March 27, 2023
Just How Far Will Denver Real Estate Prices Fall in 2023 and beyond?
Well, this is a question that may be on the mind of just about everyone these days. It’s clear now that home prices are down from 2022 highs which probably signals the highs of the 2010-2022 twelve-year mega cycle, and there appears to be great turmoil building in the economy, and in the financial system. If you are a potential buyer you probably don’t want to buy knowing that the prices will be lower or much lower in the near future. If a potential seller, you may feel like your “equity” is slipping away, and it may be causing anxiety if your home is not a long-term proposition for you.
I like to think of this question with another question: How long is a piece of string? What the heck? you may be wondering. What does that mean? Well, how far prices will fall is frankly impossible to know. It’s impossible to answer how fall prices will fall without knowing what the government’s intentions are with fiscal and monetary policy, and the lengths they are willing to go to prop up markets. If you believe in math and fundamentals, which you should because in the long run fundamentals always win out, then you know that prices will continue to fall as borrowing costs go up, credit and liquidity dries up, and economic conditions deteriorate (jobs). If a free market and business cycle is allowed to operate freely, which would include (and already includes) distress, then defaults, bankruptcies, increasing unemployment, without government backstops or interventions, then prices may fall precipitously.
It is quite conceivable, even probable, that nominal prices could fall 30%, 40%, even 50% from current price levels in Denver Real Estate. This assumes mortgage rates stay at current levels and continue higher, along with continued worsening economic conditions. Bear in mind that at our current pace, worsening economic conditions will pick up velocity. It was just within the past few weeks that several banks collapsed, including the second largest bank failure in US history (Silicon Valley Bank) and also a European Bank deemed “too large to fail,” Credit Suisse. These are not positive signs for the global economy and growth.
What would it take for this to happen?
It actually might not take a lot for this to happen. Maybe all it would take is inaction on the part of the Federal Reserve and Federal Government. The Federal Reserve has raised its Federal Funds Rate from 0% (which held for years at this level up until March 16, 2022 when rate hiking sequence began) to a level of 4.74-5% currently. This is an incredible 500% increase in one year, the velocity and speed of which is literally unprecedented in history. If the Federal Reserve stays the course with its tightening, and does not cave and lower rates back down as conditions worsen, then the framework is being set for some massive price deflation that may take place over several years.
The Federal Government, with its social spending programs, could either let the free market take over for price discovery, or may step in to “backstop” the market. If they backstop, then all bets are off. Maybe prices even increase!?
What Could Fed Gov do?
The tools the Fed Gov could use or actions they could take are almost limitless, are all highly inflationary, and they are always coming up with new programs and spending it seems these days. Here are some examples of things they could do to ease distress (which would limit price declines):
- Mortgage Moratoriums for anyone with a Government Backed Mortgage (50%+ of mortgage market)
- Forgive Mortgages for Certain Groups
- Make 40 year mortgage instead of 30 year (reduces payments, qualifies more people, juices demand)
- Income Tax Credits for buying homes
- First Time Buyer Credits
- Keep College Loans Paused Indefinitely
- Wipe Out $10k/20k of college loans as proposed
- Wipe Out College Loans entirely for everyone
- Direct Payments to People (Universal Basic Income UBI)
- All manner of tax credits and direct reimbursements
- Greatly Expanded Unemployment Benefits if Unemployment picks up significantly
- Business Handouts like PPP program to prevent layoffs and bankruptcies
If left to its own devices, and the Federal Reserve continues its fight against inflation with elevated interest rates, the Real Estate market is likely in for a rough ride. Remember though, this can take time to play out. During the last Financial Crisis in 2008, the bubble bursting took about 3 years to play out. Prices didn’t bottom until 2011 in Denver.
However, if the Federal Government steps in, it’s possible that prices could even go up. Think of this: mortgage rates again at 2.5%; everyone’s a buyer because of no layoffs and handouts for all kinds of companies and people. It’s impossible to say one way or the other, but what is a certainty is that we are in a precarious position right now. Stay tuned for further and updated thoughts as the year progresses.