At the start of the year, I read an article about the 10 biggest threats to the global economy in 2020, written by a prestigious international organization. “Global pandemic” did not make the list, which goes to show how generally lousy we humans are at accurately predicting the future. As such, any predictions that I (or anyone else) could give you about how this pandemic will unfold, in terms of its impact on the local real estate market, would likely fare no better than random chance. Similarly, with the situation evolving so rapidly, any advice or best practices I could offer today may become obsolete in short order.
So, rather than peddle advice and predictions, let’s pause and take stock.
Back in 2008, the financial crisis was sparked in the real estate sector and led to a crisis that nearly collapsed the banking system. We see from history that recessions that begin in the housing sector tend to be worse and last longer than recessions ignited by other factors. Today, the recession we are likely heading into has a very different background — our economy and housing market were far stronger and more resilient, thanks in part to the measures put in place after that recession (tighter lending restrictions, more stringent liquidity requirements for banks, etc.). In fact, we were enjoying the longest economic expansion since WWII.
According to National Association of Realtors chief economist Dr. Lawrence Yun, “Conditions today are very different than the last boom/bust cycle. In 2004, we had a huge oversupply of new homes. In 2019, we still had a huge undersupply of new homes. In fact, we haven’t been building enough new homes to keep up with demand in over a decade. During the last downturn, there was the subprime factor and the variable interest rate. Now there are fewer variable rate mortgages and virtually no sub-prime mortgages.”
Colorado is well-positioned as a top economy nationally. Real GDP growth in Colorado ranked seventh in the nation year-over-year, and the state’s five-year average ranks fifth, according to economist Rich Wobbekind with CU-Boulder’s Leeds School of Business. Wobbekind says that Boulder County’s economy has been outgrowing the state economy, and is uniquely able to weather a recession. Boulder County’s economic vitality is fueled by a highly educated workforce and diverse ecosystem of industries including government research facilities, aerospace, biotechnology, cleantech, and information technology — industries that endure in the long term.
Boulder ranks number one in the nation for home value stability and growth for the fifth consecutive year, according to SmartAsset. As discussed in our recently published real estate report, based on our extensive data and market analysis, we have had a healthy housing market through 2019. Even through the grim days of the Great Recession, home prices in Boulder County declined only by 5 percent and recovered quickly post-recession. If you held onto your home for at least six years, there is no period when you would have lost money on your investment here.
While past performance is no guarantee of future results, the real estate market in our area has a history of weathering recent recessions better than other places and recovering more quickly after the storm has passed. Given everything that is going on, I still believe that owning property in Boulder Valley is and will continue to be an excellent investment.
Be well and do what you can to flatten the curve. Stay home.
A well-functioning market consists of two sides: suppliers who offer a particular good for sale and consumers who purchase those goods. In the Boulder Valley residential real estate market since 2012, there have been more consumers looking to buy homes than there were sellers offering homes for sale, which has led to a long appreciation period for homes. Now, however, it appears that the number of buyers is dropping as is their willingness to pay ever-increasing prices.
Spotting the trend
First, how do we know that there are fewer buyers in the market? The most direct measure of buyer activity that my company tracks (courtesy of Broker Associate Mike Malec) is the number of showings per available listing. From examining the data, it is fairly easy to see that this year’s showing activity is markedly below the recent boom years, but is still above the levels present during the recession.
Second, to further substantiate this decline in buyer activity, we can look at more indirect measures, such as average sales prices, available inventory of homes on the market, and average time a home will be on the market before sale. Each of these markers indicates a decline in buyer activity. Through May of this year, the average price of a single-family home in Boulder has fallen 0.6 percent, while the average attached unit has fallen 4 percent, compared to the same timeframe last year. This indicates that there are fewer buyers competing for available homes to the point where home appreciation rates have stalled. At the same time, the amount of homes available on the market has increased nearly 20 percent for single-family homes and almost 50 percent for attached ones, while the average time on the market for single family homes has gone up 5 percent and nearly 20 percent for attached ones. These statistics indicate that those buyers in the market are becoming choosier and are able to take their time making decisions.
Based on the above discussion, it seems that there are fewer buyers in the market and that those who are in the market are more cautious, but why?
It does not appear that our local economic conditions explain the drop in buyer activity. According to the State Demographer’s office, people are continuing to move into Boulder and Broomfield counties, albeit at a slower rate than previous years (though the city of Boulder has seen its population declining in the last two years). And local unemployment levels continue to be historically low.
Economic conditions at the national level are softening, to the point where the Fed is discussing interest rate cuts, so these conditions may play some role. But, interest rates are actually about half a percent lower than they were at this time last year, which would appear to weaken that argument.
Could it be the weather?
Another possible explanation I’ve heard is that our unusually cold and snow winter could have suppressed buyer demand as people were less willing to trudge through the snow to go see houses. While this is plausible, all else being equal, we would have expected to see that pent up demand being released as the weather improves, but we just have not seen that play out in the data yet.
Whatever the cause of the decline in buyer activity may be, local real estate legend Larry Kendall of the Group Inc. Real Estate in Fort Collins always says that buyers are the smartest people in the market, so they may be acting as the proverbial canary in a coal mine, meaning that they could be a leading indicator that our market is shifting from a seller’s market to either a balanced or buyer’s market. If you are a seller, be wary of pricing above the market in these shifting conditions.
Originally posted by Jay Kalinski is broker/owner of Re/Max of Boulder.
In this day and age, one could be forgiven for wondering if facts no longer matter or actions no longer have consequences. Whether one watches the national news or a local city council study session where members declare that they want fewer visitors (both tourists and locals from neighboring cities), it is clear we are living in strange times.
Despite all of the uncertainty, there are still a few facts left out there (at least where real estate is concerned), and from them we can draw some reasonable inferences.
1. Home prices throughout Boulder Valley are reaching all-time highs.
At the top of the list, the average single family home in:
- Boulder now costs over $1,250,000
- The suburban plains now costs almost $850,000
- Louisville and the suburban mountains now cost over $750,000
- Boulder County now costs $767,000
Likewise, the average attached home in:
- Boulder now costs over $540,000
- Louisville now costs over $400,000
- Longmont now costs over $350,000
- There are no places left in Boulder County or Broomfield where the average condo is less than $340,000.
2. Local housing inventory is at historic lows
The inventory of homes throughout Boulder County is at or near historic lows..
At the end of June, there were 858 single family homes on the market in Boulder County. To add some perspective, the inventory of homes on the market at the end of June 2006 was 2,763, more than three times as many homes as there are now. There are many reasons for this, including the fact that people are choosing to stay in place longer, increasing prices/lack of affordable places to move to, strong anti-growth policies, etc. Looking at the economic, political and structural factors at play, it appears that this scarce inventory is going to be the new normal.
3. Despite the high prices and low inventory, demand remains high
We gauge the strength of demand for homes using several indicators, including months’ of inventory, the average time a home spends on the market, and the number of expired listings (homes that failed to sell on the market).
Economists say that a balanced housing market has about six months’ of inventory, with more inventory being a buyer’s market and less being a seller’s market. At the end of June, Boulder County had about 3.3 months’ of inventory, compared to 3.8 at this time last year. In the first half of 2016, the average home spent 65 days on the market (from listing to closing). So far this year, that average is 57 days, 12.3 percent faster. Last year at this time, there were 33 expired listings, compared to only 26 this year, which is a drop of 21 percent.
Taken together, these factors demonstrate that demand is getting stronger, even in the face of rising prices and declining choices. And when you consider net migration to our area and plentiful jobs, it also appears that demand will keep increasing and homes will continue to appreciate until . . . when?
What is it that will cool our market and when will it happen?
There are several issues that have the potential to slow our market. First, interest rates continue to rise and as they do they will drain buyers’ purchasing power. Second, as prices have risen faster than wages over the last decade, there may come a point where home prices have to stall in order to allow buyers’ savings to catch up. Third, a macro-level event, such as a recession, international war, etc., could cool the entire economy and affect our market.
The set of variables is too complex to predict accurately what the precise cause(s) will be or when it will come, but it will come. The good news (if you own real estate here) is that there is no better place to invest in real estate than here — even in a downturn.
Jay Kalinski is broker/owner of Re/Max of Boulder.