Is Metro denver’s overvalued housing market headed for a reset?

Market Trend

Is Metro denver’s overvalued housing market headed for a reset?

Home values in the metro Denver area are currently at 38.5 percent above what would normally be expected, and a recent study suggests there is a day of reckoning coming soon. Housing prices and premiums in metro Denver are much higher that they would have been without a pandemic, but it is not as extreme as several other markets in the country.

Metro Denver ranked 37th out of the 100 largest metropolitan areas in April, according to a study conducted by Florida Atlantic University and Florida International University. The expected median value is $461,734 according to a leading real estate investment firm when researching trends dating back to 1996. Instead, it is at nearly $640,000. The Colorado Springs gap is even higher at 45.9 percent, with an expected price of $333,261 and an actual home price index value $486,182, which is ranked as the 23rd highest premium.

In 15 of the largest metro areas in the country, home prices are 50 percent or more above the level that would be expected given historical trends. Boise, Idaho, is the most overvalued metro area at 72.6 percent, followed by Austin, Texas, at 67.7 percent and Ogden, Utah, at 64.7 percent. Las Vegas, Atlanta, and Phoenix were the next three most overvalued markets.

According to a recent article in The Denver Post, home values tend to cycle between periods of overvaluation and undervaluation, but eventually move back toward long-term trends. During the housing bubble in the early 2000s, overvaluation approached 20 percent in metro Denver. From 2008 to 2016, home values in metro Denver ran at a discount to the trend. Smaller premiums came back in 2016, but those started to tighten again in 2019 and 2020.

Everything changed with the pandemic, which set off a wave of home buying as people searched for more living space. Historically low mortgage rates boosted affordability. Listings were in short supply and prices surged.

So, is a reckoning now due? Yes, according to the co-university study. Home prices and rents can’t separate as significantly as they have from their long-term fundamental trends without major issues arising in the marketplace, according to the study. Few markets, if any, will escape unscathed.

The Standard and Poor CoreLogic Case-Shiller Indices, released in late May, reported that home prices nationally are up 20.6 percent year-over-year in March. In metro Denver, they are up 23.7 percent, while in Tampa, the market with the biggest increase, they were up 34.8 percent.

Mortgage costs are more than 50 percent higher than they were a year ago and prospective buyers will likely start to rethink what they can afford. Sellers may already be responding, with the rate of price cuts now on the rise, to meet buyers where they are. Price growth will likely begin to come back towards earth as many buyers are priced out and inventory rises, according to Case-Shiller numbers.

For home sellers, it’s a Catch 22 situation. If they sell their home for $1 million that they paid $289,000 for 25 years ago, they will still have to spend the lion’s share of that money to buy a new home, unless they are downsizing to an average condo. Likewise, if the market does come back to realistic levels, the new condo they bought for $600,000 will most likely be valued at about half that, and they most likely will never recover that money in a future sale.