In the last five years, housing prices have more than doubled in Colorado. In Greeley Colorado the median price has increased from $120,000 to over $260,000. Colorado has lead the nation in house appreciation, but many other parts of the country have also seen huge price gains as well. The average house price has increased about 25 percent in the last four years in the United States as a whole. There is a large increase in home prices, but housing prices in the U.S. are still not as high as they were in 2008. The average price in the U.S. according to Zillow is about $186,000 and the average price in the U.S. in 2008 was about $195,000. While it seems like housing prices are out of control, especially in some areas like Colorado, the overall market is increasing at a stable rate. When you consider the overall housing price index over the last 30 years we are right on track for where housing prices should be, we just had a huge bubble and crash, which makes prices seem much more out of whack than they actually are.
How was the original housing bubble created?
I see many people question if we are in another housing bubble, simply because prices have increased substantially in many markets across the country. They figure the housing crises was caused by unsustainable housing price increases and if housing prices are increasing again, another crash must be coming. However, just because prices are going up, does not mean they are going to crash down again. You have to look at the underlying causes for why prices are increasing, and if the increases make sense or are caused by an unsustainable anomaly.
In the early 2000’s, housing prices went crazy in many parts of the country. I was an agent during that time and I flipped houses with my father as well. I was not as experienced and knowledgeable as I am now, but I could still see major fundamental problems with the housing market. I remember asking my dad a question about lending guidelines during that time:
“Why are the banks lending people 120 percent of the value of their home?”
The only thing he could think of for an answer was lending on housing was safer than lending on credit cards. Not only were the banks lending people 100 percent of the value of their homes, they were:
- lending more than 100 percent to home owners
- lending 100 percent to investors
- lending 100 percent to people with less than 600 credit scores
- lending 100 percent to people on stated income loans
- lending 100 percent to people with ARM loans that would have huge increases in payments in a couple of years
The increase in prices in the early and mid 2000’s was due to an increase in demand caused by loose lending guidelines. There were plenty of houses to buy because it was easy for builders to get financing to develop and build homes. Builders built homes as fast as they could because demand was so great for housing. Prices kept increasing, which allowed many home owners to refinance and take money out of their homes. They could use that money to buy cars, furniture or take vacations, which fueled the economy.
Everything came to a halt in the mid 2000’s when builders could not sell their homes as easily since there were not enough people to live in all the houses they built. The builders had to lower prices, many home owners had cashed out their equity, and everything started to fall apart. The banks went from lending to anyone, to only lending to the most qualified buyers and demand decreased greatly. Now we had an oversupply of homes and very few buyers who could get a loan. The market crashed because it had been built up through an unsustainable demand in housing, which was caused by loose lending guidelines. The economy was driven by home equity lines of credit, the housing industry and refinances.
How is the housing market different this time?
A lot of people assume we will see a housing crash again because prices have been increasing and that is what happened last time. Housing prices historically increase, and we have never seen a housing crisis like we saw 8 to 10 years ago. I think the market is fundamentally different from it was during the last crisis, and I feel the market is much more sustainable this time around.
From what I see in my market and many other markets around the country, housing prices are being pushed up by low supply. Yes, there are some loans that allow owner occupants to buy with less than a 600 credit score, but lending guidelines are much stricter than they were before. There are no longer 100 percent investor loans, stated income loans are very rare, and you cannot get a 120 percent line of credit. The U.S. government also cracked down on fraud, which helped fuel the housing price increase during the previous bubble.
There are many reasons the supply of homes is low in many parts of the country:
- It is much harder for builders to get financing from banks for large projects.
- The cost of building has increased greatly in the last ten years (about 37 percent).
- The cost of water, building permits and government costs has increased in the last ten years.
- Many builders are still worried about building too much and getting burned by another market downturn.
- Home owners are scared to sell their homes, because they are worried they will not be able to find another house to buy.
In my market in Colorado, they are actually building less in 2016 than they did in 2015, even though it is obvious to almost everyone in the area that there are not enough houses for the population. I wrote an article on why that is happening here. Even though housing prices have skyrocketed, so have building costs. Before the housing crisis they could build homes in the $170,000 range, but now new homes are at least $270,000. The builders are not taking $100,000 more in profit since water is more expensive, land is more expensive, labor is more expensive, and building materials are more expensive.
Even though prices are going up at an incredible rate in Colorado and many other parts of the country, I do not think it is unsustainable like it was during the last housing crisis. Prices are not being pushed up by a “false demand”, but by low supply.
How much have housing prices increased?
In Colorado, prices have increased more than 100 percent in less than five years. Prices have not increased that much across most of the country. When you actually look at the historic housing prices, U.S. prices are still below what they were in 2008. Here is a graph on the housing prices for the last ten years from Zillow. You can see the median value in the U.S. has not reached it’s peak from 2008.
When you look at the median value in Colorado, you can see a completely different story for housing prices. Prices have far surpassed the peak we saw in 2008 and you can also see that prices did not drop nearly as much as the U.S. as a whole.
If you are wondering if housing prices are at an unsustainable level, I think you need to look at the local housing market, not the U.S. as a whole. In Colorado we have an increasing population, one of the best economies in the country, and too few homes for the people moving in. Prices may seem completely out of whack when simply looking at the recent appreciation, but when you look at the driving factors it makes sense.
The U.S. has not reached the peak it reached in 2008 and is on a very healthy appreciation curve if you remove the housing bubble and housing crash.
How will interest rates affect housing prices?
It was brought up in one of the comments on this post that interest rates could have a huge affect on housing prices as well. I agree that low rates are helping to push housing prices higher, because lower rates mean people can afford a more expensive home. The big question is if and when will rates increase? I cannot answer that and I do not believe the experts can answer that either. They have been predicting rates will rise for years and they have not, at least not by much. I think the government has backed themselves into a corner by lowering rates so much to boost the economy. They do not want to raise them because it may hurt the economy and we could lose all the momentum we have gained. I think there is a chance rates could go up, but I do not think they will rise significantly, unless inflation starts to increase. If inflation increases that may mean wages and income increases which would make the cost of housing more affordable and balance out the higher interest rates. That is my theory, however I am not an economist or an expert on interest rates or inflation.
Real estate markets are all affected by local and national factors. While it may appear the housing market is increasing too fast in some markets, it may actually be sustainable based on the economy and supply of homes. Just because prices go up, it does not mean that prices have to come down. Historically they have always gone up, given enough time.
I know many real estate investors are waiting for another crash so that they can buy great deals again. I am a real estate investor and the housing market increase has been awesome for the rental properties I currently own in Colorado, but it has made it really hard to buy new rentals here that cash flow. I am not expecting a crash or to ever be able to buy houses as cheap as I could a few years go.