Falling Home Prices: Denver’s Housing Market and Its Economic Impact

Home prices are declining in Denver and other areas across the nation. According to the S&P CoreLogic Case-Shiller Home Price Index, the Denver metro area is experiencing one of the most significant drops, with home prices down over 2% year-over-year. Rents have decreased even more sharply.

Karl Baumgartner, a 29-year-old internal medicine resident in Denver, writes about this trend. As a renter, he benefits from falling prices, having recently moved to a bigger apartment with better amenities that were previously unaffordable. One of his friends renegotiated her lease to save about $500 per month.

While falling rents favor renters, Baumgartner wonders about the broader economic implications. Negative inflation is typically detrimental for the economy, with a 2% annual inflation target being ideal. Is negative inflation in housing bad, or does it reflect an effective market with supply meeting demand?

Are Falling Prices Bad for the Economy?

Falling housing costs can signal economic health or distress. Higher prices tend to prompt more housing construction, increasing supply to meet demand, which can lower prices. The YIMBY movement supports this, advocating for fewer housing restrictions to enhance availability and affordability.

However, steep price falls can indicate economic problems. Detroit exemplifies this, where deindustrialization and social challenges led to a population drop and an 80% plunge in home prices during the 2000s housing bust. Economic collapse, not abundance, drove affordability, contributing to urban decay.

“Falling home prices can make homeowners feel poorer, causing them to spend less,” says Daryl Fairweather, Redfin’s chief economist.

The wealth effect describes this phenomenon. Moreover, falling prices can lead to mortgage issues, like being ‘underwater,’ escalating into crises as seen in the 2008 financial collapse. Loose lending standards prior worsened the impact.

Home price declines can also affect important sectors like construction and city tax revenues, showing potential downsides.

When Falling Prices Are Beneficial

Nonetheless, falling housing costs might be advantageous, evident among Denver renters. Cities with economic growth but limited housing development face affordability challenges, stalling economic progress.

Research by economists Chang-Tai Hsieh and Enrico Moretti highlighted stringent housing limits in areas like the San Francisco Bay Area hindering worker mobility, impacting U.S. economic growth.

Kevin Matthews from Denver YIMBY points to affordable housing as vital for economic expansion. High housing costs deter talent from relocating to job-rich areas, slowing business growth.

Misha Fisher, Zillow’s chief economist, argues cheaper housing frees income for other investments, boosting economic activities.

Affordable housing can improve family formation and community engagement, benefiting economic growth. More affordable housing raises potential for civic engagement and neighborhood investment.

Determining Good vs. Bad Price Declines

Understanding whether price falls reflect economic health involves analyzing supply increases versus demand decreases. Fisher advises that demand-driven declines often signify underlying issues like economic downturns or adverse local changes.

“Land values provide another clue,” explains Fairweather from Redfin.

Rising land values concurrent with price falls suggest economic vibrancy, with efficient land use increasing housing capacity. The ‘price to income’ ratio helps gauge whether price falls align positively with income trends.

Gradual, steady declines are generally sustainable, avoiding severe economic distress, unlike abrupt, large drops. Research suggests adjusting housing prices in real terms offers affordabilty with minimal disruption.

Denver’s case appears driven by increased housing supply, particularly new apartments, indicating a largely positive scenario. Despite slow migration changes, experts note no significant alarms in Denver.

Karl Baumgartner’s situation reflects broader relief for Denver renters. Denver may illustrate the ideal affordable housing approach without severe economic issues.