A snowy Sunday morning, I pick up the Denver Post Business section… actually, I logged on, to read another article on the Denver real estate market and the housing bubble. […]
A snowy Sunday morning, I pick up the Denver Post Business section… actually, I logged on, to read another article on the Denver real estate market and the housing bubble. As a Realtor, I’ve spent years cleaning up the mess of the first one and now they’re predicting an echo bubble. To be honest, the predictions are all over the map and variables are just that. So let’s blow ’em up.
This spring we hit a high as inventory was low and buyer confidence sent them out shopping. This drove up prices which have stayed up but not into the crazy-freaky-multi-offer home grab of April/May. Sellers, be reasonable. We’ve recovered. Buyers, you’ve still got time with a stable market and interest rates holding low, it might be perfect timing for a move up or down. Here’s what I’ve seen in 2013, along with some good indicators from Your Castle Real Estate Managing Broker, Charles Roberts about what to expect in ’14.
So Charles, Bubble or Bubble-schmubble?
The last six months have seen a surge in the metro Denver real estate market as buyers are back in force and prices have jumped upwards. The strength in the market has been so pronounced that people are beginning to ask whether we’re setting ourselves up for another bubble. Good question. While no one can ever predict the future with certainty, I see no evidence that we’re heading for a dramatic downturn in the real estate market any time soon.
That sounds kind of vague…
1. Even with the increase in metro Denver home prices (up 11% in the past 12 months) the Housing Affordability Index is near its highest level EVER in the 40 years that NAR (National Association of Realtors) has measured it. The HAI is the median price of a home compared to the median income, taking into account the prevailing mortgage rate. So, given how affordable homes still are we’re far from a bubble.
2. The number of transactions relative to the population of metro Denver is just about at the 25-year average. At the peak of the bubble in 2006 the number of deals was about 20% above the historical average. When we see the number of closed transactions well above our historical average that’s an indication of an overheated market, as it was in 2006.
We’re not there yet.
3. In 2006, many of the deals were closed with low or no documentation (“liar loans” or “no doc loans”). Today, mortgage underwriting standards are the toughest they’ve been in decades. This prevents unqualified buyers from purchasing property, which mitigates the chance of the market overheating
4. Because of high home affordability it’s a lot cheaper to buy than rent in our market. This would not be true in a bubble. For housing price affordability to return to the average level that we saw in the years between 2000 and 2004 either home prices would have to rise an additional 47% or interest rates rise to 6.7%. Neither is going to happen any time soon.
5.The imbalance between buyers and sellers we’ve seen recently in our housing market is due to a lack of inventory, not illogical/unrealistic/unsustainable demand from buyers. “Much of the price increases we are seeing are the result of rising demand among investors and homebuyers for a still-limited supply of homes for sale,” said Anand Nallathambi, president and CEO of CoreLogic. This imbalance is a logical correction from the past few years when we had too FEW buyers in the market. This is how markets are supposed to work, always regressing to the mean over time.
6.Rising mortgage rates will help to temper the possibility of a bubble as well (see the graphic “30 year fixed rate mortgages”). “History shows that a rapid rise in interest rates tends to have little correlation with home prices. Rather, rising rates are more likely to contribute to a decrease in home purchase volume,” wrote Mark Palim in a Fannie Mae commentary. So the positive side of a rise in mortgage rates is that it will reduce the number of buyers and therefore lower the chance the market will rise out of control and end up collapsing in a bubble.
Income and employment are the real drivers of home prices. The Denver market cannot continue to skyrocket indefinitely. We have already seen a rise in inventory from spring’s record lows, and this is good and healthy. However, since the inventory is still extremely low (about 8,000 homes on the market where about 17,000 is a balanced market) I think the demand will still exceed the supply for the next 6-12 months and prices will still rise for the foreseeable future. No bubble on the horizon yet. Stay tuned!