House Values & Why the Pandemic Won’t Crash Them

 In Common Questions, Qualifying for a Mortgage, Refinancing your Mortgage

Last week, we told you we did not think house values in the Metro Denver area will go down because of the coronavirus, but we did not say why.  This week, we will tell you why.

Trade Organizations & House Values

It’s important to understand what the trade organizations tell you about house values.  The National Association of Realtors, which is the largest real estate agent trade group, reports on the change in the median home price in different areas.  These reports are distributed to the mass media and are conveyed to the public via newspapers, television, social media, etc.  But what does the median home price tell us?  Almost nothing, and here’s why.  

Median Sales Price

In mathematics, the median is the middle number in a list of numbers.  In other words, half of the numbers in the list are less than the median, and the other half are greater than the median.  If the list is made up of all the houses that sold in a particular area, the median sales price is the mid-point: half the houses sold for less than the median, and the other half sold for more.  

Does knowing the median sales price tell you anything about whether your house went up or down in value, or whether there is going to be a housing crash?  No, it does not.  It only tells you that half the houses sold for more, and half the houses sold for less.  If more people buy houses in an expensive part of town, the median price is going to go up.  If more people buy houses in a less expensive part of town, the median price is going to go down.  In either case, it doesn’t tell you very much about the housing market in general, and it tells you nothing about your house in particular.

The median home price typically goes up, which makes a good talking point for real estate agents, lenders, and others who are interested in selling you a house or a mortgage.  However, if you consider that the median price of just about everything typically goes up, the almost constant rise in median home prices loses some of its luster.  To give it some perspective, here are a few unrelated items that all typically have an ever-increasing median sales price: a loaf of bread, a new car, a used car, a vacation, a cell phone, underwear, a haircut, health insurance, etc.  

Supply & Demand

So why, if the numbers announced with great fanfare by people interested in selling you a house mean very little, would we say that we agree with them, and we do in fact think home prices will continue to go up?

The answer to that question is unnervingly simple.  The demand for houses is greater than the supply.  More people want to buy houses in Denver than there are people willing to sell them, and if demand outweighs supply, prices go up.  

But what about the coronavirus?  Surely that will lower prices, right?  Not in our opinion, and here’s why.  

The Great Recession

Home prices fell during the Recession because lenders were horribly dishonest.  They ripped-off unsuspecting homebuyers and homeowners who were refinancing their mortgages by lying about interest rates, lying about closing costs, lying about just about everything related to the loans they were selling.  Lenders sold people sub-prime loans (loans for people with credit scores below 620) and they didn’t require documentation (pay stubs, banks statements, etc.) to prove that people could afford to pay the loans back.  The lenders didn’t care because they were selling those mortgages to investors, and the agencies that were supposed to tell the investors whether the mortgages were going to be repaid were lying also.  Everyone was lying.  

People who should not have been able to buy a house (because of income, or credit, or assets) were suddenly able to buy them.  They would refinance out of their 2-year adjustable rate mortgages when the 2-year fixed period was up, and they would get another 2-year loan.  Plus, they got to take some money out in cash because the value of their house had gone up!  Builders built junky houses everywhere and they all sold because many of the people buying them had never owned a house before and had no idea if they were getting ripped off.  It was a grand old time and it lasted for ten years.  Eventually, however, everyone who wanted a house had a house, and the demand went down.  The builders kept building houses, though, and when no one wanted to buy them, they lowered the prices to get rid of them.  

The Fallout

When the homeowners who were used to refinancing every two years went to refinance again, they found out they couldn’t because values had gone down.  Their houses were worth less than the amount they owed on their mortgages.  So, what did they do?  They went into foreclosure, and now the lenders owned the houses.  The last thing a lender wants is to own your house because it is a non-performing asset (no one is paying the mortgage), and that costs the lender a lot of money.  To unload the houses they didn’t want, lenders lowered the prices, further exacerbating the problem.

We all know the rest.  A world-wide recession caused by the cheaters in the US housing market.  Trillions of dollars paid to the banks to bail them out, major changes to the mortgage industry to get rid of the majority of the cheaters (sorry – you’ll never get rid of them all), the Federal Reserve buying many billions of dollars of mortgage bonds each month to drive down interest rates.  The result of that?  Prosperity for the United States.  

It was very complicated, and it took years to play out, but it all came down to supply and demand.  

Coronavirus

But what about the coronavirus?  Aren’t millions of people out of work?  Aren’t millions of mortgages going into forbearance?  Yes and yes, but for the most part, the people who lost their jobs in the Denver area are not homeowners, and the ones who are homeowners tend to have lower-priced homes.  If those people do in fact go into foreclosure and the lender ends up owning their house, the lender will not have to reduce the price because the demand for lower-priced houses is so great.  No one lowers the price of something if a lot of people want to buy it.  

Expensive houses (around $1 million and up) will probably see a drop in values because it is more difficult to get a large loan these days, and that will make the demand for those houses go down, but for houses in the $600,000 range and lower, there are plenty of buyers, financing is easy to get, and interest rates are at historic lows.  The demand outstrips the supply, so no housing crash.

If for some reason, everyone wants to move to another state, then all bets are off.  But what are the odds of people suddenly deciding Colorado isn’t a nicer place to live than somewhere else?  Until that day comes, buying a house in the Metro Denver area is a pretty good investment.  

Need to know about mortgages or need a pre-approval for a purchase or a refinance?  Contact us today and see how easy it is to improve your financial life.

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