning that the ratio of housing prices to income now exceeds 10 percent of the historical norm going back 40 years.

"Housing prices (in the Denver area) have risen 83 percent since their (low point) during the Great Recession," said Frank Nothaft, CoreLogic's chief economist.

The Denver metro area's median household income, however, has grown roughly 12 percent in the same period, to around $71,000, according to Census data. In May, the median sales price of a single-family home in the area hit an all-time high of $455,000.

"Even in just the past year, the home price index is up 8 percent," Nothaft said. "Incomes just aren't following pace."

MORE: No easy fix for Denver's housing crunch

Denver isn't alone in watching home prices soar above income growth. CoreLogic found that a third of American metros are overvalued, driven by factors like a continued movement from rural areas to cities, new-home construction not keeping pace with demand and a preference of developers toward higher-end units that creates a bottleneck among first-time homebuyers.

Ironically, a strong economy may exacerbate the problem, Nothaft said, as mortgage interest rates begin to creep back up after years below the norm.

"The average 30-year fixed rate is 4.7 percent, which is still low, but that's up a percentage point from a year ago," Nothaft said. "If mortgage rates and housing prices keep rising alongside each other, that will worsen affordability issues."

A family looking to buy the same house today as a year ago would see its price up by 8 percent, Nothaft said, and its mortgage rate up a percentage point, translating to a 20 percent higher monthly payment than last year.

"But incomes sure aren't up 20 percent from a year ago," Nothaft said.

A neighborhood story

The affordability situation is different depending on where you look, said Steve Danyliw, chair of the Denver Metro Association of Realtors' Market Trends Committee.

"When you drill down into neighborhoods, you see significant variation," Danyliw said. "All real estate is local."

Median housing prices in the 80237 ZIP code, which surrounds the area of I-25 and I-225, near the Denver Tech Center, are up 39.9 percent year-over-year in the first four months of 2018, Danyliw said. In contrast, median prices are down 13.3 percent in the 80235 ZIP code, which straddles South Wadsworth Boulevard south of Hampden Avenue.

Overall, four Denver-area ZIP codes jumped more than 30 percent since last year, while two experienced a drop, Danyliw said.

Still, just because a housing market is considered "overvalued" doesn't mean prices are in danger of crashing like they did in the Great Recession, Danyliw said.

"If you compare 2008 to now, it's significantly different," Danyliw said. "It's a supply-and-demand scenario. In 2007 and 2008, our vacant housing inventory was at record highs, with almost 30,000 listings in the metro area. Right now we're at 5,100. We just don't have the inventory that would change that supply-and-demand piece."

The higher-end market may begin to cool, Danyliw said, as the ratio of luxury units coming onto the market catches up with those going under contract.

"Instead of two or three ZIP codes with median price drops, we could potentially see 10 or 15," he said.

Other factors may come to bear on the housing market: a steady increase in gas prices can redirect family incomes, Danyliw said.

High prices may be sending young people elsewhere to buy their first homes, he said.

"We're getting to the point where home prices have gotten so high that they outweigh the desirability of living here," Danyliw said.

The end result of the Denver area's housing issues might be a general cooling of the market, Danyliw said, especially if condo construction picks up in the face of reforms to the state's decade-old construction defects law and eases the first-time homebuyer bottleneck, Danyliw said.

"2018 will still be a banner year, but it might not be a record-breaking year," Danyliw said.

Feeling the squeeze

First-time homebuyers have an uphill battle, said Jack McCambridge, the co-founder of Eave, a metro area mortgage lender.

Buyers utilizing first-time homebuyer grants or Federal Housing Administration loans may see themselves outmaneuvered by full-price cash buyers or traditional buyers, McCambridge said.

Buyers who can put 20 percent down on a house will find their bids far more attractive, McCambridge said, though 20 percent of a median-price, single-family home in the Denver area is now more than $90,000.

Low inventory and high prices mean first-time buyers may need to make tough choices.

"One of the hardest things to do in this market is to be confident about the property you want to buy," McCambridge said. "Is it in the part of town you want to be in? Does it have the features you want?"

Seeking out personal connections with sellers or finding sellers interested in maintaining a family atmosphere on their block can help, McCambridge said.

Still, some would-be buyers just won't be able to pull it off here, McCambridge said.

"Some definitely end up just discouraged," McCambridge said.

© Copyright © 2018 Our Colorado News, Englewood, CO. All rights reserved., source Newspapers

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Financials ($)
Sales 2018 1 856 M
EBIT 2018 293 M
Net income 2018 148 M
Debt 2018 -
Yield 2018 -
P/E ratio 2018 28,35
P/E ratio 2019 26,09
Capi. / Sales 2018 2,18x
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Capitalization 4 054 M
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Number of Analysts 11
Average target price 54,9 $
Spread / Average Target 9,6%
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