How Will Foothills Housing Fare in the Next Recession?
Our economy is cyclical, moving from expansion to contraction over an average of about every seven years. The latest growth cycle, starting in June of 2009, is now the longest in recorded history since the 1850s. If the current expansion endures to January 2020, it will mark the first calendar decade (the 2010s) without a recession.
The housing industry, or to be precise, the mortgage lending industry that provides liquidity for housing, was at the center of the last recession. Named by economists as “The Great Recession”, it was the deepest and cruelest since the Great Depression of the 1930s. It was caused by lenders making loans to non-creditworthy consumers and then packaging those loans into Collateral Debt Obligations (CDOs) and selling them as securities in the financial markets. When consumers found they could not afford their mortgages and discovered their homes had not appreciated in value, they walked away and let their properties fall into foreclosure.
With that in mind, it’s natural to wonder how the next recession—when it ever but inevitably comes—will affect housing. For the answer, we need to look at Denver’s economy and then the metro area’s housing market.
Denver’s economy is among the strongest in the nation. Its businesses are growing, labor is tight and the prospects for continued strength are positive. Technology and energy companies, with well-paid work forces, are moving to Denver, overshadowing other midwestern metropolises. Problems like traffic congestion and housing shortages are signs of the city struggling to accommodate the rapid growth.
A recent UBS Global Real Estate Bubble Index study ranked seven North American cities at high risk of seeing a real estate bubble in coming years. While San Francisco, Los Angeles, Chicago, New York and Boston were named, Denver was not on the list. Low affordability poses one of the biggest risks to property values in urban centers and Denver residents complain about high rent and home prices. But by comparison to these other cities, Denver’s housing market is healthy.
A housing market is in trouble when the supply of properties exceeds demand. The National Association of Realtors has found that a 6-month supply of housing units reflects a balanced market. The inventory of available homes in Denver is far below the demand required to meet a 6-month supply, meaning we have the opposite of a troubled market. Until demand falls or supply rises dramatically, our market should remain healthy.
The takeaway? The next recession will likely be caused by consumers cutting back on spending or businesses over-borrowing. But it won’t be caused by housing and the Denver real estate market, along with the foothills, is positioned to weather the storm without substantial damage.