The National Association of Realtors reported this week that Denver’s median home price increased 14.4% in March on a year-over-year basis, which was the third strongest showing in NAR’s 20-city index. And you won’t have to look far to find real estate agents crawling all over each other to tell you how great this is for Denver.But not so fast. Let me tell you what this really means.
It has been my view that while the first wave of foreclosures in Colorado (2004 – 2007) primarily hit the entry level of the market (80% of foreclosures during that time occurred on homes priced below $250k), the second wave of foreclosures (occurring now) is hitting the high end of the market.
And here’s why: It’s a lot easier to replace a $12 an hour job than a $100,000 per year job.
The first wave of foreclosures in Colorado was caused by poor lending practices, and it was a byproduct of the home ownership rate in America spiking from 61% to 69% (US Census Bureau data) between 1995 and 2005. Because of subprime lending and “easy credit”, home ownership was opened up to anyone who wanted to buy a house, regardless of qualification. And the truth is that most of those coming into the market for the first time were not buying half-million dollar homes – they were credit-impaired buyers who were buying into the entry level.
This time around, it’s job losses and the larger economy that are hurting the housing market. And when a Qwest account manager making $100,000 a year (and consequently living in a larger home) loses his job, he simply cannot find another one to replace it.
Hence, while the recession is affecting everyone, it’s clobbering the middle and upper class.
So when the median home price increases 14.4%, here’s what it really means…
One year ago, two years ago, three years ago, the deals were at the bottom of the market. So people were buying off the bottom.
Now, it’s the higher end of the market that is seeing significant value declines, and so more buyers are seeing value in buying higher up.
Keep in mind what the median home price means – the “median” price is that number at which 50% of sales fall below it, and 50% of sales rise above it. It’s not an average, or a true indicator of value. It tells you where the activity is.
And while it generally can be considered positive that people have the confidence to spend more money on homes today than they did a year ago, I would still argue vehemently that buyers in this market are value-driven, and today the perceived value is at a higher price point, because that’s where values have been declining the most.
Once we establish that values have fallen, we then need to talk about cycles and the implications of where we are in that pricing cycle.
With the low end of the market, we went through about four years of loss or stagnation before things began to improve in 2008. It’s an ugly process, which involves a lot of people losing their homes, or losing their equity, but inevitably suffering a reduction in their standard of living.
The same cycle is now in play at the high end.
As you can tell, this isn’t Realtor “happy talk”. While I am a Realtor, I am also a “realist”. And this is what I see.
So which city sat atop NAR’s list for highest increase in median price over the past 12 months? San Diego, with a gain of 20.4%. But sales there only increased 4%.
What this means is you have a small pool of buyers with the means to purchase, and those buyers are gravitating toward where they see value. And they see value at the higher end because those homes have been hemorrhaging value for the past 12 months.
What this means is you have a small pool of buyers with the means to purchase, and those buyers are gravitating toward where they see value. And they see value at the higher end because those homes have been hemorrhaging value for the past 12 months.
If the median prices surges, but sales don’t, you do not have a thriving market. You simply have people who are shopping selectively, buyers who have moved from hamburger to steak because the steak is now on sale.
If you’re looking for a true leading economic indicator that will signal a broader recovery, it will be jobs.
A jump in the median price is not a bad thing, and I don’t want to portray it as such. But like most statistics, it needs to be interpreted. It’s definitely not a bad time to buy a house… especially at the lower end of the market. But it needs to be the right house, at the right price, under the right terms.
I suspect you will hear lots of rejoicing over the next few days about Denver's ranking in the new NAR report. But before anyone tells me that all our troubles are behind us, show me the jobs. Because employment, and not median price, is the tide that will (eventually) lift all boats.
