How is the Colorado housing market at this time?

Happy Summer! I hope you are enjoying all of the outdoor activities our state has to offer. There has been no shortage of negative headlines regarding the struggling housing markets in Denver and Colorado. However, based on home price data, one could make the case that Colorado is in a better position that many areas.

Consider these factors:

Household formation and population growth continues at strong rates.
Investors continue to put capital into areas where they’re buying up foreclosed homes.
There are signs of stability in the market, although it’s likely that home prices will continue a slow decline in the near term.
Still, questions linger: Why did Colorado’s foreclosure woes begin early, and will we recover earlier?

Economy soft pre-bubble

First, a look at the economic foundation that led to a shaky housing market, but not the collapse that cratered so many other markets. Part of the reason that the bubble in home prices in Colorado was so small can be attributed to the fact that Colorado’s economy wasn’t all that strong during the inter-recessionary period of 2003-2008. Growth was moderate during this period. Some might even say it was lackluster.

Economic growth in Colorado underperformed the nation from 2002 to 2006 and only started to do better than the nation in 2007 and 2008. But by then, home prices had already peaked and were on their way down.

The labor markets during this period were not particularly excellent, either. During the 1990s, the unemployment rate in Colorado was below the national rate for almost the entire decade, often ranging from two to five percent.

But from 2002 to 2006, the Colorado unemployment rate essentially mirrored the national rate, ranging from four to six percent, and it wasn’t until 2007 that the Colorado unemployment rate even started to get close to the sort of low rates that had been common from 1995 to 2001. But by then, a new recession was on the horizon and home prices had stagnated. In 2008, the good times ended, with economic growth turning negative and joblessness accelerating.

Thus, it may be that one of the reasons we saw foreclosures rising in Colorado sooner that most of the nation was simply the fact that the Colorado economy and labor markets, during what was a bubble time for much of the nation, was relatively fragile in Colorado.

It’s not clear that Colorado suffered higher rates predatory lending or “creative financing” than other states. Nor was the pattern of housing development much different in Colorado when compared to, say, the suburbs of California or Arizona or Florida. So we’re left looking to the larger economic context to provide answers for why foreclosures accelerated here first.

Higher they rise, the bigger the fall

It’s possible that in Colorado, without the big run-ups in home prices during the middle part of the decade, it didn’t take as long for problems with negative equity to show up. With so few years of robust economic growth and job growth between the decade’s two recessions, problems may have manifested themselves sooner as home prices began to fall, wage growth flattened and joblessness rose.

Ultimately, the lack of a bubble saved Colorado from the enormous home price declines, strategic defaults and other issues associated with the popping of a very large bubble, but it may also have paved the way for foreclosures to surface here at a time when many other markets were experiencing unprecedented increases in housing demand and prices.

Will Colorado’s foreclosure woes end early after starting early? That’s not apparent yet. Although Colorado continues to show signs of stability in prices and in demand, foreclosures themselves do remain at extremely high levels by historical standards. Foreclosure filings have consistently declined each month for the past six months, but even at the current rate of decline foreclosure totals are likely to end the year at double what they were prior to 2005. This points to a need for a few more years of declines before foreclosure return to what might be considered a “normal level.”

The rate of decline is likely to be slow as well. With lenders and servicers processing foreclosures so slowly, it will take longer to move through the existing inventory we have. This problem isn’t unique to Colorado, of course, but it will have an effect here.

Colorado not immune to outside forces

Colorado real estate also is at the mercy of national and international credit markets, so if a globally or nationally weak economy continues to discourage real estate lending, Colorado will also feel the pinch.

On the other hand, Colorado continues to benefit from a desire among many Americans to relocate to Colorado. Population growth is relatively strong as is household formation. Mixing an increasing population with a small amount of new construction will undoubtedly help those who need to sell their houses to avoid foreclosure.

Job growth, however, will continue to be one of the biggest factors in driving down the foreclosure rate. Housing counselors report that job loss and income loss are the top reasons households go into foreclosure right now, and until we see the significant job gains that have eluded the state in recent years, foreclosures are likely to recede at a slow pace.