July 17, 2005


Housing Goes Frothy to Flat in Denver Area (MOTOKO RICH, 7/17/05, NY Times)

Tom Woods, a 37-year-old defense industry consultant, wanted to build a nest egg for one of his young sons' college tuition. Inspired by rising prices for homes in this Denver suburb, three years ago he invested in a new three-bedroom townhouse for $155,000. His hopes were that renters would cover most of his mortgage and that the property's value would appreciate by at least $10,000 a year.

But last October, when Mr. Woods put the townhouse up for sale to help pay some unforeseen medical bills, there was more pain than gain: the house sat on the market for eight months. He finally found a buyer in June, but to seal the deal he had to make big concessions, including paying the buyer's closing costs. After handing over the keys on Friday, he ended up with a profit of just $10,000 for his three-year investment.

Even as prices for homes in frothy markets like Las Vegas; Riverside, Calif.; Miami; and Washington are still jumping by more than 20 percent a year, 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.

3% a year in a deflationary climate--one's heart bleeds...

Posted by Orrin Judd at July 17, 2005 1:56 PM

Since most home buyers are leveraged at least 9 to 1, that 3% is actually 30%.

There are plenty of people who are leveraged by 30 to 1.

Which works the other way, as well: When your Las Vegas townhome declines in value by 10%, your loss is 100%, or more, should you have to sell during the downturn.

But, doesn't this article cast doubt on the Oracle Orrin, who assures us that home prices can never decline ?

"Population growth" he utters, in basso profundo...

Posted by: Michael Herdegen at July 17, 2005 4:08 PM

He made $10,000 and probably only invested $30k or $40k of his own money. The horror...the horror.

Posted by: Patrick H at July 17, 2005 4:10 PM

The Denver-to-Colorado Springs corridor is the fastest growing exurb in the country. Home prices here aren't going to keep gaining 15% a year simply because so much new contruction is going up. That's bad for speculators, not so much for people looking for a place to live. Note the price, $155,000 for a three-bedroom place. In California you're probably looking at twice that, which is why people are coming here.

Posted by: joe shropshire at July 17, 2005 4:29 PM

There is a limit to how much people will pay for housing, if incomes do not increase. Interest rates can only go down so far.

Posted by: bart at July 17, 2005 4:39 PM

If incomes were to flatten it would still drive the housing boom given the global deflation.

Posted by: oj at July 17, 2005 4:58 PM

Since interest rates can't go any lower, monthly payments at current housing prices cannot go any lower. 'Global deflation' would reduce the price of housing in that circumstance, effectively ending the 'housing boom.'

Posted by: bart at July 17, 2005 5:01 PM

Home prices here aren't going to keep gaining 15% a year simply because so much new contruction is going up. That's bad for speculators, not so much for people looking for a place to live.

It's also, incidentally, good for Republicans and bad for Democrats. The growth of home prices in a state happens to be the best correlation for voting on a national level of any variable studied-- the higher the growth in housing costs, the bigger the Democratic vote in presidential elections. That's partially because a growth in housing costs is associated with wider income inequality.

While within a state the wealthier tend to vote Republican and the poorer Democratic, the middle class tend to vote Republican when they feel well-off and Democratic when they feel poorer.

Posted by: John Thacker at July 17, 2005 5:02 PM

Not only can go lower, will. They're artificially high right now.

Posted by: oj at July 17, 2005 5:05 PM


To the contrary, population would decline if we became secular and nativist like Europe and Asia. If Tom Tancredo or John Kerry wins in '08, sell your house.

Posted by: oj at July 17, 2005 5:22 PM


30 yr mortgages are at 5.25%. A bank needs to make 3 points in order to break even. They also need to pay the interest on CDs, borrowing at the discount window and from other banks. There's no place for rates to go but up.

John Thacker,

That is absolutely brilliant. In a million years, I never would have been able to put it so succinctly. NYC, Long Island, Northern NJ, Los Angeles, and the Bay Area all prove the point. Beautifully stated. Thank you.

Posted by: bart at July 17, 2005 5:26 PM


there's a global savings glut--people can't lend the money fast enough or cheap enough. the money will seek those who are willing to put it to use.

Posted by: oj at July 17, 2005 5:31 PM

At zero interest, people put it in the mattress or they go to Vegas and put it on 'Black.'

Posted by: bart at July 17, 2005 5:42 PM

John: I don't think you're quite right about party affiliation and housing prices. The big cities have been Democratic for decades. The Democrats have been anti-development for nearly as long, so supply hasn't come anywhere near to keeping up with demand. Therefore the already Democratic cities have housing markets characterized by insufficient supply and huge price increases. Surely your contention can be disproved by finding rural areas that still vote heavily Democratic?

Your statement about the middle-class I don't think is quite right either. My understanding is that studies after the Nov. election indicate that the dividing line between voting Dem and Rep is something like $23K/yr, and even among those below, you can predict which way a person votes by asking whether they believe the system is rigged against the poor or not.

Posted by: b at July 17, 2005 6:19 PM

Just got back from a weekend in Denver with the wife's cousins. They live in South Denver and are looking to buy in Castle Rock. Joe is right about the amount of construction.

Areas like that do not support housing bubble spikes. My home in central ohio is like that also.

Denver has at least 2 constraints on growth.

One is the Mountains in the West, which make construction and transportation difficult, but not impossible -- there were houses under construction on the road up to Mt. Evans until we got to forest service land.

The other is water, although it does not stop the City of Denver from running sprinklers in the medians of city streets on a hot afternoon.

Posted by: Robert Schwartz at July 17, 2005 7:10 PM


The water isn't nearly the constraint you think it is. Denver Water's main supply sits behind the Continental Divide, in the Colorado River basin.

The homes will start appreciating in higher rates again, as more businesses start fleeing California because they can't get housing for their workers. In the meantime, we got 'land, lots o' land, under starry skies above.' It'll be awhile before we're fenced in by high housing appreciation rates.

Posted by: Brad S at July 17, 2005 8:18 PM


Nope. The dividing line is not strictly $23k/year. It greatly differs by state. As mentioned, the poorer states mostly voted Republican. All ten or fifteen of the states with the highest increase in house prices voted Democratic.

Yes, the inner cities always vote Democratic. But we're talking about suburbs and exurbs here. Where suburbs with affordable housing and rapid development happen, middle class people can move there, buy a house, start a family, and feel like Republicans. In cities where development is choked off and housing doesn't get built, the same income buys a much smaller house that doesn't feel like part of the American Dream.

Posted by: John Thacker at July 17, 2005 8:22 PM


I don't agree with Steve Sailer on every issue, certainly, but he's done some impressive analysis on this, as have other people. Of course, he uses it to argue for why immigration should be restricted, to keep housing prices low. But of course.

Posted by: John Thacker at July 17, 2005 8:24 PM

Brad: Colorado and California are going to have a nuclear war about that water. OTOH, we have had 25 in. of rain already this year.

But you do have lots of land. There is nothing to stop Denver from growing until merges with Omaha. In this Denver is way ahead of any of the West Coast and most of the East Coast cities.

Posted by: Robert Schwartz at July 17, 2005 8:40 PM


0% is overly high in a deflationary environment.

Posted by: oj at July 17, 2005 8:59 PM

Robert, all we want from that water "nuclear war" is to reestablish our share of the water itself. Even during the 2002 drought, we let a lot of water go downstream we could not store. Fortunately, the latest compact Gale Norton (former CO Atty General) negotiated was significantly favorable to CO.

Speaking of land, next time you're here, drive the new tollway E-470. Note how relatively little of it is developed so far:) And the tollway is already exceeding projected VPD!

Posted by: Brad S at July 17, 2005 11:14 PM

The median home price in Manhattan is "merely" $775,000, and the average price is almost double that at $1.3 million.

Even a studio apartment sells for almost $400,000, while four-plus bedrooms run more than $10 million.

Posted by: Michael Herdegen at July 18, 2005 1:27 AM

Two anecdotes, take them for what they are worth. One of the DBAs I work with owns a rental property here in the Springs and another in Breckenridge. They haven't appreciated quite the way he'd hoped, but his renters are covering his mortgages. For his third he's eyeing places in St Thomas, U.S. Virgin Islands. John, says I. What the !@#$% are you thinking of, buying a place you have to get on an airplane if you want to go look at it? He fixes me with a look of beady-eyed disappointment. That's all covered in the business plan. If I didn't take such pity on you I might have to get upset. For all I know he knows what he's doing, though I regretfully decline his offer to invest a stray $10,000. At the other extreme you have my former boss, who lives on ten acres in Black Forest which he bought twelve years ago for some ridiculous price, under a hundred and fifty thousand for the house and the land. He's square in the path of the next wave of development, barring a nuclear holocaust there is no way he loses money, but put him in a room with a pencil and a paper clip and he'll convince himself that his well will run dry and he'll have to sell his children for medical experiments. My idiot neighbor. Is out there. Watering his lawn. With a garden hose. Half of it is blowing out onto the road. You tell him he'll be on city water in five years, it goes right in his one ear and right out his other. Basically we've made the transition from early boom to mid-trajectory boom; where eight or nine years ago we had the Carnival of Greed, now we have the Carnival of Greed Gnawed By Fear. It's a bit late for amateurs like Mr. Woods to make easy money, but professionals or people with more balls than brains will probably still do fine.

Posted by: joe shropshire at July 18, 2005 1:39 AM

"The median home price in Manhattan is "merely" $775,000, and the average price is almost double that at $1.3 million.

Even a studio apartment sells for almost $400,000, while four-plus bedrooms run more than $10 million."

The correct metric is $/ft.sq. Mannhattan properties in traditional middle class areas (e.g. not harlem) are averaging $1,000/ft.sq.

This is why the Plaza is being converted to condos. It is also significantly in excess of the cost of construction. (I am guessing $500/ft.sq.). This is also why my oldest daughter is moving to Brooklyn.

In the long run, and not even the one in which we are all dead, there will be major additions to the NYC housing stock. There is a proposal on the table to rezone the Brooklyn waterfront to residential properties. This could add thousands of desirable units to the stock.

5th Ave. and CPW will continue to be very expensive, but I believe the long run trend will be toward moderation of price increases.

Posted by: Robert Schwartz at July 18, 2005 11:35 AM


NY will never get rid of the #1 upward pressure on housing prices, rent control, and will never get rid of the #2 upward pressure on housing prices, low-income housing projects. Rent control creates a preferred class of tenants who stay in well-below market apartments that were they allowed to seek their level would increase the housing stock available to all.

Housing projects have destroyed middle income and upper working income neighborhoods all across the city by spreading urban blight for political reasons.

Getting rid of either will never happen.

Posted by: bart at July 18, 2005 3:23 PM

Bart: rent control is dying and just about dead. The rule adopted during the Gulliani administration, that apartments that rent for more than $2,000 a month are decontrolled has pretty much eliminated control in much of Mannhattan. Further, the exceptionally high rent/price ratio shows that the demand is all in the ownership area.

As for public housing, most of that is old. The real issue is controlling the criminals and the city seems to be on top of that one.

Posted by: Robert Schwartz at July 18, 2005 5:52 PM


Nonsense. I wish it were true, but I have family that pay $600/month for three bedroom apartments on Riverside Drive in the 80s.

If you've ever been to Far Rockaway or Coney Island, you would not be so sanguine about the criminals.

Posted by: bart at July 18, 2005 8:42 PM

"I have family that pay $600/month for three bedroom apartments on Riverside Drive in the 80s."

Yes, but there a dwindiling minority. They will not live forever.

Posted by: Robert Schwartz at July 18, 2005 8:47 PM