Denver has an affordable housing shortage, and it’s extreme.
We’ve talked before about how Colorado’s so-called “Construction Defects Law” has shut down the condo market. In short, the 2005 law essentially creates “uncapped” liability for associations to sue builders with a simple board majority vote if there is a construction defect.
As a result, everything you see going up downtown is an apartment building, not a condominium complex. And with construction costs at all-time highs (with the highest-ever land, labor and material costs), rents have soared like never before.
In 2007, 25% of all new construction in the state was condos. Today, condos make up just 3% of all new construction.
It’s one of the things that has kept our housing market strong. Limited inventory plus ridiculous rents plus low mortgage rates makes owning a home – even at prices 30% - 50% higher than they were three years ago – more attractive than paying sky high rents.
Eventually, there will be a bill passed by the legislature that will soften this law, and shortly thereafter you will see thousands of apartments converted to condos in relatively short order. In fact, if and when this law passes, you will probably see prices fall in the short term due to the sudden glut of more affordable housing options.
If you own a condo today and you’re thinking about selling, this should be part of your thought process. Right now, demand is high and supply is low. That creates an obvious selling opportunity.
Next year, or in 2017, or whenever the legislature finally takes some of the teeth out of this law, condo inventory will surge. Because of the reduced inventory of rentals, rents will probably stay high. But buyers will suddenly have lots of choice, instead of none, and the predictable result will be a softening of prices.
It will also be harder to sell an older condo, because developers will be forced to price more aggressively to compete with thousands of new units coming online. Old units will look, well, old.
Our market is already starting to shift, and I am expecting that to continue into 2016. Appreciation of 12 – 15% per year for three straight years just isn’t sustainable. Five percent appreciation would be a great year, in my opinion, given the massive run-up in prices since 2012.
Will the market collapse? Not as long as lenders remain militant about ensuring buyers have real jobs, real down payments and real credit. The market crashed in 2008 because thousands of buyers had no skin in the game and no reason to stick around when things got tough. That’s not the case today.
But too many people have short memories, and I believe too many people are buying homes (or attempting to move up) first and foremost because they want to make money. Don’t fall for that trap. You should be able to afford what you buy, like where you live and stick to a budget. The ones who get burned when the market cools down will be those who let greed drive their decision-making.
The Denver housing market today is a lot more complicated than it was three years ago. To make smart investments, you have to think more critically because the margin for error is much slimmer. You can’t rely on past performance to dictate future results. That’s naive thinking, and you can’t be lazy right now. You’ve got to think critically, look beyond the headlines, and make a decision for yourself as to what you think the Denver housing landscape will look like in 2016 and beyond.
If you currently own a condo, you need to know that there is future volatility around that investment. What it ultimately looks like will be determined by what the legislature does with Construction Defects Reform. But if you’re thinking about selling, you know what the landscape looks like today. Tomorrow is anyone’s guess.