Rapidly rising prices can create an artificial bubble if fueled by irrational exuberance. On the other hand, a strong upward price trend can be created by healthy market fundamentals.
The latter is the case when it comes to home prices in metro Denver over the last six years. The robust increase in home values has not occurred in a vacuum. They are the result of healthy fundamentals.
One such fundamental is the strength and diversity of the economy in the Denver area. We can analyze that strength and diversity in a couple different ways.
The first way to appreciate the powerhouse that the Mile-High area economy has become is by looking at economic “sectors”.
The U. S. Bureau of Labor Statistics divides the job market nationally into 11 super-sectors as follows: Professional & Business Services, Wholesale & Retail Trade, Government, Education & Health Services, Leisure & Hospitality, Financial Activities, Natural Resources & Mining & Construction, Manufacturing, Transportation, Information and Other Services.
Job growth in each of these 11 super-sectors was up in metro Denver in both 2016 and 2017 … and at rates that exceed the national averages!
Those trends are projected to continue in 2018.
In other words, job growth in metro Denver is both broad based (across every industry sector) and strong (at rates that exceed the national averages.
A second way of analyzing economy vitality is via economic “clusters”. Clusters are different than the sectors discussed above. Clusters are related industries in different sectors that combine to serve a particular need.
For example, the Aviation cluster includes aircraft manufacturers (from the Manufacturing sector) and airlines (from the Transportation sector).
There are sixty-seven clusters recognized by economists and 13 of them are key to driving the Denver area economy. Key facts about these 13 clusters include:
- Economic Concentration: In 6 of the 13 clusters, metro Denver has a top 10 rating in something known as “employment concentration”. Employment concentration measures the percentage of people employed in a given cluster in a particular region versus the percentage of people employed in the same cluster nationwide.For example, the percentage of all employed people in the Denver area that work in the Aerospace cluster is #1 in the nation. No other major metropolitan area has a higher percentage of people working in the Aerospace arena. Denver’s other strong clusters include #2 in Beverage Production, #5 in Broadcast and Telecommunications, #6 in Alternative Energy, #8 in IT-Software and #9 in Fossil Fuel Energy.This means that Denver and the surrounding area leads the nation in almost half the clusters on which its economy depends. Metro Denver does not just do okay in these clusters but leads the way in almost half of them.
- Average Wages: The average wage in 4 of the 13 clusters exceeds $100,000 per year. Another 3 of the clusters provide annual wages in excess of $80,000 to its workers.
This means that the clusters fueling the Denver area economy are in high-paying professions. These levels of individual wages are well in excess of the $56k median family income for the country as a whole and contribute to a much higher median income in metro Denver. Higher incomes support higher home prices.
In summary, the economy in our Mile-High paradise is (1) Creating jobs at a higher rate across every sector of the economy than are being created in other parts of the country and (2) Is fueled by economic clusters that provide high paying jobs to a large percentage of the area’s residents.
A strong and broad-based economy contributes to rising home prices in a fundamentally healthy way.