ANOTHER BUBBLE?

Inventory down 40% in one year.  Contracts up 10% - 30%, depending on price point.  Case-Shiller reporting that Denver home prices have increased an eye-catching 6.7% over the past 12 months.  Interest rates in the 3's. Multiple offers, bidding wars and cash buyers in abundance.

When you look at the totality of the frenzied Denver housing market, it's hard to resist raising a skeptical hand and harkening back to the bubble and crash that effectively sank the US economy just four short years ago.

But conditions today are very different from the conditions we saw during the bubble years of 1998 - 2005.

Specifically...

1) First, and foremost, the world of mortgage finance is 180 degrees removed from where it was during the bubble years.  Back then, subprime lending, no-doc qualifying, option ARMs and negative amortizing loans flooded the market.  By 2006, anyone with decent credit and a ballpoint pen could borrow $1 million or more with a signature.  Today, buyers must qualify under painfully tight guidelines, regardless of down payment size, and virtually every buyer is locking in a fixed rate loan.

2) The rise of Zillow, Trulia and an ocean of freely available Internet-based real estate data.  Remember that Zillow launched in 2005, at the tail end of the housing boom.  Until then, most real estate data was hard to find and sometimes impossible for the public to access, meaning that consumers were making decisions based on emotion rather than hard data. Today, there are no secrets, and buyers have access to an overwhelming amount of information that helps them to make far better judgments about the value of a piece of real estate.

3) In 2005, most of the country didn't know what a foreclosure was, much less a short sale.  People were buying out of pure speculation in anticipation of pocketing huge real estate profits.  Greed was like a disease running through the market, and the upward price spiral was simply unsustainable.  Today's buyers know that losing money is possible in real estate, and they are proceeding much more carefully.

4) In Colorado, 50,000 homeowners lost property to foreclosure in 2006 and 2007 alone.  Today, having done their time, many of these former owners are re-emerging from "credit purgatory" and coming back into the market... older, wiser, and much more cautiously.  They are not buying "over their heads" this time.  And they are making real down payments, which gives them far greater incentive to stick around.

5) For the most part, the foreclosure crisis in Colorado is over.  For seven years, less qualified buyers have been systematically rooted out and replaced with buyers who have real jobs, documentable income, strong credit and actual down payments.  In 2007, over 27,000 Denver metro homeowners lost their homes to foreclosure.  This year, there will be fewer than 8,000 foreclosures in the metro area, a 71% decline from the peak.  

In January of 2011, 45% of the listing inventory in the Denver MLS was foreclosures and short sales.  Today, just 8% of active listings are distressed.  We have essentially run out of distressed inventory, or "houses on sale", which means the number one anchor on prices is out of the picture.

We now have massive numbers of first-time buyers competing with thousands of "second generation" buyers (those who lost homes at the onset of the foreclosure crisis) plus we've added nearly 100,000 people per year to the state's population since the economic crash of 2008. 

Couple that with the fact that three-quarters of the builders in Colorado in 2006 have either closed shop, declared bankruptcy or left the state... then factor in rapidly rising rents coupled with mortgage rates in the 3's... and the frenzy you see today falls into pretty clear focus.

The only slowdown scenarios I can see in the short term would be a sudden spike in interest rates (which would have a catastrophic impact on the national debt, which is financed, thus crippling the overall US economy) or an extended plunge off the so-called "fiscal cliff", if lawmakers fail to do their job and cannot come to agreement on raising the US debt ceiling in a timely manner before the end of the year.

These are things that could happen, and they deserve to be monitored closely.  And I do believe in cycles.  There will come a day in the future when it's time to consider getting out of an overheated market, just as many (including myself) checked out of an unsustainable bubble last time around.

But if Congress and the President do their job and interest rates remain low, the heat under the Denver area housing market today will only burn hotter as we enter 2013.