Bankers’ Hours column: Overvalued markets don’t mean impending recession |

Bankers’ Hours column: Overvalued markets don’t mean impending recession

Pat Dalrymple
Bankers’ Hours
Pat Dalrymple

CoreLogic, a real estate research and service company, reports that “over half [of the 52] major U.S. housing markets are overvalued.”

And Denver’s one of them. This situation probably extends to the entire front range metroplex. So does it mean that we’re on the edge of 2008 all over again?

Probably not. The present state of affairs is a classic manifestation of the Law of Supply and Demand. When a desirable commodity is in short supply, demand always drives up cost beyond its intrinsic value, generally not too long before a compensating downward adjustment.

So maybe it’s time to sell, not buy.

But how bad will the downturn be, and when will it happen? Nobody knows for sure, despite what they may tell you. The big difference between 2008 and 2018 is that the majority of residential mortgage borrowers are qualified to service the debt. Another factor is that many markets then were overbuilt, not underbuilt, as they may be today.

In the run-up to the Great Meltdown of September 2008, billions of dollars worth of home loans had been made to borrowers who had neither the income or the assets to service the debt. The exit strategy was pretty much, “Honey, we’ll just sell the darn place for more than we paid for it if I don’t land that six-figure job.”

Since money was so easy to borrow, an awful lot of houses were built to take advantage of mortgage debt waiting to be dialed up. For example, many people bought houses with no intention of occupying them, believing that they could market the properties for considerably more than they paid for them without ever making a mortgage payment.

Such is not the case now. Since that dark day in the late summer of ’08, just about everybody who has qualified for a home loan was, at the time, qualified to make the payments. Barring a major recession, with corresponding loss of employment, there will be some hits on home equity, but not a crash. It’s interesting to note that, in the report, San Francisco, probably the most expensive metro housing market in the U.S., is not considered to be over-valued, since the area’s incomes tend to support high prices.

One reason that it’s tough to predict the timing and nature of the adjustment is that signs point to a sustained shortage in certain real estate market pricing tiers, most notably at the lower end; there’s more activity in the upper end — that is luxury and pre-luxury home construction — than in the entry level segment. Simply stated, people with money are enjoying the American dream of home ownership considerably more than those without money. Surprise, surprise!

And it’s not because builders and developers are ignoring lower income borrowers to cater to the rich. The creators of housing are entrepreneurs to their fingertips, and it’s very profitable to build hundreds of houses and sell them to newly formed households. Massive fortunes have been made doing this for almost 75 years.

Rather, today it generally just costs too much to build an affordable home. The price of all building materials are up. There aren’t enough skilled tradespeople — i.e. plumbers, electricians and carpenters — to keep labor costs down. And, of course, there simply aren’t enough laborers to do the rest of the work. Throw in sharply increasing land and infrastructure cost, it’s no wonder that the homes being constructed are big-ticket items.

There will be price adjustments in markets like Denver. Some residential homeowners’ equity will shrink, maybe even evaporate if they have a high-ratio loan, but there’s little reason to expect a crash and resulting endemic recession. Capital sources, from Fannie Mae and Freddie Mac, to Bank of America, to the Second National Bank of Downriver Montana, have kept the brakes on by carefully underwriting loans to assure that borrowers can pay them back.

So things are probably not as bad as some pundits may opine.

The American Dream of home ownership is alive and well. You just have to have more money if you’re a serious dreamer.

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is