Zillow predicts metro Denver could see another year of home price gains above 15%

Forecasts for what happens next year with Colorado home prices after two years of odds-defying gains are all over the place — from the good times rolling into 2022 to a return to more typical annual increases to a few warnings that overextended markets like metro Denver could see prices start to reverse course.

The direction of interest rates and the severity of the pandemic will play a part in determining how much momentum housing markets can maintain. Let’s start with the optimistic camp, led by Seattle-based Zillow, which is calling for a 17.5% gain in metro Denver home values over the next 12 months, all the more remarkable given that Zillow’s Denver index is on track for a record-setting 22.1% gain this year.

“Monthly price appreciation did slow down this summer but has recently begun to accelerate again, and smoothed monthly price gains are now at 1.33%. If such a monthly pace were sustained for an entire year, it would translate to about 17% appreciation, similar to our forecast for a year ahead,” said Jeff Tucker, a senior economist at Zillow, in an email.

Mountain real estate markets will generally run hotter than those on the Front Range, with Breckenridge up 29.4%, Edwards, up 25.8%, Steamboat Springs up 23.4%, Durango up 22.1% and Boulder up 20.7% over the next 12 months, according to Zillow’s forecasts, which call for a 14.3% gain nationally through Nov. 30 next year following a 19.3% gain this year.

Tucker said a severe lack of supply is driving the outsized price gains in Denver and other metro markets. The inventory of homes available for sale is down 39% from a year earlier and 55% from two years ago in metro Denver. That represents the second biggest inventory drop among the 50 large metros tracked.

Ever since the housing crash more than a decade ago, builders have failed to keep up with demand, leaving the metro Denver market undersupplied by 64,209 homes compared to what would have happened if builders had kept pace with construction levels seen between 1985 and 2000, before loose mortgage lending skewed demand, according to Zillow.

While owners, not renters, might welcome another year of double-digit home price gains, most forecasts call for more normal single-digit gains next year in metro Denver. Realtor.com, for example, predicts that metro Denver home sales will rise 6% and home prices will rise 5% next year from a recent median price of $615,000.

Higher interest rates and decreased affordability will reduce demand at the same time homebuilders go full throttle and more people list their homes, predicts George Ratiu, manager of economic research for Realtor.com in an email.

Realtor.com, in a national survey of homeowners this fall, found that 26% plan to list their homes in the next 12 months, compared to only 10% who were saying that this spring. Ratiu also notes that through October of this year, metro Denver has seen 57% more residential building permits pulled compared to the same period in 2020. While the biggest increases are for apartments, new home buyers should have a lot more choices available next year.

“The influx of new homes will offer more options for Denver buyers, and relieve the pressure from the double-digit price gains seen in the past five months. A slower pace of price growth will be welcome news to first-time buyers, especially as mortgage rates are projected to rise in 2022 to an average of 3.3%, and bring markets more in line with the trends seen in the 2017-19 period, pre-pandemic,” he said.

Shelter costs were rising at a 4.9% annual rate in November in metro Denver, according to the U.S. Bureau of Labor Statistics. A 5% gain in home values would allow owners to just keep pace, assuming housing inflation doesn’t kick up another notch, which it might.

CoreLogic, which clocked a record 19.5% annual gain in its index for single-family home prices nationally through October expects an appreciation rate closer to 2.5% a year from now. In metro Denver, it is calling for home price gains to deaccelerate from an 18.5% rate of annual appreciation currently to a 1.1% increase a year from now.

“Frenzy is the right word,” Frank Nothaft, chief economist at CoreLogic, said when it comes to describing what has happened in Denver and other markets after initial lockdown orders lifted. Homes turned over at a rapid pace, half of more above list price, which is unprecedented, and the inventory of available homes for sale dropped to historic lows. And if things weren’t tight enough, investors have piled on in a big way in recent months, accounting for close to a fifth of sales.