Denver, Colorado Housing Impact From COVID-19 Showing Conflicting Signals
There is little to no doubt that COVID-19 will have a direct impact on the housing market in Denver, Colorado. The question is how much or how bad? I get asked almost daily about the future of home prices in the Denver area and why they aren’t falling already. My crystal ball is cloudy, more like a magic 8-ball, but the economic data is saying watch out 1-2 years from now. My “boots on the ground” data as a Realtor will tell you that the market is hot right now. This is driven by low inventory and record low interest rates that have boosted affordability. Why is there such a discrepancy between what we are feeling and what the data says?
Cause of the Delayed Impact
The answer lies in the suspension of foreclosures/evictions and allowing forbearance for up to 12 months of missed payments. What this basically means is that under normal circumstances the banks would be foreclosing homes left and right. Then the market would see a surge of inventory (like it did during the financial crisis) and this would cause home prices to fall. You would see the inventory not just in foreclosures, but also in people listing their homes to get the equity out as home prices fall. Without this surge in inventory, things are carrying on like usual and it feels “normal”.
This sleeping giant of built up foreclosure volume will eventually hit the market, but it is still at least 12 months away. The process to foreclose takes 5+ months in Colorado from first notice, but most homeowners still have at least 9+ months of forbearance left. Then the process to foreclose will start if they are not making their payments.
Market Before COVID-19
Before Covid-19 we had a hot housing market driven by record low unemployment in the Denver area (about 2.2%). Buyers were a bit exhausted after losing out on bidding wars for properties. A lot of buyers were giving up. Affordability was still decent as interest rates were low, so people were simply wanting to buy something that was livable and stop renting. After Covid-19, these buyers still remembered wanting a home and there was an entry point of opportunity. Inventory of homes for sale was low as those who own a home are mostly staying home. The combination of low inventory, record low mortgage rates, and ample number of buyers has continued to create a housing buzz and back to the bidding wars we went.
Unemployment Historically Impacts Home Prices
Unemployment has spiked and sits around 11% today in Denver. We have gone from the lowest in history to the highest almost overnight. How this unemployment rate recovers will have a direct effect on the housing market. Hopefully, it is more V-shaped in recovery. You can see in the chart below that unemployment has a direct impact on the Home Price Index. Unemployment has always gone up faster than it comes down.
Author’s work, Case Shiller Colorado Denver Home Price Index Vs. Unemployment. COVID-19 has had a material impact on unemployment, but not home prices yet.
How to Predict the Future
Nationwide the percentage of homeowners in forbearance stands at 7.44%, which is down from about 8.9% in June. This is a positive if the trend continues. This will be an important metric to keep an eye on.
Will a vaccine drop the unemployment rate back to 2-4% quickly and allow homeowners to start repaying their mortgages and completely avoid a true crash? We have no prior pandemic experience to go by, this is what will ultimately decide the medium-term future of the housing market.
Trying to time the market is impossible, but real estate is a great investment over a very long time-frame. Rather than time the market, find the home that you really want and live there for a long time.
In conclusion, I cannot predict the future; however, there is no denying that putting a stay on foreclosures and allowing 12-month forbearance on mortgages is having a delayed effect on the housing market due to a lack of distressed inventory. When this inventory starts to hit the market, it will have a negative impact. The hopeful offset to this impact being a positive road to recovery possibly from a COVID-19 vaccine.
Feel free to contact me to discuss how this is evolving.
By: Greg Taft