Q&A: What's Happening With the Housing Market?

Since the start of the pandemic, a perfect storm has sent home prices soaring, as record low mortgage rates and remote work spurred Americans to move. And now, even as interest rates tick up, inventory is at a record low, driving prices even higher.

In February, the Denver housing market broke new records, reports the Denver Metro Association of Realtors. February saw only 4,193 new residential listings, making it the lowest February on record. Meanwhile, the median closing price of a home stood at $575,000, the highest number on record and a 6.48% increase from January.  

The DU Newsroom sat down with Ron Throupe, associate professor in the Franklin L. Burns School of Real Estate and Construction Management, to talk about the intricacies of the ever-changing housing market. The conversation has been edited for length and clarity. 

Do you think the housing market will cool soon?

I believe it’s going to be a strong spring and cool off mid to late summer. People who have made up their mind to purchase will this spring. But, the overall economics are not positive for the economy, and that’s going to make people hesitant going forward.

What’s driving the rapid increase in prices? 

Well, there are really two things. It’s costs (labor and materials), and also a lack of new housing supply, so this combines in driving up existing prices.

Are the current prices inflated due to the COVID-19 pandemic? 

It’s hard to decouple the pandemic with supply chain issues, material costs and labor shortages. The pandemic definitely contributed, but I can’t say it’s the only reason. When employers decided employees didn’t have to be in the office, people had more flexibility on where they were going to live and drove up suburban home prices.

Will inventory pick up to meet demand?

It will, but it takes time. You know, inventory is slow to respond. That coupled with the supply chain and labor costs, it just takes time to catch up.

Do you expect a market crash as in 2008?

No, I don't see that coming. A lot of times, we call them market shocks. People don't anticipate them and all of a sudden, they’re there. So, there’s always a chance of some market shock. And right now, somebody might think about some major war with Russia as a market shock. But unless we have something like that, I wouldn't expect it all. I'd expect a slowdown, while wages catch up over time.

In the last decade, the median home price rose roughly 30%, while incomes only increased around 11%, according to a Bankrate analysis. And that disparity over the last 50 years is even worse: After accounting for inflation, home prices have jumped 118%, while income increased just 11%. Simply put, some people will never be able to afford to buy a home. Is there a solution to the housing crisis? 

There’s no one solution. It’s going to have to be a group of items for getting people into property. It’s not one size fits all. Some of it is government programs. Some of it is cooperation. They need to expand on existing programs and other programs to fit different needs. Sometimes it’s just a matter of time for wages to catch up to price increases on homes. You may have house prices surge for several years and then get sluggish. Part of that is wages need to catch up to the price increases on homes. It takes many years for wages to increase to get back to the same affordability. 

We often hear about the advantages to owning vs renting. But what are the advantages of renting?

You don't have the maintenance cost of ownership. There’s a lot of hidden cost in ownership as far as maintenance of properties, buying yard tools and lawnmowers and those types of things. You’re not paying the property insurance or the real estate property taxes on a yearly basis. And you have the flexibility to leave at the end of your lease. You’re not tied into it in one location if your life changes.

How accurate are Zillow’s Zestimates?

Well, I wouldn’t count on that as being accurate. They even disclosed that it’s not supposed to be used as an appraisal because of accuracy concerns in the past. It’s a good starting point if you’re looking for properties that sold in your market area and do some investigation on your own.

What can’t the Zestimate account for?

Well, many times those Zestimates are based on tax assessor data. And if there have been changes to the property such as finishing a basement, that might not be in the database at the assessor. Therefore, Zillow’s not going to pick it up either.

Even homes that need a lot of work seem to still be sold at really high prices in Denver. Is that specific to Denver? Does it have to do with the desirability of this city? 

It’s both. It’s going around nationally. You get a young couple or whatever the case may be, they could only afford so much, the bank has already told [them] how much they can afford. So, they’re having to look at those homes that need work, just because the price is the only price they can afford. And then, unfortunately, you have all those who can pay a little more and they’ve doing the same thing. They have more room in their budget, and it’s still a bidding war.

Now those bidding wars, you can expect those to continue until the number of buyers slows down. And we haven’t seen the slow down yet, but we anticipate it’s going to slow down here with interest rate increases going forward. Many economists think the interest rate movements will peak this fall. Rates are not going to fall, necessarily, but they’re not going to rise for years either.

What’s the average time you should hold a home before you sell?

Well, these days it’s about eight years. It used to be 10 years. So, 20 years ago it was 10 years, which made sense because then the mortgages would be tied or reflect the 10-year treasury, and the 10-year treasury would be the same length in time. Now, it’s a little less. So the 10-year becomes not as strong a predictor as it once was, even though it still is. But you got to live in a house long enough to recoup the costs of selling and recoup the costs of maintenance that you wouldn't have to do with a rental and then the transaction fees. You may have to pay bank fees, origination fees, appraisal fees, that type of thing. So you’re typically looking at roughly five years for it to make sense for you. Before that, unless you get lucky with a couple of big price appreciation years, likely leaving in less than five years doesn’t make financial sense.