Economics Group. Special Commentary. May 18, The past decade has been one of Denver s best. Figure 1 Figure 2

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1 May 18, 17 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Denver Housing Market Update Red Hot Housing Market May Be Cooling Down Following several years of red hot gains, Denver s economy took a bit of a breather this past year, as lower energy prices led to some cutbacks in the oil, gas and mining sectors. Overall job growth still advanced at a stronger pace than it did nationwide, with nonfarm employment climbing 2. percent and the unemployment rate ending the year at less than 3 percent. Job growth in Denver has outpaced the nation every month dating all the way back to February. The sustained run has pulled job seekers in from around the country. Denver added 39, residents from to 16, or a 12.2 percent increase, which was the seventh fastest among the nation s largest metro areas. The bulk of that increase has come from net in-migration from other states. The past decade has been one of Denver s best. The region has been at the forefront of the nation s energy and technology booms. Colorado s unique climate and lifestyle make it a highly sought after destination for millennials. Aerospace, communications, healthcare, cannabis and leisure and hospitality are other important rapidly growing industries. But the strong run of economic gains has also placed additional pressure on the region s infrastructure. Highways have become more congested, backlogs of needed road repairs and improvements have lengthened and housing costs have surged relative to many other parts of the country, as home construction has lagged well behind population growth. While Denver has added 39, residents since, fewer than 96, residential permits were issued during this period, and half were multifamily units. Building did ramp up this past year and has gained strength in the early part of 17, with total permits rising 3 percent from the prior year. Multifamily permits, most of which are apartments, are responsible for all of the recent uptick, however. Single-family permits are slightly trailing their year-ago pace. The past decade has been one of Denver s best. Figure 1 Figure Denver Population Growth and Building Permits Annual, Thous. Population Change: 44,261 Multifamily Permits: 11,111 Single-Family Permits: 6 4 Denver MSA Nonfarm Employment 3-Month Moving Averages Home construction has lagged population growth Month Annual Rate: 2.3% Nonfarm: Yr/Yr Pct. Change: 2.1% Household: Yr/Yr Pct. Change: Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Denver Housing Market Update May 18, 17 Denver saw the strongest growth in millennial population. Rent and mortgage payments consume a larger portion of household income. Not only is Denver seeing too few homes being built, but too much of what is being built also appears to be either high-end apartments or higher-priced single-family homes. The Denver Metro Association of Realtors reports that the median price of an existing single-family home has risen 7.9 percent over the past year to $46,, while the median price of a condominium has risen.7 percent to $26,. Those increases are roughly consistent with the S&P CoreLogic Case-Shiller home price index. Moreover, the S&P CoreLogic Case-Shiller data show the sharpest increases have tended to be for homes priced at the lower end of the price spectrum (Figure 4). The focus on building higher-end housing is both supply and demand driven. Denver saw the strongest growth in the millennial population from -1 among any major metropolitan area. The cohort of people aged 1-3 in and -3 in 1 increased.9 percent in Denver, besting Austin, Seattle, San Francisco and San Jose. Many of these new residents want to live close to the city or near transit, where land costs tend to be higher. And if you venture too far out from Denver you run up against the bustling Boulder area, where housing prices are actually higher, or Greeley, where the energy boom drove home prices higher years ago. Builders have also been more selective since the housing bust. The cost of developing raw land has increased tremendously over the past decade and the time and resources needed to navigate the zoning, entitlement and improvement process has lengthened considerably. As a result, many developers have focused on in-fill projects or teardowns and there has generally been less tract development than in past cycles. This trend is beginning to change, however, with sustained increases in home prices boosting the incentive for residential development. While higher prices are providing builders more incentive to build, fewer residents can afford to buy a home. Rent and mortgage payments consume a larger portion of household income. The median rent payment in the fourth quarter of 16 was roughly equivalent to 33 percent of median household income during that period, according to data recently published by Zillow, making it difficult to save for a down payment. The median mortgage payment requires just 22.9 percent of the median income but that is up sharply over the past three years, even though mortgage rates remain near historic lows. Mortgage payments would undoubtedly account for a larger share of income for a first-time homebuyer. Rising rents are a big reason the Consumer Price Index (CPI) for Denver has consistently risen faster than it has nationwide, climbing 3.3 percent in the Denver metropolitan area and 2.4 percent nationwide. Saving for a down payment is also a more daunting endeavor. The median price of home in Denver is currently 2.7 times higher than average income, according to data compiled by Moody s Analytics. This comparison, however, likely understates the challenge for many would-be home buyers. The bulk of Denver s job growth has occurred among lower-paying occupations, while the bulk of available for-sale housing inventory are higher-priced homes. This mismatch is evident in many other rapidly growing markets. Denver is worse off than most others, however, and this is already beginning to chip away at the region s competiveness. Figure 3 Figure Denver MSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: 12, Single-Family, 12-MMA: Multifamily, 12-MMA: 11,92 Single-Family Average (1998-3): 1, % 1 HPI Growth by Price Tier in Denver MSA Year-over-Year Percent Chg. Jan =, 3-MMA, SA 2 1% 1 % % 1 1 -% -% Aggregate Index: 8.% -1 Low Tier: 11.9% Middle Tier: 9.% High Tier: -1% % Source: U.S. Department of Commerce, S&P and Wells Fargo Securities 2

3 Denver Housing Market Update May 18, 17 Denver MSA Economic Conditions Denver MSA Nonfarm Employment 3-Month Moving Averages Denver MSA Employment Growth By Industry Year-over-Year Percent Change, 3-MMA Total Nonfarm Trade, Trans. & Utilities Prof. & Bus. Svcs. More Government Educ. & Health Services Leisure and Hospitality Financial Activities Manufacturing Other Services Number of Employees Less QCEW: Yr/Yr Pct. Change: 2.7% Nonfarm: Yr/Yr Pct. Change: 2.1% - United States: Information March Denver MSA Unemployment Rate United States: 4.% Denver: 2.% Seasonally Adjusted 1 Urban Consumer CPI: Denver vs. U.S. Year-over-Year Percent Change United States: 2. Denver: 3.3% Metro Area Population Growth: Top Annualized Growth from -16, Year-over-Year in 16 Austin, TX 1 Denver MSA Personal Income Year-over-Year Percent Change 1 Raleigh, NC Orlando, FL Houston, TX 1 1 San Antonio, TX Dallas-Fort Worth, TX Denver, CO Nashville, TN Charlotte, NC Phoenix, AZ Denver: 4.1% United States: 4.% % 3% Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities 3

4 Thousands Denver Housing Market Update May 18, 17 Denver MSA Housing Market Zillow Affordability Metrics: Denver Monthly Payments for Median Home as Share of Median Income Denver MSA Home Price to Income Ratio Median Home Price/Average Household Income House Price to Household Income Ratio: % 4% % 3% % 3 2% % 1 1% Rent: Q4 33. % Mortgage: Q4 22.9% Change in Jobs by Earnings Tier in Denver Major Occupation Groups Ranked by Median Annual Wage % 6 2 Zillow For-Sale Inventory in Denver by Price Tier Thousand, SA Top Tier Middle Tier Bottom Tier Top Tier Middle Tier Bottom Tier Median List Price by Denver Neighborhood Zillow, March 17 vs. March 16, $Thous. Belcaro Cherry Creek Washington Park Union Station Washington Park West Highland Jefferson Park Stapleton West Highland Sloan Lake West Colfax Hale University Saddle Rock Golf Club North Park Hill Five Points Central Business District Sunnyside Tallyn's Reach Speer Virginia Village The Meadows Stonegate Capitol Hill Sterling Hills Gateway - Green Valley Ranch Montbello Aurora Highlands Heather Gardens Windsor , 1, San Francisco, CA San Antonio, TX Washington, DC MSA Millennial Population Growth: Top 1 Change in Pop Age 1-3 in and -3 in 1, Percent Denver, CO Austin, TX Seattle, WA San Jose, CA Nashville, TN Houston, TX Portland, OR Raleigh, NC Orlando, FL Las Vegas, NV Charlotte, NC Dallas, TX Total Pop: 3.7% Millennial Pop: 3. % 1 1% 2 2% Source: U.S. Dept. of Labor, Zillow Real Estate Research, National Association of Realtors, Moody s Analytics, U.S. Dept. of Commerce and Wells Fargo Securities 4

5 Wells Fargo Securities Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (74) (212) John E. Silvia, Ph.D. Chief Economist (74) Mark Vitner Senior Economist (74) Jay H. Bryson, Ph.D. Global Economist (74) Sam Bullard Senior Economist (74) Nick Bennenbroek Currency Strategist (212) Anika R. Khan Senior Economist (212) Eugenio J. Alemán, Ph.D. Senior Economist (74) Azhar Iqbal Econometrician (74) Tim Quinlan Senior Economist (74) Eric Viloria, CFA Currency Strategist (212) Sarah House Economist (74) Michael A. Brown Economist (74) Jamie Feik Economist (74) Erik Nelson Currency Strategist (212) Misa Batcheller Economic Analyst (74) 4-36 Michael Pugliese Economic Analyst (74) Julianne Causey Economic Analyst (74) E. Harry Pershing Economic Analyst (74) Donna LaFleur Executive Assistant (74) Dawne Howes Administrative Assistant (74) Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC. and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 17 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 7. The FCA rules made under the Financial Services and Markets Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE