For two years in a row, Denver has topped the U.S. News & World Report’s Best Places to Live list. In 2016, Denver ranked first, and in 2017, the metro area was awarded second place, thanks to its beautiful environment, low unemployment rate of just 3.2%, and healthy population growth rate of 6.3%. It’s no wonder that the Denver real estate market forecast for the coming year is looking positive.

The pros & cons of appreciation

After a heated several years, Denver’s housing market should cool down a little, but not to worry. “Our expectation is that 2018 may indeed be the year that home prices in metro Denver increase at about the same 5 percentish rate as the nation,” says Patty Silverstein, chief economist with Development Research Partners in Littleton. For the first time in a decade, Zillow measured the rate of change in Denver home values in October at 6.5%—below the annual increase of 7% nationally, and are predicting just a 3% gain in its home value index for Denver in 2018, below a 3.2% forecast nationally. Two short years ago, Denver’s annual rate of appreciation on the Zillow home price index was 15.5%, three times that of the nationwide rate.

Location, Inc. is predicting an average drop in housing prices of 9.3 percent starting in 2019 that will span over the course of five years. The last such downturn was in 2008, and with real estate cycles lasting about 10-12 years, this dip would follow that trend. So higher prices are probably here to stay for another year, which is great news for sellers. For those planning to purchase a home in Denver in a year or more, taking advantage of the predicted dip may well be in the cards.

Denver real estate market forecast: supply, demand & affordability

An imbalance in the mix of homes available for sale on the market is one of the causes of the slower appreciation of home prices currently at play within Denver’s real estate market. More than 60% of the homes on the market are in the top third of price distribution, while just 15% are in the bottom third, according to Zillow. Builders have thus far concentrated much of their efforts on top-tier homes, where a better balance of supply and demand contributed to a slower appreciation rate this year of 5.4%.

In the bottom third of the market, demand continues to outstrip supply, and even after years of respectable gains in the lowest-priced homes, appreciation is still at about 9.5%, while the supply is expected to remain limited, say experts reflecting on the Denver real estate market forecast for 2018. Zillow says the lack of inventory—particularly in urban areas where new, young buyers want to live—will push developers to build more lower-priced housing, but many of these new units will be seen in suburban areas due to the challenges of creating affordable housing in the city.

“Overall, we expect 2018 in Denver’s housing market to be characterized by a continued divergence between the priciest communities and more affordable areas,” says Zillow senior economist Aaron Terrazas. “The tax reform bill should put more money in the pocket of the median buyer in 2018, though it could add additional pressure at the top of the market where buyers are more likely to rely on deductions that were curtailed in the law,” Terrazas said. According to a report from ABC Denver 7 News, the average price of a home in Denver was $439,161 in April 2017—a record high since the recession of 2007. Only a quarter of new home starts in the third quarter were priced under $400,000, and the average price of a detached new home is $536,584, according to Metrostudy.

New construction: Denver real estate market forecast for 2018

Many say metro Denver isn’t building enough homes to keep up with population growth. But in part due to higher housing costs, Colorado’s net migration is slowing, which may afford builders more opportunities to catch up. Colorado is expected to pull 26,000 single-family permits in 2018. To keep costs manageable, townhomes have become more of a go-to solution, accounting for 26% of new homes added in the third quarter—the highest amount on record. Condo construction is also on the rise in 2018. Multifamily developers are expected to add 17,400 units, which would mark the third year of an unprecedented streak. All of this new supply is also expected to keep Denver rents in check; ApartmentList estimates a mere 1.6% increase.