Denver Post file Metro Denver and other parts of the northern Front Range have enjoyed some of the strongest home price gains this decade, leaving many homeowners “equity-rich.”
Home values in metro Denver appear to have peaked last summer and are heading lower for the first time in seven years. That may provoke a sense of dread for those who struggled to stay afloat during the last housing downturn or lost everything in a foreclosure.
But on the whole, most homeowners along the northern Front Range have built a thick equity cushion, one that should help them weather whatever storm is coming.
“Denver has continued to maintain a healthy housing market with the percent of seriously underwater properties being some of the lowest in the nation,” said Jennifer von Pohlmann, director of content for ATTOM Data Solutions, a real estate data provider based in Irvine, Calif.
Metro Denver and other parts of the northern Front Range have enjoyed some of the strongest home price gains this decade, enough so that around 35 percent of mortgage borrowers in metro Denver are “equity-rich,” meaning their homes are worth at least twice as much as what is owed on the property, according to ATTOM.
Nationally, that ratio is closer to 25 percent. And there are some areas where half or more of the homes are equity-rich, meaning they could survive a 50 percent drop in prices and make the lender whole. Boulder has three ZIP codes that are the richest of the equity-rich: 80302, 80301, 80305. Louisville, the older part of Longmont, Lafayette and Superior all have high equity cushions, although not as high as Boulder’s.
Denver’s 80216 ZIP also is above 50 percent in terms of equity-rich properties and most parts of Denver are in the 40 percent range, with a few exceptions. The older parts of Aurora have stored up equity, while newer areas to the east and south lag the metro averages. The more established cities in Jefferson County and the corridor up U.S. 285 have higher equity levels, as do the older parts of Littleton and Englewood.
Farther out, Dillon, Breckenridge and Silverthorne have equity-rich shares above 45 percent. Telluride, Winter Park, Salida and Crested Butte are also leaders in accumulated equity.
“The component of a home which gains value over time is the land it sits on, even for condos. The enemy of appreciation is new subdivision of land — builders bringing brand-new homes to market at the same price or a little above last year’s homes, which are now second-hand,” said Lou Barnes, a loan officer with Premier Mortgage Group in Boulder.
The availability of land combined with new construction is associated with less overall equity. New buyers simply have had less time to pay down their loans and reap the benefit of price gains over time. Plus, a lot of construction in an area will tend to cap price appreciation given all the new supply coming onto the market.
The northern Interstate 25 corridor from Wellington down to Timnath, Windsor, Johnstown, Firestone and Dacono all have owners with smaller equity cushions. Brighton’s 80602, northern Commerce City and the eastern edge of Aurora have equity-rich rates at 20 percent or lower, as does Castle Rock. And in Denver, Stapleton’s 80238 ZIP stands out like a sore thumb. Equity-rich households represent only a fifth of the total.
Where homes are still underwater
Home equity represents the largest source of wealth for most households and it can provide a hedge in tough economic times. When home prices fell last decade and layoffs surged, those homeowners with equity were better able to avoid foreclosure.
They could sell without bringing money to the closing table or, if they had a steady income, wait out the downturn. Areas that suffered high foreclosures saw bigger price declines, unleashing a vicious cycle that forced more and more owners to fold.
Home equity helps in other ways. It can fund college tuition for the kids, a move to a more affordable market, or provide for a stable retirement. The average home seller in metro Denver was able to extract $135,000 last year, the highest amount in records going back to 2005, according to Pohlmann.
By contrast, one of the worst predicaments borrowers can find themselves in is needing to sell and owing more than what the home is worth. Only 1.67 percent of homeowners in Colorado and 1.3 percent of homeowners in metro Denver versus 4.2 percent nationally are underwater, according to CoreLogic. That works out to about nearly 18,000 mortgage borrowers in the metro area. It is a far cry from 2010, when about a fifth of homes with a mortgage had negative equity.
But after declining for years, the share of underwater mortgages started rising again in Colorado in the second half of 2018. And there are some areas that never shook off the last cycle.
Population declines, a decaying housing stock and a market with no home price appreciation can all contribute to chronic negative equity. Areas in the state with the highest share of underwater properties include Pueblo, Trinidad, Walsenburg, Meeker, Wiggins, Yuma, Wray and Olathe.
But there are a few surprises. Vail, Avon, Aspen and Snowmass Village also have some of the highest negative equity rates in Colorado.
“The mountain resorts were impacted by the housing bubble,” said Mike Budd, a broker associate with Berkshire Hathaway HomeServices in Edwards. “There was a downside of anywhere from a minimum of 25 percent and a maximum of just under 50 percent.”
Those who bought before 2005 likely have equity, as did those who bought at the market bottom during the start of the decade, he said.
Riley Warwick, an agent with Douglas Elliman Aspen, notes that many Pitkin County properties are purchased with cash. Those that aren’t often are bought with a big down payment, both because the owners can afford it and lenders demand it, Budd adds.
The result is that the state’s high-end resort areas have both higher rates of negative equity as well as a high share of equity-rich properties. Aspen’s 81611 is a case study. Among properties with a mortgage, 40.3 percent were equity rich, while 19.9 percent were underwater.
“The high negative equity is certainly a hangover from the 2008 downturn. That said, property values have steadily risen since 2012/2013,” said Warwick.
Why it won’t be as bad this time around
The ATTOM data would suggest that most homeowners in Colorado should be in good shape whenever the next recession hits. Unlike the early 2000s, fewer homeowners have treated their home equity like an ATM machine, draining it as quickly as they could to buy another home or support a higher lifestyle.
The poor loan underwriting standards and junk loans that were rampant last decade aren’t a factor this time around. And in the aggregate, mortgage debt hasn’t risen that much, Barnes notes.
About 63 percent of all residential properties in the U.S. carry a mortgage and between appreciation and principal payments, they saw equity rise 8.1 percent. That represents a gain of $678.4 billion last year or $9,700 per household nationally, according to CoreLogic. Colorado’s average gain in equity last year was much higher — $17,000.
But a segment of the population remains vulnerable — those who bought late in the cycle, with little money down and in areas with lots of new construction. If it seems that first-time buyers are hesitant to jump into the market even though prices are softening and inventory is rising, that could explain why.
Although the zero-down loans remain rare, there are some first-time buyers who have only put down 3 percent. If they did so last year, and the current drop in home prices continues, they could be at risk if they are forced to sell, said Ralph McLaughlin, deputy chief economist with CoreLogic.
“The homeowners who are most likely to be underwater are first-time buyers who put 3 percent to 5 percent down and bought during the peak season,” said McLaughlin.
Unloading a house will cost the seller commissions of around 5 percent to 6 percent of the sales prices, plus other closing costs. Combine a seasonal dip in prices, a low down payment and a short window of ownership, and a first-time buyer could unwittingly end up upside down.
Granted, most people don’t buy a home expecting to have to move out in a year. But LendingTree found that Denver homeowners have the fifth shortest tenures in a home, only 6.6 years. Hopping around might have worked out when home prices were rising at double-digit rates. But with gains slowing and declines an increasing possibility, today’s first-time buyers should prepare to hunker down for the long haul.