The Denver Real Estate Crash
Is the housing market going to crash? We get asked that question by just about everyone who calls us. Our crystal ball is broken (it’s a long story), but since we’ve been selling mortgages for a long time, we have some pretty good insight. Here’s what we think about a real estate market crash.
Why Do Housing Markets Crash?
Real estate market crashes occur because of underlying economic problems. In most cases, real estate crashes are local or regional in nature. Two good examples are the devaluation of Denver home prices that were caused by the very narrow focus the Denver economy used to have. There was a crash when oil prices dropped (when a large part of the Denver economy was dependent on the oil industry) and there was a crash when the tech bubble burst (when a large part of the Denver economy was dependent on the tech industry).
However, the most recent crash, which occurred in 2007-2008, was not regional and did not have anything to do with the local economy. The entire world economy crashed because our government allowed the banking industry to sell any kind of financial product that they could dream up. So the investment banks sold all kinds of products to people who had no understanding of what they were buying. Included among those products were sub-prime mortgage loans, which were loans that did not require any proof of income or assets. In other words, no one checked to see if you really made the money you said you made, and no one checked to see if you really had the money in the bank that you said you had. Anyone who wanted to buy a house was able to get a mortgage.
How Do Housing Markets Crash?
Generally speaking, about a third of the people in the US do not have the income, the assets, or the credit history to get approved for a mortgage, provided lenders are checking those things. Prior to the worldwide market crash, the lenders were not checking those things, so everyone who wanted a house was able to buy a house. Banks were giving money away to people they knew weren’t going to pay the loans back, but they didn’t care, because the banks knew they could sell the loans to unsuspecting investors before anything went south. Sub-prime loans were 2-year adjustable-rate mortgages, with very low introductory rates, and many people could afford to pay their mortgages at 1% interest rates, at least until 2-years went by and the rate went up. But because the value of houses was going up (it always does when there are fewer houses than people who want to buy them), if someone’s interest rate went up after two years, all they had to do was refinance into another 2-year adjustable-rate sub-prime loan.
That went on for years, until all the people who wanted a house had one. But the builders kept building new houses, creating excess inventory. When the builders finally realized they had run out of buyers, they sold their new houses for much lower prices, so they could cut their losses and move on. A good example of this locally is Green Valley Ranch. When hundreds of new houses are offered by builders at very reduced prices, it drags down the price of every house. Why buy an old house when you can get a brand new house for much less?
When all the values started going down, people with sub-prime loans still needed to refinance when the 2-year adjustable-rate period was up, but they couldn’t refinance because now, the house wasn’t worth what they owed on it. The result? Foreclosures everywhere and a real estate crash.
After that disaster, Congress – in what turned out to be just about the last time Republicans and Democrats cooperated – bailed out the banks and changed the lending laws. Under the new rules, which exist today, lenders have to prove that borrowers have the ability to repay the money they borrowed from the banks. It’s hard to imagine that wasn’t the law before, but it wasn’t.
So, will the Denver real estate market crash? We think NO, and here’s why.
The economy in Denver is extremely diversified now. One industry can suffer a setback and there are plenty of other industries that are unaffected. As a result, the overall economy thrives, even if one industry is negatively affected.
Another reason there won’t be a crash is because many people have discovered how nice it is to live here, and they just keep coming. It’s also cheaper to live here than it is in the places people are moving from. As expensive as it is in Denver right now, it’s nowhere near as expensive as it is on the coasts.
A third reason there won’t be a crash is because the lending laws have been changed and the banks are now discouraged from selling risky loans to people. If you have to prove that you can pay back your mortgage, and your interest rate doesn’t change every two years, the chances that you will continue to pay your mortgage are greatly increased. If there are no foreclosures, prices will not go down.
In addition, the stimulus money that is being pumped into the economy at the moment will certainly create jobs and improve the overall economy.
Something to Consider
A final reason there won’t be a Denver market crash is because of global warming. If you have ever lived on the East Coast, you know that tens of millions of people live only a few feet above sea level. As the climate changes, people are starting to realize it might be better to live at a high altitude where the chances of flooding are reduced.
The bottom line is that house prices in the Denver area will continue to increase. Perhaps not at the same rate as they are now, but they will continue to increase.
If you need a pre-approval for a purchase or a refinance, or if you need a full approval so your purchase offer will be accepted before buyers with just a pre-approval, contact us today.