Thursday, February 27, 2020


We are living in interesting times.

Our current political climate is completely polarized, the Fed has kept the "pedal to the metal" via massive borrowing and low rates for a decade, and now we have the makings of global pandemic.

I have written a couple of significant reports over the past few months which I have shared with past clients talking about our current economic climate.  In short, since the onset of the Great Recession the Fed has dragged the Fed Funds rate to zero, allowed our national debt to balloon to more than $23 trillion and doubled the amount of currency circulating through our economy, from $8 trillion a decade ago to nearly $16 trillion today.

All of this "cheap" money has spurred asset growth, job creation and soaring stock and housing markets... great things if you own stuff.

But the downside of stoking a roaring economy just because it's politically expedient is that if you do have a slowdown or a crisis, your number one tool - lowering interest rates - is already off the table.

Japan's economy sunk into a 20-year funk because its monetary policy consisted of massive borrowing to create artificial growth at a time when its borders were closed to outsiders and its population was shrinking.  There's no path to growth without growth.

Today, we've got a United States clearly divided into factions of have's and have-not's.  You can pretty much figure out how that translates politically.  Good luck with national unity after this election, no matter who wins.

Add to all that the sudden arrival on the scene of a mysterious virus that is jumping continents and sparking alarm in countries all over the world, and it's possible you might be feeling just a little bit of anxiety.

Well, I'm not here to tell you how it will turn out, but I can give you some thoughts about what I think it means for the Denver housing market - at least in the short term.  

In those major reports I sent out last September and again in January, I made it quite clear I thought the second half of 2020 would probably be our slowest housing market in a decade.  I predicted demand would be front-loaded into the calendar (as it already is) and the second-half slowdowns we have seen in 2018 and 2019 would be worse than in prior years.

Affordability has become the number one issue in the Denver market, with first-time buyers increasingly tapped out and "organic" price growth in our market is stalling because we just don't have the same number of people coming in at the bottom.

I've always said the housing market functions like a pyramid, with more demand at the bottom simply because you have far more $300,000 buyers than $1 million buyers.

Or at least it used to.

If you look at the numbers today, you'll see there are twice as many homes under contract right now in the $600,000 - $1 million range than starter homes and condos under $250,000.

And relative to supply, you currently have 3.19 months of inventory under $250,000 while we have just 2.22 months of inventory for homes priced between $600,000 - $1 million.

What does it mean?

It means that, increasingly, properties in the Denver market are being "traded" among people who already own homes and have significant equity, with far fewer people coming in at the bottom.

The have's are buying and trading houses with one another.  The have not's are voting for Bernie Sanders.  

The pyramid shape I described above is becoming a diamond, with not much demand at the bottom (due solely to affordability, not a lack of desire to own), a lot of activity in the middle, and then tailing off again when you get to millionaire's row.

So what does the coronavirus have to do with this?

As I write this on Thursday, the Dow has dropped nearly 3,000 points in four days.  Global supply chains are being interrupted, international travel is freezing up, oil prices are plummeting and fear is spreading as fast as the virus itself.

And as the stock market falls and traders take defensive positions, mortgage rates are plunging to record lows as investors seek "safe havens".

Rates will continue to fall as long as the stock market continues to crater, and so while you may not like what's happening to your 401k, hopefully you can recoup some of those losses with a lower mortgage payment... assuming you buy or refinance now into this fear-based window of opportunity.  

Yes, the decline of the stock market is a negative and it's going to evaporate some wealth.  But in terms of the Denver housing market, which is driven by younger demography (smaller 401ks with more Millennials earlier in the saving-for-retirement process), lower rates are going to be a greater positive in the short term than falling valuations with the Dow Jones... at least as long as we don't come completely off the rails.

We saw the inverse of this effect two years ago, when the GOP tax bill was passed in December of 2017.

Affordability was already stretched thin in the Denver market after six years of solidly rising prices... and when Wall Street was rewarded with a massive gift courtesy of the GOP tax bill, the stock market surged forward and interest rates were sucked up into the vapor trail.

The effect was chilling and severe on the Denver market.  During the second half of 2018, once tax returns were filed and corporate profits reported, the stock market began its march to 25,000 while interest rates blew up, going from sub-4.00% to the low to mid 5's within about 120 days.

Those higher rates and payments proved to be too much to sustain the momentum of a market that was already stretched thin on affordability, and that ushered in an era of much slower growth and even stagnation in some areas.

It caused me to shift from my position from "offense" to "neutral" about this market going forward, and I've been much more cautious in advising clients since the middle of 2018.

What does that look like in real life?

In 2013, I personally closed deals for 16 first-time buyer clients.  Value in the market was so obvious and the upward trajectory so clear that buying a home was seemingly the right answer to almost any question.

Last year... I closed exactly two first time buyers, both well-qualified with good incomes and conservative financial profiles.

So narratives change with the market, and that's why the coronavirus is important.

Assuming it doesn't kill us all, it is opening up the window of affordability and it is going to make the Denver housing much more attractive in the short term.  Whether that window is open for a few weeks or a few months remains to be seen, but the surge in activity is noticeable already.

I still think our Q3/Q4 market is going to be soft, but as Q1 comes to a close, conditions right now are the strongest and most attractive they will be all year.

Want to sell?  Do it now.

Want to buy?  Given the new rate environment, do it now, if securing the lowest rate is important.

There will be far more inventory and much less competition in the summer and fall, but it's hard to see how rates can stay this low for more than a short window of time.

The main impact for now is that the coronavirus is going to cause demand in our market to be even more front-loaded than we anticipated, and may make the second half slowdown even more severe.