After soaring higher and higher through the pandemic, metro Denver’s housing market started losing altitude in the second half of last year. Going into 2023, forecasters disagree on whether the market will pull out of its steep descent and stabilize or be forced to make a hard landing that could wipe out billions of dollars in home equity.
“Overall, my biggest prediction for the market in 2023 is stability,” said Nicole Rueth, a senior vice president of The Rueth Team in Englewood, which is affiliated with One Trust Home Loans. “Q1 will still have slower demand, fewer new listings and lower inventory. Q2 will see the transition to lower rates, more demand and more new listings.”
The Federal Reserve’s efforts to quell rising prices will shape much of what happens this year in the housing market. And keep an eye on labor markets, which have proven resilient so far. If people start losing jobs in large numbers — be ready for the oxygen masks to drop down.
Annual consumer inflation rose 6.5% in December, down from 7.1% in November, according to an update Thursday from the U.S. Bureau of Labor Statistics. Mortgage rates for 30-year loans averaged 6.42% last week compared to a 3.5% rate a year earlier, according to the Mortgage Bankers Association.
Lawrence Yun and Nadia Evangelou, economists with the National Association of Realtors, also predict a stabilizing market, noting they expect mortgage rates to settle in the 6% range. While that’s much higher than where they started in 2022, having stability in borrowing costs, combined with improved affordability, should allow for homebuying activity, which was down 20% last year in metro Denver, to strengthen.
Nationally, the pair are predicting a flat year for home prices, with about half of the metro areas seeing small price gains and half seeing small price declines.
“As one of the most expensive areas, the Denver metro area may experience some small price declines during the second quarter of the year,” Evangelou and Yun wrote in a forecast published by the Denver Metro Association of Realtors.
Rueth predicts that increased competition during the peak spring selling season could drive up prices slightly. More normal fall patterns will emerge in the second half as buyers take advantage of the additional homes on the market. One reason for her optimism is that demand was delayed, not destroyed.
“The largest age group is 31 today — those buyers did not go away. They were priced out, then feared out, and are now ready,” she said.
Evangelou and Yun note that metro Denver remains undersupplied when it comes to housing. Builders should provide two new single-family homes for each job created, but during the past 12 months, the pace in metro Denver has been closer to one home for every six new jobs. And the sharp spike in interest rates has caused many builders to pull back.
Zillow, the real estate portal and research firm, estimates home values will decline 1.9% in metro Denver this year, or nearly three times the 0.7% decline it is forecasting nationally. That would represent the biggest home value decline metro Denver has seen since the 2.1% drop in 2011. As a reference point, the worst decline in Zillow’s index came in 2008, when home values dropped 5.7% in metro Denver.
“Without a meaningful boost to inventory, mortgage rates are the key to unlocking more activity. We’ve seen some signs for optimism that inflation is coming under control and mortgage rates have fallen a bit in response. Still, buyers are far from out of the woods when it comes to affordability challenges and it’s unlikely much relief is on the way in 2023,” said Nicole Bachaud, a senior economist with Zillow.
One sign of how much Zillow has soured on Denver’s prospects is its annual ranking of “hottest” real estate markets. Metro Denver ranks 40th out of 43 metros in 2023.
Some forecasts call for more turbulence
Credit analysts at Goldman Sachs take a darker view. While they also expect 30-year mortgage rates to remain in the 6% range this year and next, they are calling for home prices nationally to fall about 10% from last year’s peak. In more overheated Western markets, the drop could top 25% from the peak.
The median price of a home sold in metro Denver, including condos, peaked at a record high of $616,500 in April, and as of December was down to $554,990, according to DMAR. That represents a 10% decline.
A 25% decline from the peak would bring the median home sold price down to $461,625, a 20% decline brings it to $492,400 and a 15% decline would bring the median or midpoint price down to $523,175. Just as buyers had to deal with the shock of rapidly rising mortgage rates last year, sellers will have to deal with realizing they missed the top of the market.
Glen Weinberg, owner of Fairview Commercial Lending in Evergreen, sees an additional 10% decline in metro Denver home prices in his best case scenario this year. Depending on the direction of interest rates, he warns the drop could reach 20%, with Denver getting hit harder than the lower-cost suburbs that surround it.
“Denver in the past was always a top pick of places to relocate to but things have changed quickly. Now Denver is commonly on the list of best places to move out of. The number one driver is cost. Denver has gotten expensive and as rates have doubled it has gotten even more expensive,” he said.
The inventory of available listings, which rose more than 222% in December year over year, could see another big surge in the spring as sellers try to time the peak season wave, he said. And the homes that do come on the market are taking much longer to sell.
Likewise, David Bitton, a co-founder at DoorLoop, a property management software company, forecasts home prices nationally are headed for a 10% decline this year, with 20% more likely if a recession sets in.
“Because of the rising inflation rates and the weaker job market, fewer people can afford to buy new homes now. Many buyers were kicked out of the market,” he said. “Sellers will begin to feel the brunt of this phenomenon in 2023 as high prices and mortgage rates continue to limit the pool of qualified home buyers.”
Yet, even with a 20% decrease this year, Denver home prices will still be up 30% since the pandemic buying wave took hold, Weinberg said. And Construction Coverage, an online guide service, said that since 2000, the median metro Denver home price is up 220%, one of the biggest gains of any metro area.
A stretch of falling home prices might invite comparison to the housing crash of the 00s, but the two periods are very different. Between 2006 to 2009, U.S. home prices fell 28%, causing 11 million homes to drop below the value of the underlying mortgage, according to CoreLogic. A massive wave of defaults and foreclosures resulted, bringing the entire financial system to the brink of collapse.
Back then, mortgage loans represented 71.3% of the value of the home on average, and some loan products issued actually increased loan balances by adding unpaid interest back into the principal. Many loans were issued with minimal or no down payments. But in the third quarter of 2022, that loan-to-value ratio was closer to 43.6%, leaving plenty of cushion for most owners.
“Today’s homeowners are in a much better position to weather the current housing slowdown and a potential recession than they were 12 years ago,” said Selma Hepp, interim chief economist at CoreLogic, in a research note.
Related Articles
-
Sponsored: Winter weather, holiday celebrations chill Denver housing market
-
Golden’s workers can’t afford to live there but first-ever homeownership project offers hope
-
Statewide decline in home sales surpasses that seen in metro Denver last year
-
New housing for Winter Park Resort employees part of $40 million deal
-
4 Noses Brewing plans canned cocktail plant in Broomfield
To create the same levels of underwater mortgages as seen 15 years ago, home prices would need to drop 40% to 45%, according to CoreLogic. That would represent a crash.
“The housing market across the board is in a doom situation for a bit, but we are not about to see a recurrence of the systemic crisis that we had in 2012,” said Susan Wachter, professor of finance and real estate at Wharton in a recent interview.
Buyers should expect a more stable market than in 2022 with less competition, which will grant them more bargaining power and more time to make decisions, Bachaud, the Zillow economist, predicts. Sellers will be competing for buyer attention and can no longer sit back and expect to call the shots.
“Pricing a home correctly is very important in a market like this where sellers are the ones competing for a buyer’s attention rather than the other way around. And more time to make decisions with additional inventory coming on the market will help give today’s buyers the edge they need,” she said.
Bitton isn’t calling for a buyer’s market just yet, saying 2023 could look more “neutral.”
“In all, if you don’t have a definite date in mind for purchasing a new home, it’s best to wait it out. Every prospective buyer’s best time to purchase a home is unique, and the ideal time to purchase a home is not the same for everybody. It’s important to look at your finances and know how buying a new home will affect your monthly bottom line,” he advised.
Get more real estate and business news by signing up for our weekly newsletter, On the Block.
