Denver housing market enters danger zone

"Steep rent increases are squeezing consumers hard in metro Denver, leaving many people anxious to buy a home.

But after the area's big run-up in home prices, renters would do better to invest their down payment savings elsewhere and wait to buy, according to an index from Florida Atlantic University.

"There is about a 70 percent chance that renters in Denver will get more wealth on average than buyers," said Ken Johnson, a real estate economist at the university in Boca Raton, Fla.

That's because Denver, along with Dallas and Houston, are the three metro housing markets most at risk of a price correction in the months and years ahead, according to the Beracha, Hardin & Johnson Buy vs. Rent Index.

Nationally, buying remains a better route for building wealth than renting.

During last decade's housing boom, Denver didn't reach the extreme overvaluations as did the metro areas of south Florida or Southern California.

Denver, however, is now approaching index highs last seen in 2006 after logging some of the sharpest home price gains in the country the past year. And if prices keep rising, so do the odds of a severe correction.

The most favorable scenario would be for a long stretch of flat prices that allowed incomes time to catch up. Denver's index remained elevated in favor of renting from 2000 to 2007, before a severe correction.

Johnson said he and his colleagues created the index in 1981 as a way to spot potential bubbles in regional housing markets. When it comes to the nation's energy hubs, they are sounding an early warning.

The odds of an equity-sapping drop in home values for buyers late to the game are high in Denver, Dallas and Houston, cities which are vulnerable to the retrenchment in oil and gas prices.

"We expect something is going to happen. We don't know when and to what extent. I think prices are going to go down," Johnson said.

Ron Throupe, an associate professor at the University of Denver's Daniels College of Business, said he sees the rent-versus-own question as more of a tossup in metro Denver..." (denverpost.com)