This question is one of the top questions I am being asked this year by consumers and real estate agents. Thus, I did an extensive study of about 20 hours looking for answers based on history in Denver’s real estate market. In Denver home prices have dropped twice in the last 50 years, first in the mid 1980’s and then from 2006 to 2008. Here is what I learned—
· In both instances getting a mortgage was very easy as lenders offered no money down loans and they lent money assuming home values would continue to soar and buyers bought homes solely for speculative purposes.
· The unemployment rate was > 9% in the 80’s and even higher 15 years ago and the job losses were widespread in every industry. Whereas last year’s unemployment was entirely driven by restaurants/bars, hospitality and retail.
· In the 80’s we saw more than 10 months of inventory of homes for sale for 4 consecutive years before home prices dropped.
· 15 years ago prices began to drop after we had more than 6 months of home inventory for sale for at least 2 consecutive years.
· Also, 15 years ago home builders had 30 minutes of inventory of home for sale.
· Thus, we had TOO MANY HOMES FOR SALE!
· Today, we have had less than 2 months of inventory of homes for sale since early 2013 and we have had less than 1 month of inventory since June 2020.
· Thus for home prices to drop we need inventory levels to increase by 1200%. If someone tells you that “X” needs to increase by 1200% for “Y” to happen, how likely do you think “Y” will happen?
· We need months of inventory to be > 2 months for price increases to slow to < 7% a year.
What could cause our inventory levels to increase by 400% to 2 months of inventory? I think it will take an Outside Shocking Event such as–
· Mortgage rates rise above 4.5% for at least a year. But, I don’t think the Federal Reserve will ever allow this to happen.
· A Great Recession or Depression that causes unemployment rates > 10%.
· War