Since November, Joe and Sarah Webber have searched for a larger home to replace the small bungalow they own near the University of Denver in the Corey-Merrill neighborhood.

They want to stay in that part of Denver, with its spacious parks, but doing so will cost them at least $1 million for a basic home large enough to accommodate future kids. They are realizing that $1 million, even $1.2 million, doesn’t buy what it used to, much less what they hoped it could.

“We are feeling like prices are high, which we knew. But it feels like the prices are really high for what you get. We have been consistently disappointed in the quality of the houses,” lamented Sarah Webber, director of marketing and communications with the Denver Metro Association of Realtors.

If they can swing it, the couple, in their 30s, wants to buy another place and then rent out the two-bedroom home they own, which is 1,000 square feet including the basement. With a mortgage rate in the 2% range, rents should generate enough cash to cover the costs.

Last year, metro Denver home prices kept rising, even as 30-year mortgage rates reached a 23-year high of around 7.8% in October. The median price of a single-family home sold in December was $613,500 compared to $600,000 a year earlier, according to a monthly update from DMAR.

Normally, a big spike in interest rates should cause home prices to flatten and then fall, restoring affordability and keeping things in check. But the housing market has proven anything but normal since the pandemic.

Now that mortgage rates on 30-year loans are back to 6.6%, and are expected to go even lower once the Federal Reserve starts cutting rates sometime this year, a big question is what comes next for the housing market in 2024.

Will home prices heat up on stronger demand as affordability improves and buyers jump back in? Or if rates drop a lot, could that release a backlog of listings from sellers, unexpectedly pushing prices down?

Zillow, which runs the country’s largest real estate portal, puts Denver in the camp of metro areas where homeowners should prepare for slightly lower home prices and another stretch of sluggish sales because of a lack of relative affordability.

“Demand is still leaning towards places that offer affordability, while Denver is among the least affordable markets in the U.S. when looking at the cost of a mortgage compared to local incomes,” said Nicole Bachaud, a Zillow senior economist, in an email. “We are expecting affordability to improve, but home shoppers in Denver will still be challenged financially.”

Zillow is predicting Denver metro home values will drop 1.3% this year, while Colorado Springs home values will be down 0.6%. Nationally, Zillow is calling for home values to remain flat.

Realtor.com predicts Denver is in store for a larger 5.1% decline in prices and a 15.3% drop in sales from a weak 2023. Sales this year could run about 42% below the pace averaged from 2017 to 2019 if that happens.

A “hot” housing market for years, Denver now ranks 95th out of the 100 largest metros in Realtor.com’s 2024 forecast. Joining Denver in the cellar are other formerly popular markets like Portland, Ore.; Austin, Texas; and Charlotte, N.C.

Toledo, Ohio; Oxnard, Calif., and Rochester, N.Y., by contrast, are expected to lead the country in terms of sales activity and price gains. And in the case of Toledo and Rochester, and many of the most robust markets listed for  2024, it comes down to affordability. Buyers are desperate for it.

But not every forecast relegates metro Denver to a housing has-been. CoreLogic is forecasting a 2.5% gain in its national home price index over the next 12 months, with Denver expected to beat that with a 4.5% gain in its single-family home price index.

“This continued strength remains remarkable amid the nation’s affordability crunch but speaks to the pent-up demand that is driving home prices higher,” said Selma Hepp, CoreLogic chief economist, in the company’s November 2023 Home Price Index report.

Hepp notes that metro areas in the Mountain West and Northwest have proven more vulnerable to higher interest rates. But conversely, they should benefit more as interest rates move lower.

If the Federal Reserve, as expected, eases monetary policy over the next year, then mortgage rates should continue to come down, which will improve affordability and contribute to a “more lively housing market in 2024,” predicted Charlie Dougherty, senior economist with Wells Fargo Economics, in a research note.

“That said, lower debt costs are unlikely to change the underlying supply and demand dynamics of the current market, which means home buying and selling will likely remain fairly subdued,” he cautioned.

Two-thirds of current mortgage holders are sitting on a rate below 4%, while nine in 10 are below 6%. Mortgage rates, at around 6.6%, still have a way to drop to motivate someone holding a low rate to move if they don’t have to move.

“Many people are stuck in their houses and unwilling to move. The cost of moving is relatively high,” said Gerald Cohen, chief economist at the Kenan Institute of Private Enterprise during a recent economic update call.

One line of thinking is that lower rates will cause demand to spike again. But with so many sellers still locked in place by a low rate, the inventory of listings won’t meet that added demand. Bidding wars will return and prices will shoot up again. If so, the time to get in is now —  before prices spike.

That concern has Abby Walkush and her husband Evan Nolan out actively looking for something to buy. The couple has rented since moving to Denver four years ago, initially apartments, and now a condo in Aurora near Cherry Creek State Park.

The irony of their search is that they could save serious money in monthly payments by renting a condo rather than trying to buy one.

Real estate brokerage firm Redfin estimated last summer that someone purchasing a median-priced home nationally could expect to pay $630 more a month than if they rented a comparable property. In Denver, that premium to own versus rent came in at $1,663 a month, or 58% higher. That gap was the largest outside of California metros and Seattle, surpassing the gap seen in places like New York City and Boston.

Walkush said when she and her husband pencil out the numbers, renting is cheaper than buying. Lower mortgage rates could help close that gap, but higher property taxes and insurance premiums this year could widen it.

“The motive is to build that equity and to have a house with the touches we want. We are looking for townhomes and condos, but we are also dabbling with buying land and then building,” said Walkush, who works as a marketing manager at Guide Real Estate in Glendale.

Short-term buying may look like a losing proposition, but long-term it should be a winning one. The couple’s price point is in the $425,000 to $450,000 range. In an ideal world, the pair, in their mid-20s, would like to live in the Golden and Morrison area.

Walkush grew up in Wisconsin and her husband comes from Minnesota, two states where housing costs are much lower than in Colorado. Although the thought of returning home has entered their minds, she said, “Stronger forces are holding us here.”

“It is definitely tough seeing how much cheaper it is to live there. But you can’t put a price on living in a state you want to, on all the awesome things Denver offers,” she said.

That tug of war between sellers who don’t want to sell unless they have to and buyers who can no longer afford to buy or reject the paltry inventory out there should keep prices in check across 2024, predicts Andrew Abrams, a member of the Market Trends Committee at DMAR and Walkush’s boss.

If financing costs can settle down, then buyers and sellers alike can gain their footing, he said. Consistent interest rates should create consistent behavior in the market.

“Right now the consistency with rates will increase the number of listings and sales compared to 2023, but not enough to make a dramatic shift in the market,” he said.

He predicts home prices in the metro area will end the year up 0% to 2%. Sales should also rise, ending two years of declines. He has tried to brainstorm any sources of “hidden inventory” out there that might swing the market more strongly in favor of buyers, but can’t find one.

But a lot depends on interest rates. Ken Shinoda, a portfolio manager with DoubleLine specializing in residential mortgage-backed securities, argues that falling rates could work to unexpectedly push home prices lower, in what he calls the “rate paradox.”

There’s a “magic” mortgage rate that could free up what he describes as a “frozen” market, bringing enough sellers and buyers to the table at the same time to get deals flowing again and to trigger lower prices. Just as 2023 was a contrarian year, 2024 could also prove to be one as well.

One place that needs a thawing is metro Denver. Closings were down 18% last year compared to 2022 and are around 34% lower compared to both 2021 and 2022, according to DMAR.

Sales are running 29% below 2019 levels and last year’s market was the most sluggish seen here since 2011. Despite that, the median price of a single-family home sold still rose 2.25% year-over-year in December.

So what is the magic rate to keep an eye out for? Shinoda estimates that a 5% rate on a 30-year mortgage could do the trick.

“In today’s context of frozen inventories, lower rates can potentially revive transaction activity and soften prices,” he wrote in a research note late last month.

Rental markets facing a surplus

As the home purchase market struggles with ongoing shortages, the area’s rental market faces a surge in supply, with about 120,000 apartments under construction or in the planning stages, said Marc Cunningham, president of Grace Property Management & Real Estate in Thornton, in a letter to his clients.

About two-thirds of that 120,000 number, however, is aspirational. Apartment projects are getting dropped because of a lack of financing and concerns over a softening market, said Scott Rathbun, president of Apartment Appraisers & Consultants in Denver.

Still, Rathbun estimates about 45,000 apartments are under construction in metro Denver, which represents about a three-year supply assuming enough construction labor can be put to the task. Labor and other bottlenecks resulted in about 13,348 units completed last year, a robust number but one that could have been even bigger.

RealPage, which tracks the multifamily market nationally, said apartment construction reached a 35-year high in the U.S. last year and new units should go up substantially this year in what it describes as a “generational” apartment boom. Denver is a leader in that boom.

“That’s a pretty massive amount coming in 2024 (in Denver). Only three other markets in the nation — Dallas, Phoenix and Austin — have more units expected to complete in 2024,” said Julia Bunch, a content manager at RealPage.

That added supply might explain why rent increases were fairly subdued last year, with the average rent coming in at $1,870 a month in the region, according to the Metro Denver Vacancy & Rent Report from the Apartment Association of Metro Denver. The vacancy rate edged up to 5.8% in the fourth quarter from 5.6% a year earlier.

Both Rathbun and RealPage expect new apartment construction to start thinning substantially beyond the next couple of years, reflecting the greater difficulties developers face in getting financing and the higher regulatory burdens.

Permits are dropping sharply in Denver, which accounts for nearly half of the new apartment supply, and Rathbun predicts that after a stretch of flat to falling rents, a shortage could emerge, causing rents to spike in late 2026 or 2027.

The new supply is hitting at a time when household budgets are getting squeezed by inflation, and the resumption of student loan payments, and other pressures. Cunningham expects that will slow demand from renters.

More people may delay moving out on their own or may double up with roommates or other families or just stay put in their existing rentals, he said.

“Rental supply is up, renter demand is down, rents are flat, expenses are up, and legal risks have increased,” Cunningham said.

Nearly four in 10 apartments in Denver carry a rent above $2,000 a month, according to a study from the website RentCafe. Despite that, the city ranks seventh in terms of its popularity and is the most popular city in the Western part of the country among people searching for an apartment on its website, RentCafe said.

Denver is among the major metros, along with Salt Lake City, Philadelphia and Seattle, that John Burns Research & Consulting listed last year as having a small out-migration now becoming a “big out-migration.” Being a “migration loser” should result in less housing demand on both the purchase and rental sides.

Census numbers show Colorado has seen a shift in migration patterns. Net migration over the past two years is running at half the pace averaged last decade, and about six in 10 net migrants are international rather than transplants coming from other states.

The apartments developers have in the pipeline were designed with younger, high-paid tech and professional workers from California and other states in mind. They likely won’t meet the needs of refugees coming from places like Afghanistan and Venezuela. Making a shift from urban “luxury” units to working-class affordable options could take years and will be tougher to pull off financially.

But near-term, falling rents and a more abundant supply represent good news for tenants. If home prices continue to escalate this year, and rents go down, the home purchase market might see reduced pressure.

Webber said she and her husband aren’t in a rush to buy immediately, although they would like to find something suitable by spring. On weekends they head out to open houses and to tour the slim pickings, only to grow more disappointed by how much sellers are asking, and how little they are offering in return.

One example was a listing that boasted about its “updates,” which were made in 1998, a quarter century ago. That might feel recent to someone in their 70s, but not for someone in the prime buying age of early 30s.

She said the couple isn’t averse to putting money into fixing up a home, but they want a discount on the front end. They don’t want to pay a high price, financed with money at a high rate, and then have to put a lot of work into a home.

“I am hopeful and I do believe we are going to find something. Rates will come down. More people are going to list their homes,” she said.

And if they don’t, they could either try to get by in their current home, small as it is, or rent that one out and then rent rather than buy a larger home to live in.

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