I found myself in something of a debate with a family member (who lives in Denver, like much of my family) regarding whether it was dangerous to purchase a new house in the area. The housing market in general is flashing some mixed signals. Mortgage applications are increasing as are permits, which are good indicators that there is a solid pipeline of buyers if not inventory. Homebuilder sentiment just posted its first decline of the year today, however, which will almost certainly be used by the Federal Reserve to justify lowering interest rates.
If you want a particularly frightening perspective on housing in specific locations, look at the most recent quarterly data on housing prices in Texas and Colorado.
One can say that a financial bubble is a fairly subjective term. It would be hard to argue that prices that are more than 50% above the last cyclical peak is not a bubble though. And several large metro areas in flyover country are well, well, well beyond that threshold:
Median home prices in 73 of the 123 metro areas analyzed in the report (59 percent) were above pre-recession peaks in the first quarter of 2019, led by Greeley, Colorado (79 percent above); Denver, Colorado (68 percent above); Fort Collins, Colorado (67 percent above); Austin, Texas (62 percent above); and Dallas, Texas (58 percent above).
Including Denver, Austin and Dallas, other major metros with at least 1 million people and with Q1 2019 median home prices at least 40 percent above pre-recession peaks were Nashville, Tennessee (55 percent above); San Antonio, Texas (49 percent above); San Jose, California (43 percent above); Houston, Texas (43 percent above); and Kansas City, Missouri (41 percent above).
Median home prices in 49 of the 123 metro areas analyzed in the report (40 percent) were still below pre-recession peaks in the first quarter of 2019, led by York-Hanover, Pennsylvania (56 percent below); Trenton, New Jersey (35 percent below); Atlantic City, New Jersey (32 percent below); Bridgeport-Stamford-Norwalk, Connecticut (28 percent below); and New Haven, Connecticut (22 percent below).
Those major metros with at least 1 million people and with Q1 2019 median home prices at least 10 percent below pre-recession peaks were Hartford, Connecticut (17 percent below); Philadelphia, Pennsylvania (15 percent below); Chicago, Illinois (14 percent below); Baltimore, Maryland (13 percent below); Miami, Florida (12 percent below); Washington, D.C. (10 percent below); and Birmingham, Alabama (10 percent below).
So while most of the largest metropolitan areas in the country are expensive, they are still fairly in line with past cycles. Places like Denver are almost 70% beyond the last cycle. This means if you see a serious reversion to the norm in coming years, relatively new homebuyers are going to be underwater in the sort of way that ruins normal people’s financial lives for a decade.
This is something of a catch-22 for our country’s economic engineers. If the Fed lowers interest rates in part to stimulate housing, it is mostly just postponing bursting these financial bubbles temporarily. This ultimately contributes to, instead of reducing, financial stability.
Seeing data like this does make me worry about the current state of politics. We have unquestionably been reaping the rewards of a very pro-business government that has been bringing domestic investment back. A sharp swing in the opposite direction coupled with fragile situations like this is indeed a recipe for a serious financial disaster. And there’s clear data now where the epicenters of such a disaster might be – not on Wall Street, but in the Heartland. Will it affect the policy response that the people most impacted also have the least political influence in Washington DC?