Sunday, January 8, 2017

Vacancy rate in metro Denver falls to 1-year low of 5.1 percent

In yesterday's post, we looked at apartment rent growth in the metro Denver area, and we noted that rent growth, even though it's been lessening in recent quarters, has been quite strong over the past two years.

Not surprisingly then, we find that apartment vacancies have been relatively low. During the third quarter, metro Denver's vacancy rate was 5.1 percent. That's down from the second quarter rate of 5.4 percent in the second quarter, but it's up slightly from last year's third quarter when the vacancy rate was 5.0 percent:

The metro-wide vacancy rate is at a one-year low, but remains higher than during most of what we saw during 2012 and 2013 when population growth was strong, and new housing units were not being produced in the larger numbers that are being produced now. 

Traditionally, a vacancy rate of five percent has been called an "equilibrium" rate site it tends to imply neither a tight market, nor a market with excess supply. As an example of a tight market, we might look to the vacancy rates during the 1990s when vacancy rates frequently fell to levels near four percent (or even below). 

With a vacancy rate of five percent, we're likely seeing a reflection of the overall economy in which job growth is solid, and so is new construction in housing. The new construction means that, even with new job growth, demand is not driving vacancy rates down to historic lows as they did in the 90s. 

Indeed, one of the larger drivers of the vacancy rate has long been employment.  In the second graph we can see how the vacancy rate frequently moved along with the unemployment rate over the past 25 years. when the unemployment rate is low, vacancies tend to be low. When unemployment is high, the vacancy rate tends to be high.  In the wake of the 2008 financial crisis and recession however, we saw that the market tightened even as the unemployment rate increased. This was likely due partially to the accompanying foreclosure crisis which drove many former homeowners into rental units. It was also likely due to the crash in housing-unit production that followed the 2008 financial crisis. Today, however, it is likely that we will see the two variables track more closely as housing-production levels return to more normal levels in the absence of large numbers of foreclosures. 

Saturday, January 7, 2017

Metro Denver rent growth falls to 3-year low in third quarter

According to new data from the Metro Denver Apartment Association, the average rent in the metro Denver area grew 5.9 percent from the third quarter of 2015 to the third quarter of 2016. That's the smallest year-over-year gain in the average rent since the second quarter of 2013.
The year-over-year growth rate has also been falling for the past five quarters. Year-over-year rent growth had reached an all-time high of 13.2 percent during the second quarter of 2015. Since then, the growth rate has gotten smaller each quarter, and as of the third quarter is now at a level not seen since the second quarter of 2013 when the year-over-year growth rate was 4.3 percent:

In the first graph, we see that rent growth had reached all-time highs last year, but things have since tapered off (the graph shows percentages):

At 5.9 percent, the growth rate for this year's third quarter is at a level that would have been considered very run-of-the-mill throughout the 1990s. Considering that new housing permits reached a 15-year high in metro Denver during October 2016, it may be that the period of surging rents in metro Denver is over for now. 

In the second graph, we see rent growth in non-inflation adjusted dollars over the past 35 years (the graph shows dollars): 
Although rent increases have been getting smaller, they do remain in positive territory, so we do see that the overall trend has certainly been upward. 

During the third quarter of 2016, the average rent in metro Denver was 1,358 dollars, which was up 5.9 percent from the third quarter of last year (when the average rent was $1,291), and down 0.2 percent from the second quarter (with an average rent of $1,371). It is very unusual, however, for the average rent to fall from the second quarter to the third quarter, further suggesting that the apartment market really is softening. 

Inflation-Adjusted Rents 

It is always a good idea to look at rental rates with an eye on the inflation-rate as well. In recent years, rent growth has generally outpaced the Consumer Price Index (CPI), and we see that is still the case as of the third quarter. (The CPI was up only 1.1 percent, year-over-year for the third quarter). However, we can see that rent growth, when we take inflation into account is less than it is in nominal terms. Adjusted for inflation, the average rent in metro Denver looks like this: 

As the CPI has been growing very slowly in recent years, we find little difference in the recent trend between the nominal numbers and the inflation-adjusted numbers. What's different in this case is the fact that rents can go down for years at a time  in real terms — as happened from 2001 to 2012. That has not the been the case since 2012, however, and even when adjusted for inflation, we find that rent growth has been substantial in recent years. However, as is the case with the nominal rents, the rate of year-over-year growth in rents has been falling for the past five quarters. 

The takeaway here is that rent growth continues to be positive, but the trend suggests we're already moving beyond last year's record-level rent growth and may very well be moving into a period of more moderate rent growth, especially in light of increased activity in single-family and multi-family construction. 

Home Loan Payoffs Down 2.6 Percent in Third Quarter of 2016

The number of mortgage loans paid off in Colorado was down 2.6 percent during 2016’s third quarter compared to the same period of last year. Mortgage payoff rose 21.6 percent from the second quarter to the third quarter of this year. 

Public trustees in Colorado released a total of 87,192 deeds of trust during the third quarter of 2016, indicating a sizable increase in the amount of home purchase and refinance activity since the first and second quarters of this year. Typically, a release of a deed of trust occurs when a real estate loan is paid off whether through refinance, sale of property or because the owner has made the final payment on the loan. Release activity rises as refinance and home-sale activity increases. 

In the first chart, we see release activity in the third quarter compared to the third quarter of last year: 

In this case, we see that Summit County and La Plata County reported the most release activity over the period, thus suggesting more sale and refi activity in those areas. The largest decreases, on the other hand, were found in Boulder County and Eagle county over the period suggesting less sales and refi activity. Overall, release activity fell in 11 counties while increasing  in 10 counties. 

The second chart shows release activity relative to the overall number of households in each county. A lower number indicates more release activity per household. 

In this case, there were only 7 households per release of deed of trust in Summit County, making it the most active county. The least active county was Pueblo County:

The third chart shows total releases for the first three quarters of this year compared to the same period last year. In this case, the largest increase was found in Alamosa County, and the largest decline was found in Eagle County. In the counties surveyed, activity fell 1.3 percent from 2015 to 2016. 

In this case, it appears some of the most expensive counties — in terms of real estate — have been experiencing some of the largest declines in activity while the largest increases are seen in the lower-cost counties such as Pueblo and Mesa. There are exceptions, however, as in the case of La Plata county, which is a relatively expensive county that is nonetheless seeing continued increases in release activity. 

Being largely driven by refi activity, release activity is sensitive to changes in mortgage rates.  In the next graph, we can see that following periods of decline in mortgage rates, release activity tends to rise. Release activity tends to fall in periods following increases in the mortgage rate: 

For example, note how release activity fell significantly during late 2013 and early 2014 following an uptick in mortgage rates during 2012 and 2013. Similarly, an increase in mortgage rates in 2015 likely contributed to a slight drop-off in release activity in early 2016. In 2016, however, mortgage rates have fallen, which helps explain the uptick in release activity during the third quarter of this year.  

Other factors are important too, however, and these include overall demand for housing, employment, and population growth. In Colorado, even in the face of increases in the mortgage rate, we often continue to see sustained real-estate transaction activity when jobs creation remains solid and population totals are steady or increasing. Overall, 2016 has seen little change from 2015 in terms of statewide release activity.

Barring a significant chance in economic conditions, this situation is likely to continue. 

(Totals for releases of deeds of trust are collected quarterly. This report tracks releases of deeds of trust as reported by public trustees in Colorado. The report includes twenty-one counties which are chosen based on population size and to ensure that as many regions of the state as possible are represented. More than 90 percent of all occupied households in Colorado are within the twenty-one counties chosen.)