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Preamble

What follows is a detailed study of the Boulder area real estate market focused on revealing the present market conditions. The compilation of this study came out to be on the longish side, and I am sorry. I know it’s hip to blog but there is just no way to communicate this in three sentences which is apparently the limit on available attention span these days.

Ø Jump to the Conclusion at the end if you’re short on time/attention. Later read the in-between filler to impress your friends at cocktail parties.

Ø Just want the data details? See When a Flat Housing Market is Good and Real Estate Data sections.

Ø If you want to understand how and why housing prices go up or down see The Fundamentals and What Drives Housing Prices Higher.

Ø The story of the history and basis of the Boulder area housing market can be found in The Boulder Housing Market: A Story of Cycles.

Ø Glutton for details? Jump in below.

The Boulder Area Housing Market Revealed

By Paul Dart

Broker Associate at RE/MAX of Boulder, Inc

April 3^rd, 2009

Fear is dispelled by knowledge. Amid all the dark economic news from the national and local media it’s very easy to let yourself get sucked into the back hole of despair. If you’ve been watching TV, listening to the radio, reading the paper; it’s all so dramatic. Friends, coworkers and relatives are working to convince you that it’s all bad. Before you know it you’ve convinced yourself. Now you’re a talking ghost.

Somewhere along the line I couldn’t handle it any more. I was either moving to Mars or India. Just before I gave it all up though I stepped out of the media flame thrower to catch my breath. When my head cleared I realized I had a lot of fear and was living my life with pockets stuffed with it. In one way or another most of my clients were expressing that same fear; paralyzed that they would make a bad decision in buying or selling a home. No one wants to make a really stupid mistake. The question is pretty much the same. Buyer version: “What if I buy now and home values continue to go down?” Seller version: “Is the value of my house dropping every month?” My version: “Is anyone selling real estate on Mars?”

You’re afraid of something until you understand it. Then you can take appropriate action. So I set out to get that knowledge for my self and my clients. In the last several weeks I’ve been gathering data from trusted and reliable sources to work to understand the current state of the Boulder area housing market in the most objective way possible. I need to provide my clients with an honest answer to their questions. With objective information they’ll be better able to make their home buying or selling decisions. I also thought the data might suggest what we could anticipate as we begin our traditional selling season.

My research time-warped me back to the early 1960s where the foundation for the present Boulder housing market was laid. The story since then has been of a number of growth spurts spaced in between plateaus of relative price stability. How and why those cycles occurred lead me to the very unexpected and surprising present conditions of the Boulder area housing market. The resulting picture is both unanticipated and, in the face of the national economic picture and media reports, contrary to what most everyone believes.

Boulder Bucks the National Housing Trend (Again)

The condition of local economic factors and data from credible sources indicate that the current housing market in the Boulder area is in perhaps the most stable condition it has been in since the last great growth cycle of the 1990’s, definitely running counter to the current national housing cycle. And it’s not the first time our market has acted contrary to the national trend. Or the second. The details of this conclusion follow and are annotated with the data sources. Note that no data was harmed or spun to reach the findings contained in this report. My goal here is to provide objective information. Please feel free to independently fact-check as you wish. All sources are noted.

The Fundamentals

Before we begin, bear with me as we set the table with a few fundamentals. First, the natural economic state of real estate is stable. It doesn’t necessarily appreciate. (!!!) And, it will only do so when the there are at least a few more buyers than sellers, and only when local market conditions align to create that condition.

Second, keep in mind that each local real estate market throughout the country is first influenced by past and current events and circumstances in that local market. The national economic tide will affect a local market, but local real estate markets are a product of local conditions first, and are not perfect reflections of the national real estate market average. Said another way, the depth of the national housing picture, good or bad, is not the situation in every market in the nation.

Third, while the national economy is only one of the factors which influence a local market, there is no doubt that the current national and global economic situation is impacting the Boulder area housing market. As a nation we have a deep economic hole to climb out of, and it’s going to take some time and unprecedented steps by those in power to get us out. Yes, there will be lots of politicking involved, but that’s all a part of the process in this great nation. Fortunately the very best people we have are hard at work on the issues. Not withstanding the guy on the corner wearing the “The End Is Coming” sign, the national economy is too big to let fail. We will find a way out of this.

What Drives Housing Prices Higher

Let’s consider the elements for a surge in the price of housing in a local market. It includes accumulated purchasing power; buyers with money to spend. That occurs when housing values are stable (flat) for a number of years during which time incomes are rising at a rate of as little as a couple of a percent above inflation. Add to that low unemployment, and a low vacancy rate in rental housing. All of this will not move a housing market without the catalyst ingredient: people moving into the area or incoming migration. After several years of stability when these factors all fall into place, the price of housing is suddenly a bargain. The once stable market starts to accelerate as there isn’t enough housing inventory for the number of new buyers. Critical to the strength and potency of the resulting rise in prices is how limited the available stock of housing is. On the wide open flat lands of middle America there is practically no limit to how much new housing can be built to take-up the excess of buyers. The result is modest appreciation of prices before the market runs its natural course and returns to balance (stability) again. However if available housing and land are restricted by geographic or regulatory reasons, that additional influence will cause a steeper rise in housing prices. Keep this in mind when we talk specifically about the Boulder Area. The market will only continue to appreciate as long as the favorable conditions exist. At some point it will stabilize and return to a balance when buyers have found the houses they need, or other elements of the market shift to alter the balance. The most volatile markets (e.g. San Francisco) can accelerate so quickly they overshoot the natural balance and prices fall back some.

“Open Space”: A Home Owner’s Best Friend

To fully understand why the Boulder area housing market consistently out performs almost every other county in Colorado, you have to go back to an election that occurred forty eight years ago. In 1961 voters said “yes” to a tax designed to acquire “Open Space” lands throughout the county. In 1976 the city severely limited the number of new building permits issued each year. The county quickly followed with a combination of restrictive growth ordinances and codes. In a blink of an eye Boulder staked a claim to preserving the beautiful vistas and feel of this place, and limited the amount of land available to develop and what you could build on it. Then in 1971 Senate Bill 35 passed effectively eliminating the subdivision of land between cities. The dye was cast, and today the land available to build on in Boulder County is limited to scattered infill sites on which the county has tightened their restrictive growth ordinances. While the land here is plentiful and bucolic, where you can build is very limited. The effect is a acute shortage of land on which to expand the stock of housing. That turns out to be one of the most important factors which fosters solid appreciation of real estate over time.

The Boulder Housing Market: A Story of Cycles

The economic story in this area is all about cycles. Colorado’s economy is driven by agriculture, mining and tourism. We tend to do well in times of inflation when the national economy is in recession. So it was in 1970 through 1983 when Boulder ran counter to the national trend. The sustained boom was largely fueled by an incoming migration running 2% of the Colorado population per year. That’s a lot of new people. The energy bust and Savings and Loan scandal of 1983 combined to bring that to a screeching halt. In-migration of people turned to out-migration and for the next eight years our market was flat. From 1983 through 1990 the nation was again in recession, but during that time incomes here were increasing at a couple of a percent above the rate of inflation and income available for people to buy housing accumulated. Home sales were down and housing inventory was at a low. Then low mortgage interest rates were triggered by the recession. (Keep both of these in mind later when we talk about the current Boulder area real estate stats.) The catalyst to our next contra-national cycle was a pick-up in people moving into the state (incoming migration) as we began to expand as a technology center. Measured against housing prices that hadn’t changed significantly in eight years that new buying power kicked-off a very healthy four year rise in prices starting in 1991. Because all the economic factors were authentic, when the cycle came to an end, the new housing prices were also authentic; and so held and remained stable. Equilibrium was reached in the mid 1990’s and the market again flattened.

Soon after however the High-Tech Gigasaurus rumbled on to the Front Range. Housing prices started to rise as people moved into the area. We woke up one day to the headline that the Boulder-Longmont corridor had the highest concentration of high tech workers per capita in the nation. Housing inventory ran short, prices were forced up, and in the east part of the county Erie, Longmont and Broomfield annexed huge tracts for new builders to soak up the buyers. But this cycle had not begun with all of the economic factors in harmony. Incoming migration and the new incomes had forced the growth; the equation was not in balance. Not enough time had passed for authentic income support for housing to accumulate to support another period of rapidly rising prices. In 2001 the infamous tech bubble burst and 100,000 jobs in the greater metro area vanished, 40% of those in Boulder County alone. The shocking events of Sept. 11^th followed weeks later fueling further insecurity. Prices had over-shot real value and the housing market lurched to a halt. The greatest effect was felt at the upper end of the market as the highest price ranges collapsed in the ranges below starting a domino effect that finally came to a stop just around $850,000. The rest of the housing market flattened out.

In the ensuing eight years as the dust settled in the greater Boulder area housing market, several housing markets in the nation took-off, notably Tampa, Los Angeles, Las Vegas and Phoenix. This market however seemed stuck in the Doldrums. The new home developments in the east part of the county and beyond struggled to keep their heads above water and several disappeared from view. The million-plus dollar market slowed its price slide but has struggled to make up any new ground. Some price ranges and neighborhoods even showed some modest growth, but on the whole the market was stable: not appreciating and not falling. In 2004 the number of houses on the market here peaked and began to decline. Then in mid-2007 the national economy tipped over after a wild binge consuming huge quantities of sub-prime loans chopped up into little pieces and securitized into investments. Like pork left out on a summer day, it was only a matter of time before the whole mess turned toxic, poisoning the entire investment system. We all know the results.

When a Flat Housing Market is Good

What then is the current state of the Boulder area housing market? Let’s check each of the fundamental elements that influence the housing picture.

· Employment. By 2005 the larger Denver metro economy had recovered those 100,000 tech jobs. There have been job losses locally- IBM, Sun Micro Systems and Seagate most recently- but some off-setting gains have been made with companies like Covidien, Rally Software and GE Energy. The unemployment rate in the Boulder MSA is low at just 5.8% with Colorado’s average at 6.6%. In contrast the national rate is at 7.2% with California’s rising 9/10ths of a percent in December alone to 10.1%. (Denver Post)

Employers. Those jobs are now thriving in a broadly diversified business and industrial base. This has broadened stability. The concentration of job employers includes clean technology, natural/organic, outdoor active living, data storage, aerospace, bioscience, nanotech and photronics. In the City of Boulder no industry represents more than 20% of the jobs. Add to that the commitment of one of the largest energy companies on the planet, Conoco/Philips, to occupy the old Storage Technology site in Louisville. There they will build their world wide training headquarters and research facility for alternative fuels. Build-out and ramp-up to peak employment (7000!) is several years out, but consider the exponential vote of confidence for the existing economic foundation of this area. The due diligence of huge corporations like C/P is mind-numbing. Innumerable factors and numbers are crunched before making a move of this magnitude. Among other factors: an area’s geographic location, major air transportation access, general economy, available work force, housing stock, quality of schools, cost of living and long term stability. Their choice of this location over any other in the United States is a billboard sized vote of confidence that extends for years to come. Companies of complementing interests and others seeking a similar environment take notice and often follow suit. (Boulder Economic Council)
Housing Supply. The number of houses on the Boulder area market is the lowest it has been since 2004. The housing market nationally peaked in 2007. (Boulder Area Realtor Association, National Association of Realtors)
Housing Prices. In most price ranges the price of housing has remained largely as it was priced in 2001, less if over $1,000,000. Some price ranges in the lower third of the market have appreciated. (Boulder Area Realtor Association, National Association of Realtors)
Rental Market. Rental vacancy is in the low single digits in Boulder with rents rising significantly since 2006. (Boulder Daily Camera 3-20-09)
Availability of Land. The supply of land available to build on in this area continues to become more limited. That which is available is subject to tightened regulation. See Open Space and conservation easement holdings of Boulder County and the City of Boulder Mountain Parks, and Boulder County limits on home sizes.
Foreclosure Trend. The numbers of area foreclosures has been dropping steadily in the last two years. (Denver Post)
Income Support. Buying power for housing has been accumulating at a couple of percent over the rate of inflation since 2001.
Interest Rates. Mortgage interest rates are fractionally off historic lows.
Schools. Let’s not forget the attraction of the public schools that make up the districts in this area in addition to the number and quality of private schools. Every district has an underperformer, but on the whole the schools in this area perform at a very high level and are very attractive to families moving here.
Finally, the catalyst: Incoming Migration. Colorado is in the top 5 in the nation for population growth.

http://dola.colorado.gov/dlg/demog/population/components/components.pdf

It is apparent that during the eight year period of flat growth the local housing market fundamentals here have been recovering. Conditions specific to this market place kept us from growing while other markets accelerated, but as the national economic effects batter those once high markets, the Boulder area is as stable and balanced as it has ever been in its history of cycles.

Real Estate Data

Significantly, the number of sales in the Boulder area peaked in 2004, three years ahead of the 2007 peak nationally. While the housing market here has slowed, it has done so at a measured pace since 2004 with housing inventory following suit. Sales numbers in our market were down year-over-year in 2008 by 15%. But our saving grace has been that inventory of homes, which has been falling since 2004, has shadowed the decline in sales, down 12% last year. That puts us in the enviable position of having remarkably stable prices.
In FHFA’s (Federal Housing Finance Authority, formally the Office of Federal Housing Enterprise Oversight or OFHEO) Top 20 Metropolitan Statistical Area and Divisions with the Highest Rates of House Price Appreciation, the Boulder MSA is ranked 17^th in the nation for appreciation at 2.99% in 2008. http://www.fhfa.gov/webfiles/1280/4q08hpi.pdf, page 28. That includes the dragging effect of houses priced over $1 million. On February 24, 2009 Standard & Poor’s and Fiserv released data showing that home prices in the greater Denver metro area were down just 4%. Those areas that took-off after 2001? Tampa -22%, Los Angeles -26.4%, Las Vegas -33% and Phoenix -34%. 3% appreciation here looks pretty great in comparison.

This market is not overburdened by For Sale signs, leaving a good balance of buyers and sellers on average. I’ll be especially watching our first quarter showings and new inventory numbers, and when and how much comes on to the market.

Price ranges that don’t have a balanced supply of buyers have come down. Any property over $1 million faces a stiff headwind of a lack of reasonably priced jumbo loans (over the $417,000 conforming loan cap) more than it does a dearth of buyers. The credit markets have to loosen-up for these price ranges to begin to recover. The Showings per Listing data and Absorption Rates illustrate this sharply. (See attached data) The lower price levels however are ticking right along getting the lion’s share of the showings with absorption rates around 5-6 months, which by definition is a positive market. And we’re seeing an increasing frequency of competing offers in these price ranges. (!!!) In the Boulder Area Realtor Association 4^th Quarter data (attached) you will see declines both average and median prices for most areas with a few surprising exceptions. More robust areas include Louisville, Superior and Erie. Yes, Erie. In comparison to the national picture, the drops in home values in the greater Boulder area to date have been incredibly fractional.

Conclusion

The national picture is dark. But not the market here. The picture emerging is a local real estate market demonstrating a good deal of fundamental stability, poised to grow even as the national economy struggles to recover. While there can be no doubt the national economic situation is very serious and will take a great deal of time, attention and money to return to a balance, the local Boulder area housing market is showing core strength and stability. If not for the depth of the national downturn this market may have been well into its third counter cycle rally, founded in solid local economic components. Economic factors will change, but those in place now in this area were forged in an eight year cycle of no growth while other markets took off on speculation fueled by subprime and stated income loans. Indeed some say those last eight years were our saving grace. At the worst, the current strength of this local housing market is acting as a buffer against the worst of the national state of affairs. The complaint we are hearing from our buyers is that there are not enough houses to see in their price ranges. There is pent-up demand in our housing market, poised to move when conditions nationally begin to turn.

Answer the Question

Let’s return to the question buyers are asking that started this investigation. Is it a safe time to buy real estate in the Boulder area? Safety is a very individual concept. Our sense of security is tied to how we see the world and to the circumstances of our lives. Only you can make yourself comfortable, or not, with the data above. Perhaps a better question is; is it a good time to buy? Let’s look what other qualified people and groups are saying.

Richard Wobbekind (CU Leeds School of Business) observed at the Boulder Economic Summit in January that “Colorado’s economy is the richest, most diversified it has ever been.”
The Private Mortgage Insurers (PMI) issue insurance on mortgages of greater than 80% loan-to-value. (Loans with less than 20% down payment.) They published the Winter 2009 Economic and Real Estate Trends analysis of local MSAs (metro service areas) to assess their risk. These guys are especially good at assessing the risk of housing prices going down, because they only lose money when that happens. In their latest report the Boulder MSA has less than a 1.7% chance of decreasing home prices in the near future. http://www.pmi-us.com/media/pdf/products_services/eret/pmi_eret09v1.pdf.
At the Boulder Real Estate Forecast held at the University of Colorado in November, Brad Blackwell, Retail National Sales Manager for Wells Fargo noted that “Buying real estate is not a get rich quick scheme. It is a get rich scheme.” He added that buyers tend to stay on the sidelines too long, waiting until prices turn around and confidence returns. When that happens he said, buyers will come rushing in. His advice is not to try and time the market. He concludes: “Buy now: real estate is on sale.”
Finally, in a recent conversation on this topic with a very savvy client looking for investment properties, he turned to me and said “In order to sell high, you’ve got to buy low. That’s why I’m in the market now.”

A Final Thought

We started this research in fear and doubt. We discovered why the Boulder area market appreciates better than most any other county in the state, and what specific financial components influence a local housing market and why they act the way they do. Overlaid on top of that we looked in depth at the current condition of those local financial elements and real estate data.

My hope is that you can now make informed decisions when it comes to buying or selling real estate in this area, and astonish your friends over martinis. We are fortunate indeed to live in this area for many reasons, not the least of which are the factors which tend to built natural stability into our housing market.

I have personally canceled my plans to open a real estate office on Mars, and am here to continue to assist and serve your interests and those of your referrals, for which I am most grateful. If there is anything here you don’t understand the fault is mine. You can email me at pauldart@att.net or contact me at (303) 931-5198 and I’ll happily try and shed light on it.

Notes, Charts & Data Sites

Case/Shiller Index vs. OFHEO. You hear the media quote the Case/Shiller Index as a barometer of the housing economy. A careful analysis of Case/Shiller however reveals that its data is limited and selective. C/S derives its data only from county assessor records and only from 20 metro areas across the nation. It also is value-weighted giving greater influence to more expensive homes; a slice of the housing market that is not doing well. A more objective and comprehensive data source is FHFA, the Federal Housing Finance Authority, formally OFHEO, the Office of Federal Housing Enterprise Oversight. FHFA/OFHEO data is derived from conforming and conventional loan data and price trends for all properties in 366 metro areas representing every state of the nation. This report therefore relies on the FHFA/OFHEO data.

Data

Latest OFHEO housing report:

http://www.fhfa.gov/webfiles/1280/4q08hpi.pdf

Observing the economic cycles through time.

Go to http://www.ofheo.gov/hpi_city.aspx. This site will allow you to compare three different metro areas through time and observe their cycles. In the left hand column enter Boulder, CO. Compare against two other metro areas like San Diego-Carlsbad-San Marcos, CA, Fort Lauderdale, FL or Des Moines, IO.

Colorado Population figures:

http://dola.colorado.gov/dlg/demog/population/components/components.pdf

Boulder Economic Council:

http://www.boulderbusiness.org/

Francis Draper, Executive Director francis.draper@boulderchamber.com

2009 Colorado Economic Outlook:

http://leeds.colorado.edu/uploadedFiles/_Documents/Centers_of_Excellence/BRD/Boulder%20Economic%20Council.pdf

University Colorado Chancellor Speech:

http://dirwww.colorado.edu/chancellor/speeches/boulderEconomicCouncil011708.html

Attached PDF Charts & Graphs