Rundles Wrapup: The economic death pledge in Denver

Lately, mortgages have been on my mind. I remember long ago writing about the topic and discovering that the word mortgage, from the Old French and ultimately Latin, literally means “death pledge.” An odd etymology — you’d think the word “mortgage” would have been better suited to describe marriage, considering that “’til death us do part” is the traditional vow. Maybe medieval French etymologists had a premonition about marriage in the latter part of the millennium and decided it was inappropriate.

Or better yet, perhaps they had a premonition of Denver and Colorado in the 21st century: places where the traditional ability to acquire home financing would go through death throes.

A recent report on home affordability conducted by the real estate research firm ATTOM Data Solutions notes that of the 12 counties in the United States where home affordability is at its lowest level – ever – seven of the counties are in northern Colorado, with four in the Denver metro area. The measurement used was the percentage of homeowners’ wages it would take to pay a mortgage and related costs – traditionally thought of as optimal in the 25 percent to 30 percent range. Today in Denver and the Front Range, we’re looking at percentages exceeding 40 percent and even 50 percent, based on median home prices and median local wages.

In other words, housing prices have skyrocketed so far out of whack that we’re at the tipping point of where people simply can’t afford to buy the American Dream. This is not a good thing for the Colorado economy, as there are only two possible outcomes:

1) out-migration; people will move away to more affordable communities and, importantly, companies (employers) will do the same so their employees can afford to own homes and raise families on the wages provided; 

2) urban sprawl; home builders will buy up cheaper land on the far, far reaches on the metro areas to build more affordable, desired housing.

Neither scenario is good, and both would have a negative impact on current housing values, not to mention the ability to sell here and out-migrate to either developable farmland or more moderately priced communities in Nebraska, Kansas, Texas or wherever. Both of these things have happened before, right here in Colorado.

I marvel at the price of even modest homes these days. Bungalows in Denver, even in marginal neighborhoods, are going for $400,000 and up. How can the average young couple, including relatively well-paid ones, think about saving up the expected $80,000 down payment required in modern mortgages, much less make the mortgage payments if it eats up anywhere close to 40 percent of income? By the time they get all their ducks in a row, they will be dead; thus the term “mortgage,” I guess. 

When I was a young man looking to buy my first house, I got one of those bungalows for around $50,000. Using standard inflation calculators, that 1,000-square-foot house I bought in 1980 in today’s dollars should be something like $160,000, but I looked it up on Zillow, and the Zestimate is $451,000. As my wife and I have joked for some time, if we were looking to buy today, we couldn’t afford to live in our own neighborhood, only now it’s fairly clear that we couldn’t afford to live in almost any neighborhood in a 150-mile radius. And believe me, we have talked seriously about moving far away.

Over the years, I have seen the ups and downs of the real estate market, and I have personally taken a hit in a down market and also benefited from the spikes. But I have to observe, with years of perspective: There is no way these prices can go much higher, and I’m pretty sure a flattening and probably a downturn are on the near horizon. Indeed, it’s already happening in the $500,000-plus market, and the “average” home is almost there.

I wish I could offer a solution, but all I have is this warning. Given the current American economy, with wages flat and interest rates on the rise, a West Coast-style “trophy” housing market (which an ATTOM spokesman said Denver is approaching) in these environs is unsustainable.

I hate to say it, but Denver’s economic boom, which has created this crazy housing market, might be nearly dead.

Thus the term “mortgage.”