Saturday, July 16, 2005

Rocky Mountain Low

In the Sunday edition of The New York Times there's an interesting story examining the significant cooling that's occurred in the Denver real estate market:
"Even as prices for homes in frothy markets like Las Vegas; Riverside, Calif.; Miami; and Washington are still jumping by more than 20 percent a year, Denver's homeowners are learning the hard way about living through the real estate doldrums. Five years ago, median house prices were rising at an annual clip of nearly 17 percent. By the first quarter of 2005 the increase had slipped to 3 percent, according to an analysis by, a research firm."
The NYT story gets into some of the lessons this might hold for other markets where people still cling to the foolish belief that this market is going to soar indefinitely:

With economists warning that prices in hot markets cannot continue to rise as sharply as they have in the past few years, the experience of Denver's homeowners may foreshadow what could happen if those markets start to cool. Denver's circumstances are in some ways particular to the area, driven largely by job losses in the telecom sector, but they illustrate how a moderate slowdown could play out for homeowners in other parts of the country and stand as a potent reminder that galloping price appreciation is not the norm.

What I found most interesting in the piece was the frightening amount of so-called "creative financing" that's gone on in the Denver market.

... Analysts say the Denver market has remained as healthy as it has because of low mortgage rates as well as creative financing, including no-money-down and interest-only loans. Interest-only loans have accounted for a high rate - 42 percent - of purchase loans over $360,000 in Denver this year, according to LoanPerformance, a mortgage data firm.

That unnerves some economists, who say that even with appreciation of less than 5 percent, Denver's housing prices may be overvalued.

"I think it is a very frothy market," said Tucker Hart Adams, the chief economist of the Rocky Mountain region for U. S. Bank, adding that those who bought homes with interest-only or variable-rate mortgages could be vulnerable. "When rates start moving up, they're going to see their payments go up," she said. "When people start getting nervous and start to sell, it's a downward spiral."

The story doesn't get into the tragedy this will likely cause. Many of those interest-only loans have a bubble payment that the buyers never intended to pay. Instead, they were gambling on double-digit increases in value so they could refinance and parachute out before the big payment slammed down on their original loan. Without the double-digit increases, many of those people, if not most, are going to end up in foreclosure, or, at the very least, they'll have to sell at a loss.