(Denver mortgage lender Jimmy Kinley tells it like it is about how our recent Denver real estate boom is slowing. – Dennis Martin)
The Denver real estate boom appears to be transitioning. Home sales are just a little slower. And, buyers can choose from just a few more homes on the market. One thing I have learned over the last 15 years in this real estate business is that any time there is a transition from one normal market to another totally normal market, we tend to overreact and blow it way out of proportion.
A few months ago, here in Denver, the buyers slowed down and the inventory finally started to catch up. So, naturally, that must mean the bubble is going to burst and home values are going to crash like its 2007 all over again. Well, that is one way of looking at it.
Denver Real Estate Boom Crashing?
But, let’s briefly talk about what drove the market crash of 2007. It was fueled by loosening of mortgage guidelines that allowed people who were previously unable to purchase homes to purchase them with no down payments. In addition, their home loan mortgage was super cheap for 2 years before ballooning to a payment they couldn’t make. That caused one of the strongest buyer’s markets in history. The inventory couldn’t keep up and the bidding wars drove prices up at an incredible rate.
Suddenly, those mortgages adjusted to a much higher payment and many “skinny buyers” couldn’t make the new payments or even refinance into a normal mortgage. Because, they still couldn’t qualify. Boom, the foreclosures start. The foreclosures drive everybody’s home values down. Even mortgage holders with regular loans found themselves upside down with a mortgage balance higher than a home’s value. By then, the foreclosure train was headed down the mountain and the brakes were gone.
What Made This Boom?
So, let’s compare that to this Denver real estate boom. The mortgage guidelines are so tight even some well qualified people like self-employed people with lots of money to put down can’t get a home loan. Because, they don’t declare enough of their income on taxes. Some make $200,000 a year. But, they can’t use their income to qualify because its commissions and they don’t yet have a 2 year history. The bottom line is, there is NOT a ton of higher risk buyers driving the boom in values.
Our recent Denver real estate boom was fueled by the strongest job market in the country. Many large corporations have been moving to the Denver metro area. And, Colorado is a pretty great place to live. The millennials also had a huge role in this boom. Rent rates got so high that many decided it was cheaper to own. Millennials are smart and tend to do the math and process through things before they make a decision. Many of us could learn from them on that score.
So, this Denver real estate boom was fueled by good ole simple supply and demand with no cheating factors skewing the numbers. So why are we suddenly seeing home price reductions all over town you might ask?
Why Sellers Still Overprice
The number of buyers trying to purchase homes are down and the listings are up. When sellers think this is the top of the market, they quickly decide to list and now we have even more inventory. Listing agents have been pricing houses above market for the last 5 years and selling them for even more in many cases. Sellers now know that and expect that. Even when a great Realtor tells a seller they cannot do that anymore, the sellers still want to try. If the agent doesn’t take that over-priced listing, another agent will. So, the house gets listed too high.
After weeks of slow showings and no offers, the sellers realize the Realtor was correct. And, they drop the price to where it should have been in the beginning. Now, the media will find of all this data in the coming weeks and months and spin it to make it sound like the bubble is bursting. Let’s face it. No matter which side of this issue you are on, the media tends to spin to the negative side.
Savvy Buyers Can Finally Get A Good Buy
Don’t be fooled! In my opinion, there is a window here where a buyer can take advantage of the slight panic created by a transitioning market. A savvy buyer might get a better deal on a home. I think if we educate Buyers about on the facts, they will understand that. Right now, some buyers are buying into the talk of the bursting bubble and pumping the brakes. This is causing an even lower number of buyers. And, the overreactions are creating a temporary, but still strong, buyers’ market.
Educated buyers, in my opinion, should get busy finding a house before this window closes. Those people who own homes and didn’t want to move up should get busy too. There is plenty of inventory to find the home you want. Half of the contracts I have reviewed in the past month are contingent on the sale of their current home. The key is that Sellers just must price the home correctly. Don’t focus on what you think its worth. Don’t look at what you paid for it or what it was worth 2-5 years ago. That should help you see that the price your Realtor is telling you is competitive and is pretty awesome!
What do I think the future will bring? I think we go back to a normally appreciating market. The crazy 10% year over year increase in value was awesome for homeowners, but not sustainable. The only correction I think we will see is a slow transition time back to a normal market. Buyers may have a short window to get a better deal on that panic. Buyers really shouldn’t wait. Mortgage interest rates are only going up! And, means payment will go up too.
Denver Home Loan Mortgages
Let’s talk mortgages for a moment. With the buyers’ market slowing, we are seeing a ton of niche products and no money down marketing blowing up the media ads. There is only one true 100% loan program with no strings attached in my opinion. It’s called a VA loan and I feel confident that anyone qualified to use one dang sure has earned that right.
All the rest of those programs have strings attached. I’ll offer them. And, I am not saying they are all bad. I am just saying they are typically not what the people on the radio and TV make them out to be. If you get a grant for your down payment, you would think that is free money. Why wouldn’t you? The definition of a grant is non-repayable funds, isn’t it? So how do they get away with calling it that? To use these grant programs, they require we increase the closing costs and charge a higher rate. In many cases a full percent higher rate or more over the current market rates. They require that we then sell them the servicing of that loan.
So, they give you the money up front. But, then they charge you more up front and a large amount more every month for the loan. This also reduces the amount of house you qualify for. Because the payment becomes so much higher. Again, I am not saying these are bad. I am just saying you shouldn’t be fooled by a good sales pitch that leads you to believe you are getting free money. If you can produce your own down payment from savings, your investments, or a gift, you will get a better loan. And, with the lower rate, you will be able to afford more home for less money.
Higher Denver Mortgage Interest Rates
We can’t have one of these market updates without talking about rates. They are going up. I have been saying for years we need to enjoy these rates because they can’t last forever. The average for a 30-year conventional loan since Freddie Mac started keeping records in 1971 is still over 8%. And, the high was nearly 18%. So, where have rates spent most of their time in the past 47 years? Almost 7 years below 5%, 27 years between 5-10%, 10 years between 10-15%, and 2 years above 15%. What!?!?!? We should only be so lucky to still have rates in the 4’s and starting to creep to 5%.
We just must accept that anything short of a full-blown market and economic crash will likely result in rates that continue to move up. If you have a plan, don’t wait. If you want to talk in more detail, feel free to give me a call. As always, thanks for taking the time to read this and for trusting me to continue to earn your business! Please use the form below to ask me any questions. Or, just leave a comment on this blog below.