Terrance Hunt
Vice chairman, Newmark Knight Frank
In the past 10 years, we have seen a substantial shift in housing trends, specifically household’s increased preference to rent and decreased feasibility to own. On a national level, the steadily declining homeownership rate clearly indicates this trend. There are many contributing factors to this shift, which have impacted housing markets of certain metros more than others. Looking at these factors, there is an apparent correlation with a metro area’s appreciation post-housing crash and the area’s increase in renter households. Denver leads the pack in this metric with the sharpest recovery in home prices out of the United States’ 100 largest metros, in addition to outpacing employment growth with an influx of entry-level yet high-paying employment opportunities. From 2010-2017, metro Denver grew by 98,982 households, equating to an 8.42% increase. Over the same period, metro Denver’s homeownership rate decreased over 3 percentage points, from 68.22% to 65.1%. This change represents a 71,137 increase in renter households, accompanied by an increase of only 27,845 homeowners. Simply put, from 2010-2017, approximately 72% of new households formed in Denver chose to rent instead of own. Caused by strong economic growth, a consistent in-migration of young talent and plenty of room for new development, this shift changed Denver’s typical household demographic.
Despite the abundant growth of high-paying job opportunities, Denver residents still are feeling priced out of homeownership. From 2009-2019, the average home price in metro Denver increased 103%, while average monthly rents increased only 79% during the same period. This gap was well complemented by Denver’s influx of young professionals seeking heavily amenitized, flexible rental options in urban high-density locations. Considering metro Denver’s median home price of $455,000, households looking to own will need not only $91,000 upfront for a down payment, but approximately $2,164 per month to afford their mortgage, taxes and insurance. Compared to current metro Denver rents of $1,527, renting is the more fiscally attractive option for most new households in Denver.
Adding to this trend is the fact that the average student debt in the U.S. is upward of $32,000, making a down payment particularly challenging. While many of the new households migrating to Denver prefer renting, this monthly difference coupled with the down payment also make choosing to rent an easy decision for undecided households. Assuming the industry guidelines of spending no more than 30% of income on housing, owning a home in metro Denver would require an annual income of at least $86,560 and renting would require at least $61,080. Comparing these metrics to metro Denver’s median household income of $79,048 (still $18,500 higher than the U.S. median income), it’s easy to see why homeownership affordability has become a frequent topic of discussion in Denver.
Regarding Denver’s multifamily growth, homeownership affordability issues certainly have increased the renter pool, but shouldn’t be considered a driving force. If residents of Denver preferred homeownership over renting, then renter household incomes likely wouldn’t much exceed $85,000. That hasn’t exactly been the case, as high-earning renters-by-choice have quickly filled up luxurious, large units at properties such as St. Paul Collection and the Confluence, where units rent for up to $15,000 per month. While not representative of the entire renter market, there is clearly a market for rental apartments regardless of homeownership affordability: Households choosing to own instead of rent forego the amenities, perks, convenience and often superior location that is almost exclusive to urban apartment living. Younger generations are less interested in tying up money in a house when they can avoid property taxes, insurance, maintenance requirements and a $91,000 down payment by renting.
This shift in Denver’s housing preferences was abrupt and the trend has stuck for over a decade, showing no indication of reversal in the near future. The development and economic growth that paralleled Denver’s sharp post-housing crash recovery resulted in an equally sudden change in reputation, which is very attractive to renters. Lack of entry-level homes will ensure these new renters will stay renters longer, as only 4.15% of the 32,899 metro Denver home sales thus far in 2019 sold below $300,000 (which is already an expensive “entry-level” home).
Interest rates are approaching the bottom floor with nowhere to go but up, and increased interest rates will only improve the case for renting nationwide, including Denver. The most significant factor, however, is Denver households’ increasing desire for the flexibility, convenience and urban location that apartment communities offer.
