Saturday, June 21, 2014

Another Real Estate Bubble?

Is it deja-vu? Have we seen this movie before?
The metro Denver real estate market has made a dramatic turnaround — going from a buyer’s market to a seller’s market in short order. With prices rising dramatically, is this just another bubble that is going to come crashing down?
Not necessarily. Historical perspective shows this. The accompanying chart shows the average sale price of single family resale homes in metro Denver for the last 18 plus years. Notice two things:
Denver Home Price Trends Another Real Estate Bubble?
(1) Prices rose $61k from January 2012 through April 2014. That is an increase of 21.8%. There was a similar price rise in a similar time period that added $60k to the average sale price of homes from January 1999 to April 2001 — a 32.2% price increase. Yet that dramatic rise was not followed by a crash. The market continued to appreciate at a healthy rate for another five years.
(2) Notice the straight line on the accompanying chart. It is the “best fit” line through the data. If you can remember back to high school algebra, the best fit line is the line that shows the real trend in a set of data. Prices were above the trend line from mid-2000 to mid-2008 and then below the trend line through mid-2013. Prices have just recently returned to the long-term trend line. It appears that the recent recovery has put us back where we would have been if the long term trend has persisted over the whole period from mid-2000 to today. That seems healthy.
As they say in the investment world, “past performance is no guarantee of future performance”. However, this historical look shows that big increases are not always followed by immediate setbacks.
By the way, we’ve seen info on home price trends in metro Denver going back into the 60s. As we recall, there is never a period of price decline lasting more than 5 years.
The bottom line: It is a great time to sell. If you’ve been wanting to move, it’s a great time to jump in and do so. It is always a great time to buy and especially when your next move will be a place you want to stay for a time frame of five years or greater.
Stay tuned for more insights on the Denver area real estate market. In the next installment, we’ll report on some economic fundamentals that bode well for real estate in the mile-high city.

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