Okay, so Denver is reported to have the second worst home affordability rate in the country. That is Denver County, as it is measured against 432 other counties across the U.S. including every major metropolitan area. In Denver, median home prices are up 215 percent in just nine years! And it’s not just Denver. Six of the 25 least affordable counties in the country are in Colorado. Jefferson County ranks as the 20th least affordable in the country. All that is, of course, the flipside of the same coin that has our economy among the best in the country. All things are relative, which is why affordability is more important than price. It’s also why most in the metro Denver area hope we don’t land Amazon. Enough is sometimes more than enough.
While a recent report from Zillow shows median rents being twice the cost of median mortgage payments, which sounds preposterous and I’m challenging them on that, I can safely say it does, and has for many years, cost less monthly to own than it does to rent. The caveat is that mortgage payments are generally considered to come with some up-front down payment and closing costs. There’s the catch, right? But still, that is an amazing reality! This is also why I’ve encouraged so many people to help their adult children buy a home in lieu of future inheritance. There are those who actually buy a rental home when their child is born to build equity for college. I did.
But the real subject here is home affordability. The Home Affordability Index is calculated by applying the average weekly wages in an area to the annual wage necessary to purchase a median-priced home. Rising prices and rising mortgage rates, of course, diminish affordability. At some point, probably at its inception in 1983, “they” assigned 100 as the benchmark number, and since then, the Housing Affordability Composite Index calculation has gone up and down based on the aforementioned factors. The higher the number, the more affordable housing is.
The earliest index number I could find goes back to the first quarter of 1989 when interest rates were at 9.77 percent. I should say interest rates had come down to 9.77 percent from over 17 percent at their peak! The median price of a home in the United States in 1989 was less than $92,000 and the Affordability Composite Index stood at 110.3. At the end of last year, the median price of a home in the U.S. was just under $250,000 and the Affordability Composite Index stood at 160.7. What that means is that homes are 46 percent more affordable right now than they were in 1989, in spite of higher prices! Can we call that “relatively” good news?
By the way, the highest Affordability Composite Index number came out in the first quarter of 2012. Home prices were most depressed at that time and interest rates lingered just above 4 percent. So why didn’t you buy a home then? Or two or three?! The likely reason you didn’t is the same reason why the market was glutted with available inventory, and that was that unemployment was at a record high and consumer confidence at a very serious low, so you probably either couldn’t purchase a home, or a second or third home at that time, or you just weren’t comfortable doing so. Because I have always tracked the real estate market data so closely, it was clear to me in 2012 that the recession was ending soon, and real estate was an amazing investment. I was preaching hard and loud that entire year that, “This is the year you will look back on one day and wish you had bought more real estate!” I do not purport to be right all the time, but I was certainly right about that. By the way, many investors with cash they had pulled out and were not comfortable putting back in the stock market bought a lot of Colorado real estate at that time. Those folks are sitting pretty today.
While home prices feel like they’re getting out of reach, I can offer two consolations to you. First, just prior to home values doubling in the Denver area, they fell 30 percent in the recession. So, it was in the spring of 2016, on average, that we arrived back to where we were in 2005. Secondly, home affordability nationally was worse than it is now, from pre-1989 until the middle of 2009, and then it peaked less than three years later (2012) at the low point of the housing crisis, of course. I apologize that I can’t specifically quote these numbers for Colorado, but generally speaking, we did follow the national trend very closely. In summary, yes, housing affordability now is getting away from us. The bulk of that trend has taken hold just in the last two years though, and unfortunately, it’s a trend that is likely to continue another five years minimum.
Is this a new housing crisis? Absolutely, yes! Is there any relief in sight? There is, but it is very limited, and it’s not what we would hope it to be. That relief, and the only homeownership crisis relief, appears to eventually be coming from the now prolific building of apartments and townhomes. Notice I didn’t say condos. However, there will be condos aplenty as soon as many of the myriad new apartment complexes reach the seven years of maturity that gets them past the 2001 Colorado Construction Defect Law that put the builders and developers in such peril of easy lawsuits where the risk of selling condos is just too great. That law brought condominium construction all but to a complete halt by 2004. Traditionally, condominiums are the most affordable housing that an individual can purchase. So, when all those apartments become available as condominiums, there will be opportunity for those who can live the apartment dweller life long-term to purchase those units. As to those with families who dream of white picket fences, Denver may not be the place for that dream, any more than New York or San Francisco. Most townhome construction is not as susceptible to those lawsuits, and so that construction is in full swing, albeit not so much in the affordable or entry level price range anymore.
And what about affordable mountain living? When the median price for Evergreen is $700,000 and the median price for Conifer/Pine is over $450,000, “affordable” becomes more debatable than not for average households. I will, however, say there is a lotof land available for building in the Denver foothills—an actual glut of private land—if we can find talented builders that know how to build there, and if the county building authorities can figure out how to be more help than hindrance. That’s a tall order. And truly, I hear you not wanting any more growth in our mountain communities. But, we must be real. Many of us once just dreamed of living in the Rocky Mountains, often from faraway flat and (insert adjective) places like Indiana, in my case. I was a teenager when my dream came true. You?
The KC Butler “Home” Team wishes EVERYONE a Happy Home.