This is the most common question asked by first time home buyers, move-up buyers and sometimes even Denver relocation home buyers today. Although interest rates are outstanding, many Buyers are still nervous about the direction of home prices over the next few years.
Google “real estate forecast” and you will find 74,000,000 links. I can only imagine that every possible scenario is covered in these articles. Top economists and industry watchers all have differing opinions, so what should a Buyer think?
I am a strong believer in historical trends. What can history teach us about the likely answer to this question? Real estate markets have historically moved in cyclical patterns of “boom and bust” and I believe they will continue to do so. The question is when will the market hit a bottom or hit a high.
These peaks and valleys are impossible to predict, but over the long term there is a consistent trend that people can follow.
I have included 2 graphs that illustrate the historical direction of home prices in metro Denver. My opinion of future home prices relies on the trend represented in this historical data.
The first graph charts the Federal Housing Financing Agency Home Price Index for metro Denver. FHFA gathers sales price information for any home backed by Freddie Mac or Fannie Mae and charts “sales pairs” to determine changes in home prices. Sales Pairs are two sales of the same home in differing periods (prior to 1987 this data was based on appraisals, including refinances, instead of sales prices). This method of tracking sales avoids skewing the pricing information due to a change in the product mix. The one weakness with this data is that it is for homes using “conforming” loans, which currently are loans of less than $417,000 in Denver. Therefore, higher end sales are ignored in this data.
The thick blue line in this chart shows the FHFA home price index since September 1977. Prices remained relatively unchanged from 1983 to 1991. From 1991 to 1998 there was reasonable growth in prices and then in 1999 and 2000 there was exponential growth. 2001 to 2004 saw minimal growth and since 2004 the market has gyrated up and down, but has a general sideways direction.
The thin black line represents the “best fit” line based upon the historical data. This line is calculated using linear regression and is a mathematical formula used to illustrate trend lines. The predictive quality of a regression line is measured by the “r” value. The closer the r value is to 1, the better the predictive nature of the regression line. This regression line has a value of .9045, indicating historical data has closely corresponded to points along this black line.
The takeaway from this graph is the fact the current price is currently along the index line. To me this indicates that homes in metro Denver are fairly priced based on historical trends. Could home prices fall below this line? They sure could, but they will eventually come back above this line as has historically happened. So prices could continue to move sideways or down in the next several years, but long term they will again appreciate. The best part is that that black line indicates an annualized growth rate of 5.0% (not flat growth). If prices are below the trend line, prices will have to appreciate at a rate greater than 5% to catch back up to the trend line.
The second graph I have included below shows the Case Shiller Home Price Index for metro Denver. The Case Shiller index also uses “Paired Sales” data similar to FHFA. The main differences are that Case Shiller uses all home sales compared to FHFA only using sales with “conforming” loans and FHFA only includes sales with government backed loans. The Case Shiller data is available starting in 1987. The historical trend is very similar to the FHFA trend.
The biggest difference between the two graphs relates to the forecasted trend line. The Case Shiller trend line currently shows home prices in metro Denver are below the 23 year historical trend line. This would indicate homes are underpriced compared to the historical trend line. To catch up to this trend line, home prices would need to appreciate at a rate higher than 4.0%, which is the historical growth rate reflected in the Case Shiller data.
As a prospective home buyer, I would feel very comfortable purchasing a home today. Although the market is uncertain for the next one to two years, the long term trend of housing indicates that homes are fairly valued or undervalued in metro Denver. Combine this with the fact that interest rates are at historical lows, it is a great time to buy. Buyers can purchase a well-priced home, lock in an incredibly low interest rate and enjoy low monthly payments on their dream home for years to come!