Denver is on the Edge of the Cliff

Three months ago I had a very "heated" debate with someone from Boulder, CO about how real estate is such a great investment and how prices will never go down. There was no talking sense into her as her reasons included familiar themes such as "this is God's country" (I thought that one was reserved for Marin; I guess not), "everyone wants to live here", "the weather is really good", "it's pretty", and so on and so forth. Well, according to this article Denver's real estate market may very well be a model for California and all the other bubble areas.

Some choice quotes:

"Denver's homeowners are learning the hard way about living through the real estate doldrums. Five years ago, median house prices were rising at an annual clip of nearly 17 percent. By the first quarter of 2005 the increase had slipped to 3 percent, according to an analysis by Economy.com, a research firm."

"Although sellers continue to profit, houses are sitting on the market longer, buyers are negotiating harder, and some owners, particularly young buyers who may have been counting on rapid appreciation, are postponing dreams of renovations, moves to larger homes and big savings for their families."

"With economists warning that prices in hot markets cannot continue to rise as sharply as they have in the past few years, the experience of Denver's homeowners may foreshadow what could happen if those markets start to cool."

David Lereah is the eternal real estate cheerleader --

""I think it's a good example of when a market softens, what happens," said David Lereah, the chief economist of the National Association of Realtors, a trade association. "You see double-digit price appreciation go down to 4 percent or even 1 percent, and then it starts coming back to a historical norm of between 4 and 6 percent. That's very healthy. That's wonderful. It beats inflation.""

"But many analysts take a gloomier perspective, suggesting that the most heated markets could suffer more than Denver's so-called soft landing. "I think Denver is a best-case scenario," said John H. Vogel Jr., adjunct professor of real estate at the Tuck School of Business at Dartmouth College."

The "buying up" cycle is broken (when first-time house buyers are out of the market, the entire market collapses):

"But for other homeowners, the calculus of the 1990's that might have led them to trade up quickly no longer applies. "When the market was strong, somebody would move up to a nicer home in two years because they had so much equity," said Karen Snyder, an owner of Metro Brokers Right Realty in Centennial, a suburb southeast of Denver. Now, she said, "they're just staying put.""

People are clueless about what has been happening. I guess they should have been reading more RE related blogs:

"Mr. Salazar, 30, said he was shocked that the house had appreciated so little. "I was thinking the market was going up because this is such a nice area," he said."

"Local analysts say it was inevitable that surging prices would not last."

Since when was this "inevitable"?! Everyone's been saying RE always goes up, it's the best investment one can make, yadda yadda yadda.

"In fact, analysts say the Denver market has remained as healthy as it has because of low mortgage rates as well as creative financing, including no-money-down and interest-only loans. Interest-only loans have accounted for a high rate - 42 percent - of purchase loans over $360,000 in Denver this year, according to LoanPerformance, a mortgage data firm."

"That unnerves some economists, who say that even with appreciation of less than 5 percent, Denver's housing prices may be overvalued."

""I think it is a very frothy market," said Tucker Hart Adams, the chief economist of the Rocky Mountain region for U. S. Bank, adding that those who bought homes with interest-only or variable-rate mortgages could be vulnerable. "When rates start moving up, they're going to see their payments go up," she said. "When people start getting nervous and start to sell, it's a downward spiral."

So what will be the catalyst for the Bay Area in general and Marin in particular? Or are we going to be just like the folks in Denver and believe our own stories about why we are special?