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Q4 2022 Question: I've Heard We're in a Housing Bubble, Are We?



Q: I’ve been hearing CNBC, the Denver Post, and social media telling me the housing market is going to decline in 2023, with some saying it’s going to CRASH! What do the data and facts tell us?

A: To summarize the next 6 paragraphs: data and facts do not support a Denver metro housing crash, nor even a decline. The market should remain steady over the next couple years and here’s why:

Existing mortgages are high quality. The Mortgage Bankers Association recently published their Mortgage Credit Availability Index, tracking underwriting standards. According to their index, it is harder to qualify for a mortgage now versus any time over the past 19 years. We learned during the last mortgage crisis that low-quality loans default and high-quality loans do not, thus adding a level of protection in the housing market.

Distressed sales are at a record low & equity at a record high. In 2010, 28% of homes had negative equity, which led to the distressed sale wave of 2010-2013, where approximately 25% of all sales in Denver metro were distressed. Distressed sales only made up 0.8% of all sales in 2022.

Supply remains low and will remain low. Low supply means there are fewer homes competing for buyers and less competition leads to appreciation – or at least - steady home values. In May of 2008, inventory hit a record high (26,300 homes) and in January of 2022, inventory slumped to a record low (1,200 homes). As we enter 2023, inventory is at around 4,800 homes, which is well under the 40-year average of 15,000. Why will inventory continue to remain low? We have not built enough homes each of the last 14 years. Further, household formations are rapidly increasing as Millennials begin buying homes at a record pace – increasing demand, whereas Baby Boomers are staying in their homes longer – decreasing supply.

Recessions support home values. Most consumers believe we are either “in” or “headed for” a recession in 2023. Most believe home values decrease during recessions. Not true. In 5 of the past 6 recessions, home values held steady or increased ↗. The one time they didn’t was during the Great Recession, of which real estate mortgage crises caused that recession. Consumers in recessions want steady assets that hold their value when the financial world around them is crumbling, thus, they turn to real estate.

Mortgage rates are not crippling. Rates are high, but only relative to the past couple years. The 50-year mortgage interest rate average is around 7%. Rates are currently at 6.50% and 97% of economists believe rates will come down in the next 3 years. High interest rates actually cause fewer people to sell, which causes lower inventory, which supports values. High mortgage rates decrease transaction volume, not prices.

Inflation helps real estate values. Inflation is an enemy to renters, who experience steep rent hikes during inflationary times and helps homeowners, who lock-in their payments under 30-year mortgages, while paying it with increasing wages.

Thanks to my colleague, Lon Welsh, and my friends at Your Castle Real Estate for some of the insights gleaned from their latest report: link.


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