Since the beginning of 2012, home values in Denver (just the
city, not the metro) have increased by a mind-numbing $18 million per day.
That’s $18 million per day, every day, for roughly 1,200
consecutive days. Add it all up, and
that’s $23 billion in freshly-minted equity just in the city of Denver.
I have never seen anything like it. In 21 years as a broker, including the high-flying
subprime days back in Southern California in the early 2000s, I’ve never seen
the economic landscape of a place change so fast or so dramatically. (You see the manifestation of this everyday between
7 - 9 a.m. and 3 - 6 p.m. on I-25, among other places)
It’s safe to say that, right now, this city is literally
floating on an ocean of cash.
So you’ve got an awful lot of people today who are feeling
pretty good about things, flush with equity with nothing but good vibes
about the housing market.
Which is kind of dangerous.
Buying a house is not supposed to be like hitting a jackpot
or winning big at the roulette wheel. It’s supposed to be a long-term
investment, slow and steady, with a few tax advantages thrown in to make it a
long-term winner.
That’s not how many people are looking at it right now.
Twelve years ago, I remember going to a coaching seminar
where a well-known, prominent real estate personality in Southern California
told me “People say that in Orange County, you need a second job to afford a
home. But the truth is, owning a home in
Orange County is like having a second job.”
That was fatally-flawed thinking, yet many people fell for
it.
Greed is a powerful emotion, and it’s being felt like on
both sides of our market right now.
Sellers want the cash, and many buyers want a piece of the action.
But the problem is, people suddenly seem to have selective
amnesia about the housing market and they are basing their decisions solely off
what’s happened over the past 36 months.
Houses make generational price shifts like this only one
every 20 or 30 years. Usually when some
radical variable is injected into the market, like a major employer moving into
town, a significant change in the tax laws or (in our case) the Federal Reserve
printing money with reckless abandon for five years, then loaning it out at
60-year lows.
Think about this… in 1944, when the VA first began making 30
year home loans, the initial interest rate on a mortgage was 3.5%. Today, 71 years later, rates are barely above
this initial launch point, in a market where home prices have increased 30% - 50% since the Federal Reserve fired up the printing presses in 2009.
Does that sound fishy to you?
Truth is, the government benefits a lot from a hot housing
market. There’s property tax revenue,
there’s the wealth effect (creating equity so that people will spend more,
generating more jobs and tax dollars) and there’s the overall job security that
befriends politicians when the economy is doing well.
There is innovation in our economy, and technology has
created new markets and amazing new growth opportunities. But on the other side, millions of jobs have
been lost, destroyed or outsourced to workers in other countries.
We are moving into an 80/20 world, where most people will scrap to get by while a much smaller group leverages education,
technology and cheap money from the Federal Reserve to soar to
new economic heights.
In five to 10 years, we’ll look back and know if this
extended season of low rates did more harm than good.
I am of the belief that the Fed’s drastic intervention in
2008-09 was warranted and necessary, but low rates became a comfortable
drug-of-choice as artificially low borrowing rates started spinning off more
and more economic benefit.
The bottom line is that since the Great Recession, those
with access to assets and credit have made a killing, while those without them
have fallen further and further behind.
There’s a recklessness in the market right now that concerns
me, because too many people are walking around feeling like shrewd investors,
when in reality many of them just had good timing. In a hot market, everyone’s a genius.
I’m not telling people to get out of the market (yet) or
refrain from buying. But I am telling
people to slow down, evaluate things carefully, and get their emotions under
control. We’ve been in frenzy mode for
three years, and it’s going to look different in the future. Your decisions need to be reasoned and
sustainable, not just an emotional byproduct of playing with house money.
