Mile High Rebound

12/17/2015

Many U.S. cities have seen their local economies and housing markets bounce back since the Great Recession, but very few have seen a rebound like Denver’s. While the legalization of marijuana has been a high-profile issue in the region, the influx of tech start-ups, an energy boom, and strong service sector growth around healthcare and hospitality have also contributed immensely to the region’s economy. Robust growth, diverse job opportunities and the lifestyle that the region offers have seen the transformation of the metro area into a popular destination for millennials. According to the Colorado State Demographer, in-migration has added an average of nearly 30,000 new residents annually to the Denver/Boulder area for the past five years. With the influx of population and households, the demand for housing has increased significantly over the past several years.

The numbers tell the story: employment in the Denver metropolitan area is up 3.2% from last year through the third quarter while the region’s jobless rate is the lowest it has been since the tech boom. Even with the influx of people moving into the region and subsequent expansion of the labor force by over 8% since 2009, the region’s jobless rate has fallen by more than half.  Currently, the Denver MSA had the third-lowest unemployment rate in the country out of all the large metropolitan areas[1], behind only Salt Lake City and Minneapolis. Denver also had the third-lowest jobless rate out of all the metropolitan areas in the state of Colorado, behind only Boulder and Fort Collins (both are in the top-10 for lowest in the nation).

Denver County Unemployment Rate

A healthy labor market and historically low mortgage rates have pushed new home prices in the region to record highs. Both locally and nationally, new home prices have reached all-new nominal highs.  But, as shown in the chart below, they have increased much faster in Denver than in the nation as a whole. During times when the economy has contracted or experienced weaker growth, local new home price performance has tended to track national trends. However, during times of economic expansion such as 2003-2007 and the current post-Great Recession recovery period, new home prices have increased noticeably faster. According to data from Zonda, the median price for a new detached home rose just 2% over the past year in September but the median price for a new attached home in Denver jumped 17% as decreasing affordability has driven buyers to pursue townhomes and paired homes. The construction defects law has restricted condo development which has kept supply tight for the attached housing market. Broomfield and Jefferson Counties tout the region’s most expensive new homes with the median price above $500,000 in both counties.

Denver New Home Price

Both new and existing home sales are up over the past year in the region although the resale market has fared much better during this recovery than its new home counterpart. New home sales are far from reaching their pre-recession highs while the resale market has already surpassed those levels. New home sales in the Denver/Boulder metro areas are up 14% over the past year but are still 50% off their 2005 levels, while existing home sales rose 5% over the past year and are now 4% higher than their previous peak in 2005. Denver is also home to one of the nation’s best-selling master planned communities: Stapleton is ranked as one of the busiest in terms of home sales so far this year. Publicly-traded homebuilders dominate the metro Denver new housing market with nine out of the top-11 builders being publics. Data from Zonda shows that Richmond American Homes dominates the market with the most actively-selling new home communities in the Denver metro area while Shea Homes is selling the most expensive homes out of the area’s top builders with an average base price of $535,440. Richmond American achieved its top ranking with exclusively single-family detached housing as the area’s leading builder currently offers no condo, townhome or duplex products.

With affordability now becoming an issue, consumers have been switching from single-family homes to buying townhomes or renting apartments.  Building permit activity has returned to near pre-recession levels but that has been largely fueled by growth in the multi-family segment. Roughly 45% of all building permits issued were multi-family through the first nine months of this year. And even with high levels of new units being delivered in the apartment market, strong absorption is keeping vacancy rates low and rents at record highs. Despite widespread support for change, Colorado has failed to reform construction-defects laws in the last two legislative sessions which will continue to keep affordable housing supply tight and home prices high heading into 2016.

[1] Defined by the 2010 Census as MSAs with a population of 1 million people or more.

Kevin Gillen, Ph.D., Chief Economist
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