Everybody asks me. "Should I sell this year or next?" "Should I wait to buy until prices drop?" "ARE prices going to drop?"
I always tell them I don't have a crystal ball. And I don't. And neither do the people at PMI Mortgage Corp. But apparently they have much more sophisticated market forecasting tools than I do. And they have released a report detailing the likelihood of declining home prices in the 50 major U.S. markets.
It's not such good news if you live in Florida or California. But it's really not bad if you live here in Denver.
The report was based on the percent likelihood that a specific market will see declining home prices. The average likelihood across the U.S. was 34.6%. The "top" markets (and by "top" I mean "most likely to head towards the bottom" were Riverside/San Bernardino California (65.2% likelihood), Phoenix (64.6% likelihood), Las Vegas (61.4% likelihood) and West Palm Beach/Boca Raton (60.7% likelihood).
Where did Denver fall in the list? 38th out of 50, with a 15.6% likelihood of declining prices.
Real estate is local. So many people read books about falling real estate values, and they're convinced that the real estate "market" is going to fall like the stock market falls. And it just doesn't work that way. Real estate is not one "market." It's a collection of smaller markets, each of which rises and falls based on local factors. Sure, there are national trends -- recession, inflation, interest rates -- that can affect a local market. But those factors are mitigated by what's going on in that area. After all, people have to live somewhere, regardless of how the economy is doing.
So why are some areas poised to take a dive while others are relatively stable. One of the main factors is a recent history of rapidly appreciating prices. Real estate values as a whole tend to increase over time. But what goes up too fast is bound to come down. When home prices rise much faster than wages, affordability declines. The people who live there can no longer afford to buy there. And so demand dries up and prices drop. In Phoenix, housing prices have climbed steeply for the past few years. One agent there says that, two years ago, homes were appreciating at a rate of 54% annually. Last January, there were about 3500 homes listed for sale on the MLS. Now there are about 54,000.
Why has Denver been spared? Our growth the past few years has been slow and steady. Yes, we had a pretty big run on prices back in the '90's. But it was never anywhere near 54% annually. Our prices leveled off around 2001, and we experienced what experts call a "soft landing." No big price drops. We just stopped growing at 10% - 20% per year and dropped down to 2% - 5%.
I've always believed that Colorado's desirability as a place to live factors into the equation as well. Even when prices climb, people are willing to try harder to find a way to stay, because it's a danged nice place to live!