Metro Denver's housing market seems unstoppable, setting record after record in the resale market and leading the country for the gain in pending new home sales. But the rising tide of COVID-19 cases and the economic disruption they will trigger are raising concerns about the staying power of the housing recovery both here and across the country.
"If there is a nationwide lockdown, it will be very harmful to the economy, a devastating blow," Lawrence Yun, chief economist with the National Association of Realtors recently told the 2020 Realtors Conference & Expo. "We will have to face a second recession."
Existing-home sales in the U.S. rose for the fifth consecutive month in October to a seasonally adjusted annual rate of 6.85 million homes, which represents a 26.6% increase from the pace a year earlier and is the strongest pace since 2005, according to the NAR.
In Denver, home sales last month rose only 16.3%, but likely because buyers couldn't find enough to buy. The number of homes listed for sale at the end of October was down nearly 44% over the past year and the median price for a single-family home sold is up 14.3% over the year to $519,900, according to a report from the Denver Metro Association of Realtors.
Buyers are so desperate to find homes they are scouring obituaries and divorce filings to get an early start on potential listings, according to Money magazine.
And yet there are concerns that the market may have gotten ahead of itself, given the economic strain many households continue to suffer and the potential for another wave of job cuts.
"We will feel good when the election is resolved. We will feel good when we get another fiscal stimulus package. And we will feel good when there is a trusted vaccine," said Ali Wolf, chief economist with Zonda.
Another fiscal stimulus package remains in limbo. And while there is good news on the vaccine front, the vaccines won't arrive soon enough to forestall a record level of hospitalizations in the days ahead.
"Given all of these, we are at a higher risk of a double-dip recession than we have been in the past," Wolf said. And a double-dip recession, if one happens, won't be good for housing markets in the near-term.
Further out, the housing markets face the expiration of forbearance agreements which allowed struggling borrowers to skip up to 12 months of mortgage payments during the pandemic. Buyers who start paying again have the option of making up those missed payments over time or tacking them onto the end of the mortgage.
But those who still can't make the mortgage when the agreements expire face a difficult predicament. They will likely be forced to sell. But Yun said the situation now is different than 12 years ago, when struggling homeowners were forced to sell into a glutted market where many homes weren't worth what was owed on them.
In metro Denver, there is less than a one month inventory of single-family homes available given the pace of sales, making it likely that buyers would quickly snap up any distressed homes that showed up.
Housing analysts are also closely watching for changes that might come with a Biden administration. One proposal his campaign floated in October was to provide first-time buyers an advance tax credit of up to $15,000 that they could bring to the closing table, making housing more accessible.
But there is another proposal, the elimination of 1031 Exchanges, that the industry finds troubling, Yun said. That tax break allows real estate investors to defer taxes on gains from a sale if they roll over the proceeds into a new investment.
It is especially popular with land developers, who take raw land, convert it into lots for homes, sell those lots, defer the gains and use the money to buy even more land and start the process all over. Removing the 1031 Exchange allowance could severely limit the supply of lots, and with it the supply of new homes, keeping the market constrained, Yun warned.
Lower interest rates resulting from the pandemic have boosted affordability and spurred a surge in demand. With supply tight, home prices have risen sharply to fill the gap. The greatest risk to the housing market going forward are rising interest rates, Yun said.
A spike in interest rates would shrink the pool of potential buyers and potentially drive down prices. But what might cause a spike? Unrestrained federal borrowing to stimulate the economy could cause bond investors to lose confidence, and an unexpected jump in inflation could send them running for the door.
Mark Vitner, a senior economist at Wells Fargo & Co., also speaking to the NAR conference, said that whenever the economy suffers an outside shock, shifts already underway get accelerated and traditional patterns get disrupted.
One shift that he expects will have staying power is the move away from large, expensive and dense coastal cities like New York, San Francisco, and Los Angeles and towards medium-sized cities in the mountain west, the southeast and Texas.
"Those shocks tend to result in paradigm shifts. Disruptions in one market tend to cause opportunities in others," Vitner said. He lists cities like Denver, Austin, Portland, Ore., and Charlotte, N.C., as places where the pandemic has opened up new opportunities.
"Housing has got the wind at its back longer term," he said, even if that means having to pass through some turbulent months this winter.
