Grand Junction, Colorado's real estate market may be on thin ice, but Denver's real estate market is not heading for a correction. This is the bottom line from a report estimating the degree to which various real estate markets are overvalued or undervalued as of the first quarter of 2006, prepared by mortgage servicing company National City, and consultancy Global Insight.
Most of the metropolitan areas studied in Colorado are only slightly inflated, which means that the likelihood of a downward correct in real estate prices here is very low. The Pueblo, Colorado market is 3.0% overvalued. Denver's market is 5.9% overvalued. The Colorado Springs, Colorado market is 6.4% overvalued. The Boulder, Colorado real estate market is 15.6% overvalued. The Greeley, Colorado market is 20.8% overvalued. And, the Grand Junction, Colorado market is 27.89% overvalued. By comparison, the most overvalued real estate market in the country, Naples, Florida, is 102.5% overvalued, and much of California's real estate market is grossly overvalued.
Grand Junction's growing house prices are likely a result of another oil industry boom.
The exuberance in the Greeley market is likely a product of its development into a bedroom community, not only for people in nearby Fort Collins, for also for people who work as far away as Boulder and Denver, as the drive until you can afford it trend continues.
Denver is showing the aftereffects of a sustained period of sluggish housing price growth after trends towards inflated prices a few years ago, and the impact of an exceptionally high rate of foreclosure that has been experienced in Denver on its real estate market, which has a remarkably high number of properties for sale at the moment.
The only sustained correction of real estate values in Colorado in the last twenty years took place in Denver from the first quarter of 1985 to the first quarter of 1989, during which real estate prices dropped 12%. Immediately prior to that correction, the Denver real estate market was overvalued by 18% according to the report's methodology. No market not at least 14% overvalued has experiences a sustained (two year or more) correction of at least 10% of value in the past two decades anywhere in the nation, and a majority of corrections in the past two decades have been preceeded by an overvaluation of, at least, 30%.
This is good news for the Denver economy. An overvalued real estate market tends to be a leading indicator of economic trouble on the horizon. Foreclosures tend to be a lagging indicator that flow from economic hard times already in place for some time. Thus, the real estate market is unlikely to slump out of control, and this stability may provide a foundation for an economic recovery in the Denver metropolitan area.
Grand Junction, in contrast, is in a very fragile condition. If the oil boom motivated by currently sky high oil prices falls apart, if for example, tensions ease in the Middle East, it could see another smaller verions of Black Monday: "May 2, 1982. The day Exxon shut down its $5 billion Colony Oil Shale project.", which devistated Grand Junction's economy and took a couple of decades for it to really recover from economically. Oil shale is back now.
"Shell thinks the whole thing is economic at a crude price of $30.", so with oil prices North of $70 a barrel right now, the boom will continue, but the entire project hangs in the balance on that commodity price. A drop in oil prices could cancel the project again, and while Grand Junction would be quite as devistated now as it was then, because it is diversified its economy in the meantime, it would certainly take a heavy hit if that happened.
Hat Tip to Daily Kos diarist bonddad.