In this morning's Rocky Mountain News a reader thinks he has the answer.  John A. McElroth of Arvada blames it on "the builders, mortgage people and real estate people" who "did it to themselves."  He thinks real estate is "booming," and cites an article he read somewhere that says mortgage people and builders conspire to raise new home prices, and real estate people talk sellers into higher prices.

Mr. McElroth seems not to have the facts straight.  Real estate in the Denver area did boom in the 90s during a time when we thought our economy was on a non-stop path to eternal prosperity.  A house went on the market and buyers outbid each other to buy it.  Homeowners refinanced their mortgages at the drop of an eighth of a point, paying huge fees in closing costs and extending their loans another 30 years, spending the proceeds on remodeling, vacations, cars and anything else they wanted.  Everything was at a fever pitch.  And prices DID rise.

But in 2001 everything came to a sudden halt.  The Colorado economy began to tank, largely due to the bursting of the dot.com bubble.  Jobs were lost.  A steady stream of relocating home buyers slowed to a trickle and the housing market felt the repercussions.  And what had been a solid sellers' market in the 90s turned on a dime in 2001 into a buyer's market which continues today.

When sellers tried to sell for double-digit increases over what they paid, it wasn't so much real estate people who encouraged them, but the experience of having faced significant increases when they themselves purchased.  They didn't understand the market, and sellers bent on getting more than they paid are hard to convince to list their homes at TODAY'S market price.  If real estate agents didn't promise to list their homes at the price the sellers insisted on, the agent wouldn't get the listing. 

Agents did try to get home sellers to list at a reasonable price, but sellers didn't believe their house wouldn't sell for 10-25% more than they paid for it.  So agents listed at the inflated price and told sellers they'd have to lower the price if it didn't sell within x number of days.  By the time sellers experienced the reality of the market, the listing was "tired," meaning people looking to buy a house in that price range saw that it had been on the market for awhile, the price was too high for what comparable houses had sold for, and they walked away.  In droves.  Which left a high inventory and a dwindling number of buyers.  The laws of the marketplace -- supply and demand -- caught up with these sellers and they were forced to lower prices.  Meanwhile buyers were getting houses at bargain prices, and sellers were offering incentives to get buyers to buy.

Meanwhile, people who had signed up for Adjustable Rate Mortgages (ARMs) and didn't have the money to refinance before rates went up, lost out when rates DID go up and their payments increased.  (Another story.)  Other buyers had chosen other risky loans, and still others were fleeced by some unscrupulous mortgage brokers.  By 2005 Colorado had the highest rate of foreclosures in the nation, which just added to the inventory.

Doubtless there are other facts that contributed to the housing slump, but in basic outline that's what happened.

Comments welcome!

For further information or for questions contact Judith Clausen at Buyers Advantage Real Estate of Metro Denver, 303-587-3509.