In the heart of Denver, a quiet revolution is taking place. Home prices and rents are on the decline, a trend that has left both residents and economists scratching their heads. For 29-year-old Karl Baumgartner, an internal medicine resident, this shift has been a game-changer. “As a renter myself, I am ecstatic about the falling prices,” he shares, highlighting how he recently upgraded to a larger apartment with better amenities, a move that would have been unthinkable just a few months ago.
Baumgartner’s experience is not unique. Across Denver, young professionals are breathing a sigh of relief as their rental burdens ease. One of his friends even managed to renegotiate her lease, saving a staggering $500 per month. “With almost all of my friends being in a similar position at the beginning of our careers with plenty of debt, we are all very excited about the decrease,” Baumgartner notes. But as the dust settles on these personal victories, a bigger question looms: what do falling housing prices mean for the broader economy?
When Falling Prices Signal Economic Distress
The story of Detroit serves as a stark reminder of the darker side of declining home prices. Between 1990 and 2010, the city lost nearly a third of its residents, a exodus that triggered a massive drop in home prices. By 2007, houses in Detroit were cheaper than cars, a chilling testament to the city’s economic collapse. This wasn’t affordability born out of abundance; it was a symptom of deeper socioeconomic problems.
Daryl Fairweather, chief economist at Redfin, explains that falling home prices can make homeowners feel poorer, leading them to spend less. This phenomenon, known as the wealth effect can have ripple effects throughout the economy. Eric Zwick, an economist at the University of Chicago Booth School of Business, warns of an even more sinister consequence: debt. When home prices fall, many owners can end up “underwater,” owing more on their mortgages than their houses are worth. This scenario played out during the 2008 financial crisis, with devastating results.
“That created a kind of cascade of forced sales, further price declines, more people defaulting potentially, and then spillovers into the financial system, which then affected everybody,” Zwick says. The construction industry and city tax revenues also took a hit, illustrating the far-reaching impact of falling home prices.
The Silver Lining: When Falling Prices Boost the Economy
But falling housing prices aren’t always a harbinger of doom. In Denver’s case, the decline seems to be a result of increased supply, a development that economists generally view as a positive sign. The city has seen a surge in new housing units, particularly apartments, in recent years. This influx of supply is helping to ease the housing affordability crisis that has plagued many U.S. cities.
Misha Fisher, chief economist at Zillow, suggests that cheaper housing can free up income for other investments. “If people are spending 80% of their income on housing, that’s not leaving a lot left over to spend on other things,” he says. This increased disposable income can stimulate other sectors of the economy, from retail to entertainment.
Moreover, affordable housing can encourage family formation and civic engagement, behaviors that ultimately benefit the community. Zwick suggests that cheaper housing might help encourage family formation. When people are less worried about the cost of an extra bedroom or finding enough space for a family, they may be willing to have more kids. Over the long run, that could mean more workers and more taxpayers, which can ultimately benefit the economy.
Deciphering the Signs: How to Tell if Falling Prices Are Good or Bad
So, how can we tell when a decline in housing prices is a cause for celebration or concern? Economists suggest looking at several factors. First, why are prices falling? Is it due to an increase in supply or a decrease in demand? Fisher from Zillow says demand-driven price declines are often a bad sign, indicating broader economic problems. On the other hand, supply-driven declines are typically healthier.
Land values can also provide clues. Fairweather from Redfin explains that when a city’s economy is struggling, land values usually drop. But in a vibrant city with strong demand and increased housing supply, land values might rise even as housing prices fall. “You’re making better use of the land,” she says. “You’re getting the most economic value out of the land. That’s “
The size and speed of the price decline also matter. Gradual drops are usually manageable, but sharp, sudden declines can trigger widespread economic distress. In Denver’s case, the fall in prices doesn’t seem dramatic enough to push many homeowners underwater, suggesting that the city is experiencing the kind of housing affordability that economists hope for: more affordable housing without a broader economic downturn.
