“The number of homes on the market surged, the number of sales dropped, and price reductions were abundant last month, all signs that buyers are pulling back in metro Denver” – Denver Post (September 6, 2018) citing the Denver Metro Association of Realtors.

Buy a home now if you must if you manage to qualify for one of the de facto sub-prime mortgages sponsored by the Government Taxpayer. But I guarantee that if you wait 6-12 months, you’ll be able to buy the same home or a better home for a lower price…

Denver has been one of the top-10 hottest housing markets in the past few years, largely driven by an enormous inflow of households moving to Denver from California. However, I started seeing signs developing of a market top that were similar to the indicators I noticed leading up to the popping of the last housing bubble.

As reported by the Denver Metro Association of Realtors (NAR-affiliate) single-family home sales dropped 7.5% in August from July and were down 9.8% from August 2017.Condo sales dropped 5% in August from July and fell 15.6% year over year. At least 30% of the sales were below the original listing price. The inventory of listed homes rose at a record rate for the month of August. Normally inventory from July to August drops a small amount.

Based on articles I encounter in my research or sent to me by subscribers, most if not all of the hottest markets are experiencing a similar development. The spokesman for the Denver affiliate of the National Association of Realtors, like a good salesman, attributes the declining sales to “push-back” from buyers. But, as you might well have expected, I disagree with that assessment.

As I’ve discussed previously, the Government lowered the bar on mortgage qualification requirements for its mortgage programs starting in 2015 in order to counter, what was then, a deteriorating housing market. The Government has lowered the bar on its guaranteed mortgages each successive year since 2015. A growing portion of the home-buyers using Government guaranteed mortgages would have been considered “sub-prime” in the previous mortgage/housing bubble.

In effect, the Government has kept “juicing” the housing market by enabling a larger population of people to buy a home that they otherwise could not afford unless they could get a low-down-payment, rate-subsidized, sub-prime quality Government mortgage. At some point, the limit will be reached on the number of people who can qualify under the current requirements. I would argue that the system is approaching that point.

The second factor in reduced buyer demand is the potential buyers who can qualify for and afford a mortgage from any issuer (Government or private-label) are starting to see a lot more inventory come on the market accompanied by falling prices. Many will hold off on the decision to sell their existing home and “move-up” in order to see if prices come down. It doesn’t take a genius to understand that the prices are going to go lower when you drive around desirable neighborhoods and see a lot of “for sale” signs.

Once the buyers are in full-retreat, we’ll start to see sellers get more aggressive on pricing and we’ll see motivated sellers panic. Similar to the last bubble, the motivated sellers will primarily be “investors” who are stuck with a home they can’t rent at a rate that covers their expenses and flippers who can’t sell at a price that covers the costs of buying the home and preparing it to flip. Just like 2008, this is when the “price wars” will start (as opposed to the buyer “bidding wars” in a bull market) and prices spiral south.

This is why the stock chart of the Dow Jones Home Construction Index looks like this:

The homebuilder stocks have been in a bear market since the end of January. Many homebuilders are down over 30% since then. If that fact surprises you, it’s likely because you get your news from CNBC, Bloomberg, Fox Biz or the Wall St Journal, none of which have reported the bear market in home construction stocks. This is just like the mid-2000’s bubble leading up to the financial crisis. The homebuilders peaked in July 2005 and were in a full-fledged bear market before 2007.