I recently sent out my 2024 Denver Real Estate Fall Market Update letter to about 300 past clients and in that letter I spoke extensively about what I call "The Waiting Room".
For context, so far this year I have met with over 40 prospective buyers or sellers who have ended up sitting on their hands instead of moving forward with a purchase or sale.
They are an older couple with some developing health issues looking to downsize, but with 25 years of personal belongings piled into their home and a small mortgage with a 3% rate... the path to downsizing involves a lot of work, a lot of time and a higher monthly payment for a much smaller home.
These clients are really nice people and we talked over the kitchen table for nearly two hours, brainstorming scenarios.
What if they rented a smaller home or townhome for a year, spent a few months clearing out their existing home and sold with minimal pressure or stress before searching out a replacement home?
What if they chose to rent out their much larger long-term home, which would keep them from having to considering updating it while also creating positive cash flow above and beyond what they would pay for a rental?
What if they pulled cash out of their existing home, used it for a down payment on the replacement property, moved into that replacement property and then dealt with prepping and selling their larger home?
What if they moved most of their stuff into storage, took a two-month cruise while we updated, listed and sold their home and then found a short-term rental until they could identify a replacement property?
What about adding a chair-lift and making modifications to this two story home so they could stay in place for the next 10 years?
What about selling direct to a third-party home flipping operation like Open Door (at a 10% - 12% discount) with a rent-back until they could find a new home?
For now, we haven't resolved anything other than it's going to be work and it's going to take time. They also have a $1,400 per month payment on a $900,000 home with a fixed income and any downsizing formula would raise their payment by at least 50%. There are a lot of reasons to simply stay in place, but that still leaves them feeling stuck and housebound in a property that no longer meets their needs.
In the end, we were simply spinning in circles, which is how so many client meetings have finished up in 2024.
A big part of the issue with these clients (and the housing market in general) is that not a lot of things make sense. First-time buyers are looking at mortgage payments that are much higher than rent - doesn't make sense. Long-time owners who want to downsize are looking at higher mortgage payments for half the house - doesn't make sense.
And so we go in circles, thinking and thinking but never acting.
"In 2020 and 2021," I said at one point in our conversation, "most buyers and sellers had motivation levels that were 14/10. Today, most of the people I meet with have a motivation level that's a 4 or 5... and it takes a motivation level of at least 7 or 8 to actually move forward in this environment."
More circles.
One of the things I have tried to educate people about this year is that the housing market is going to remain dysfunctional until we have better affordability than we have today. And there are only three ways for that to happen - higher wages, lower rates or (gulp) lower prices.
Higher wages are going to take years to catch up with today's affordability numbers. Right now, a household making the median income in the Denver metro would need to spend about 54% of that income to service the mortgage on a median-priced home... far above the upper limit of 36% most lenders observe in their underwriting guidelines. While wages have been rising, it will likely take 5 - 7 years for wages to catch up to where prices are today.
With $36 trillion (and counting) in federal debt... rates aren't coming down much, if at all. There is simply too much debt in the system and with so much securitized debt in play, both the government (through Treasury bond sales) and lenders (through mortgage-backed securities) are having to offer higher and higher yields to attract willing buyers.
Maybe... maybe... rates get back down into the 5's in 2025... but the rates that brought record affordability in 2020 and 2021 are not coming back, ever, in my opinion.
And so we are left with option 3... falling prices.
This is the most likely scenario, although we all hope price reversion is minimal and things stabilize quickly. In most housing markets, prices rise rapidly but fall slowly. That's because bidding wars can revalue neighborhoods quickly to the upside... but when demand dries up sellers are slower to adjust, which means properties linger and inventory rises but prices remain sticky for longer.
Unfortunately, nowhere in this menu of options is higher prices, and that's a real killer on buyer motivation. It's a market adrift at sea, listing aimlessly like a sailboat with no hint of a breeze in sight.
The Federal Reserve threw a massive (over-indulgent) party in 2020 and 2021 and the hangover affect is going to last for years, if not the rest of this decade.
Which means fewer transactions, way fewer real estate agents and lots of people stuck in place, including both owners and renters, going in circles.
