A recent Morgan Stanley poll of more than 1,000 high net-worth investors revealed that they overwhelmingly feel the region’s housing market is both overpriced and unaffordable for first-time homebuyers.
Morgan Stanley Wealth Management’s Investor Pulse Poll, designed to gauge the investment pulse both nationally and in select markets such as Denver, found that 89 percent of the metro area’s wealthy investors feel the market is overpriced. Nearly as many (86 percent) said the market is pricing out first-time homebuyers. There is concern a bubble is forming.
“I think the financial crisis of 2008 is still very fresh in a lot of people’s minds, particularly high net-worth investors, so they’re looking at what happened to real estate prices here,” Denver-based Morgan Stanley financial advisor Todd Hauer said. “We were down probably 30 to 40 percent from the 2007 highs to the 2009 lows.”
Poll respondents, all of whom were between the ages of 25 and 75 with $100,000 or more in household liquid investable assets, were split on whether millennials (people born between the early 1980s and the early 2000s) should invest in a Denver-area home before trying to achieve other financial goals (49 percent backed real estate, while 51 percent did not).
Hauer cites the “recency bias” of investors who remember the 2008 housing bubble.
“Any time any asset class — whether it’s real estate, stocks or anything — goes up a lot, the risk also goes up, and vice versa.” Hauer said. “Anything that’s down significantly, the risk of a much bigger decline is less.”
To say Denver’s real estate market has been white-hot in recent years is to engage in extreme understatement. According to the S&P/Case-Shiller Home Price Indices, the metro Denver area led the nation for the highest rate of home price appreciation for half of 2015.
Denver was second in the nation among major cities four months out of the year, and wound up third in December, behind only Portland, Oregon, and San Francisco. Overall, home prices in Denver rose 10.2 percent in 2015, compared to 5.4 percent nationally. That kind of rapid increase has some investors wary.
“The 2008 situation is fresh in a lot of people’s minds, and that is probably what’s driving the concerns about real estate valuations,” Hauer said of the pulse poll. “There were several months last year where Denver was right behind and even ahead of San Francisco, in terms of median home prices, so that kind of raises an eyebrow.”
The pulse poll also found that concerns about terrorism (85 percent), the affordability of quality healthcare (83 percent) and the government budget deficit (81 percent) all weighed heavily on the minds of the Denver area’s wealthy investors. More than half (55 percent) felt there will be a recession in the next five years. They also overwhelmingly felt it was important for the federal government to address healthcare costs (90 percent), the economy (86 percent) and the nation’s infrastructure (80 percent).
Denver-area high net-worth investors favored dividend-bearing stocks (51 percent said “good”), actively managed mutual funds (42 percent), mutual or exchange-traded funds (42 percent), broad stock market and exchange-traded funds (38 percent), and a cash position (36 percent).
They disfavored hedge funds (7 percent said “good”), insurance (13 percent), private equity funds (16 percent), international stocks or mutual funds (20 percent) and bond funds (20 percent).
As far as investment sectors, they favored technology (68 percent said “good”), pharmaceuticals (51 percent), renewable energy (51 percent), bio-tech (50 percent) and healthcare (48 percent), and they disfavored consumer discretionary (16 percent), insurance (22 percent), entertainment (24 percent), tourism (26 percent), financial services (28 percent) and industrials (28 percent).
Six in 10 (58 percent) were at least somewhat familiar with socially responsible investing, with slightly less considering themselves well-versed in sustainable investing (48 percent). Respondents overall were open to both concepts after being provided with brief descriptions.
In that same vein, Denver’s wealthy investors ranked renewable energy sources highest when focusing on specific types of energy investments in 2016 – with solar (64 percent rated as “good”) and wind (56 percent) taking the top spots. Natural gas (49 percent), the only traditional source to crack the top 5, and battery-powered electric vehicles (41 percent) weren’t far behind.
Hauer noted that oil stocks currently only make up about 6 percent of the S&P 500 index compared to 12 percent when oil was selling for $85 a barrel just a few years ago
“To say here we are today [at $30 a barrel] when it’s such a small part of the total stock market valuation and yet it’s having a very outsized effect on sentiment in the market is kind of unprecedented,” Hauer said. “Clearly it’s weighing on the minds of investors.”
Hauer also understands Denver-area investors affinity for renewables.
“Colorado, we’re an outdoor state. That’s a big part of our economy, our industry, and people are sensitive to that and wanting to protect the environment here because it’s important and most of us live here because of that,” Hauer added.
In Denver, college was another area of concern for wealthy investors. Overall, 93 percent agreed, and 55 percent strongly agreed, that the sharp rises in the costs of higher education are not justified, but 70 percent believed a college degree is a “must” for students today.
“That didn’t surprise me that people feel that way and they’re starting to question the value and price,” Hauer said. “The prices keep going up dramatically and parents and students keep saying what kind of value am I getting for $100,000 in state or $200,000 out of state?
“To a great extent, consumers, whether they’re parents or students, are reaching their limits, and yet a high proportion of them are saying that it’s not optional. You’ve got to do it, but they’re really questioning the value.”