Dallice’s thoughts on a Boulder Housing Bubble
Speculation about a housing bubble is back. That didn’t take long! I’m calling the rumors and increasing questions that cross my path, an invitation to explore this further and take you along for the ride. These musings will cover three areas:
- Signs of a housing bubble
- What is the Boulder Real Estate Market actually doing?
- Dealing with buyer/seller fears, insecurities and planning for your real estate future
FIVE INDICATORS OF A HOUSING BUBBLE
1. Sharp increases in housing prices. Could be a sign of that “run up” before the crash or reset.
2. Affordability. We are talking about the portion of pre-tax household income needed to cover the cost of owning a home. A long standing premise is that housing costs should not consume more than 30% of a households income.
3. Interest Rates. In short, low rates have people racing to buy and rate hikes soften the housing market.
4. Lending Criteria. Are lending practices reducing the pool of competitive buyers and causing the market to favor sellers? Are they becoming more lenient and increasing the number of buyers in the market place?
5. Delinquencies. Increased numbers of short sales and foreclosures cause home prices to stagnate or fall.
WHAT IS THE BOULDER REAL ESTATE MARKET DOING?
The median income in Boulder in 2013 (2014 data not released yet) was $71,604. In the last 10 years or so, the median income (adjusted for inflation) has hovered between $66,000 and $71,500. 2010 was not the best year for us and our median income that year dipped to about $68,000, but soon thereafter we watched it climb back. Between 2010 and 2013 the median income in Boulder rose 8.34% and showed a 5.36% increase between 2012 and 2013 alone. Who couldn’t be happy about this? It’s good news.
All the while unemployment rates have gone down, putting us well ahead of not only the national average, but the rest of Colorado. Also good news.
The median real estate sales price last year was $685,000 . Good news if you are holding real estate in Boulder… Eh, probably not so good if you are a buyer struggling to qualify in a rising market.
We have all heard or experienced the seller’s market that flew in the door in March 2012 and has been plaguing buyers ever since. Low inventory has fueled buyer competition at levels that hadn’t been seen in recent history. Competition has resulted in bidding wars and, to the delight of sellers, sales prices that exceed list prices by 5%, 10% or more in many cases! A classic case of supply and demand. Low inventory is also evidenced by the lower number of sold houses each month and lower DOM (days on market before contract). In 2014 every single month showed fewer homes sold than the same month the year before… When I say fewer, I’m not kidding. A mind-blowing 10-30% less homes than the same month in 2013, were sold in 2014!
IMHO, the average days on market statistics paint a good picture of the real estate market. Early 2012 was when the market changed quickly from a buyers to a sellers market and the DOM dropped quickly in response. 2013 was significant in our Boulder real estate market. Price point matters as the buyer pool for high end homes is smaller so finding a qualified buyer takes a bit longer. There is less competition to fuel those faster decisions by buyers.
*When reading the chart below, please take into consideration that 10 years ago fewer homes fell into the million dollar range, many more homes were priced under $650,000. The median sold price before the year 2000 was under $400,000 and homes selling in the $650,000 – $1,000,000 range would move more like the >$1,000,000 homes do today, so just take the first half of the chart with a grain of salt.
Lending is about as easy as I have seen it since 2007. Of course lending practices have changed since the recession of 2008, but that was to be expected and is nothing to worry about if you have a job, pay your taxes and manage debt adequately. Gone are the days where all you needed was a pulse (weak and irregular was fine too). Right now a first time buyer with good credit can secure a 30 year fixed loan with only 3% down. If it’s not your first time at the rodeo, then be sure you have 5% or more for your down payment or start investigating FHA loans. Lending institutions will still make you jump through hoops to qualify for a mortgage, but overall my clients are feeling a little less violated, stressed out and frustrated than they were 2 years ago – and fewer closings are being held up by last minute surprises. (I maybe had ONE of those in 2014). All in all, with interest rates as low as they are, lending is not an issue.
Where are we with foreclosures in Boulder CO? As you might expect, foreclosures and short sales are just not a big issue right here, right now. As a County, Boulder has one of the lowest rates of delinquency in Colorado and has done for a long time. Information pertaining to the city alone is hard to find, but I can tell you that my research lead to finding only one new Boulder NED (Notice of Election and Demand) filed with the Public Trustee of Boulder County in December 2014. The rest (far from a despicable number) came from other communities in Boulder County.
REAL ESTATE FEARS AND YOUR FUTURE
I’m not Fox News. I could sensationalize real estate news for the benefit of myself… Ratings. But I think just reporting the facts (along with my humble opinion) has more merit, shows more integrity. Our brains are hardwired to detect danger. We latch on to anything that sets off alarm bells, raises fear and could endanger us. We are designed to go on high alert then act. Fight or flight has kept us alive, as individuals and as a species to this point. It serves a genuine purpose and should not be ignored.
However… Filling our brains with news about how the economy is heading for a depression, or the real estate market is looking “bubbly” or inflation is going to get you, is WAY too dramatic and doesn’t serve us. On the flip side, clutching at the idea that if you wait to sell, the price of your property will just keep rising indefinitely at this pace, is delusional. I’m no genius but with an ounce of common sense I can read the writing on the wall. What goes up, must come down. The seller that jumps into the market just after the market has crested (because you won’t recognize the crest until just after), will be joined by others just like him… Pushing the curve toward higher supply than demand and fueling an inevitable slow down in appreciation and lower sold prices. Sure, over time just about any piece of property will still appreciate, but its more of a gradual incline on the curve and the line is not smooth, it’s pitted with little up’s and down’s. Just like the rest of life.
The pendulum always swings the other way. After a buyer’s market comes a seller’s market. After a period of low interest rates we’ll experience a period of higher interest rates. Low inventory will turn itself into normal or high inventory levels once again. Circle of life, my friends. Not at all unpredictable and nothing, I repeat nothing, that should be filling your mind with fear or keeping you awake at night if you are expecting it and have planned accordingly to take advantage of each stage in the cycle, or at least protect yourself.
Check out this table:
Note that there are only a couple of times in history when the market didn’t peak with land values on about an 18 year cycle. (This chart was published years prior to 2008, hence the question mark around the events starting 2006-2008.) The first “missing” event was in the early 1940’s. People were overseas, engaged in WWII so the real estate market didn’t boom and there was not a subsequent depression. In the 1970’s the country saw high inflation and high unemployment at the same time. The value of tangible goods like gold, silver, collectibles and land rose. In 1980, as the Federal Reserve stopped the rapid increase in the money supply (they doubled interest rates!!) and a sharp recession followed.
With low inventory, comes the race to build. It takes a couple of years to register the demand and another couple for construction to get moving. This will be add inventory, bring the supply and demand curve to equilibrium and at some point push the curve over, affecting DOM stats as well as sold prices.
Investigating this phenomenon, I found it also interesting to learn that most real depressions follow real estate booms. We also witnessed a little recession following the tech boom in 2001, the same year that the 9/11 terrorist attacks shocked the economy. You might remember it was kind of short lived and the real estate boom lifted the economy up fairly quickly at that time as it continued its climb. This area, the Boulder Colorado area, was significantly affected by the tech bubble bursting. Our real estate market was on a similar trajectory to that of California, Florida, Phoenix, Las Vegas and many other locations in the US, but real estate slowed and reset to a degree, which curbed our property values/sales run up. When the bubble was bursting in 2008, Boulder was not hit hard. Yes, prices and inventory reflect a market slow down but we had a soft landing compared to many other places. What comes up, must come down… And we had not gone up as high. (See Median Sold Price chart above for dips in the curve starting 2001 and 2008.)
Thinking of buying or selling?
Like you, I was curious about the affordability factor of Boulder. It’s just not clear. I mean yes, we have a great Affordable Housing Program and certainly there is no shortage of homes to choose from if you are earning well above the median income, but what about the middle class?
If you are a Boulder couple, both earning the median income ($70,000 each) and looking to purchase a median priced home ($685,000) is it possible? Yes and no. Qualification depends on many factors. For accurate information about your particular situation you are advised to consult a lender. I can direct you toward great people at several banks, brokerages and credit unions if you’d like to chat with them, no strings attached. What I can say is that a couple with $140,000/year income, with little to no other debt (car, child support, credit cards etc), with great credit scores and 20% down will likely qualify and be able to afford a home in this price range without any issues at all. If that same couple has additional monthly financial commitments, a recent bankruptcy, less down payment or a combination of factors that reduce qualifying ability, then they will qualify for less, or nothing if credit score is dire. This is not the end of the world either. All it means is they will be lowering the price of the house they buy (still possible in Boulder) or waiting a bit longer to save more down payment or work through credit issues.
Are you concerned about when the right time to buy or sell, is? What about rumors of an impeding crash or a housing bubble? You are not alone!
My opinion? We have recovered from 2010’s crash. All indications point to us being in the “Expansion Phase” of a very predictable real estate cycle. With some smaller up’s and down’s ahead of us as per normal, we probably have a good long time before a depression hits again in another 10 or so years – Assuming of course we steer clear of shockingly large, economy-impacting events! 🙂
The truth is, no matter what the real estate market is doing or how the economy is treating us, it is the right time to buy or sell for someone.
Right now, with low inventory and rising prices, sellers are doing well. But so are buyers. They are locking in low interest rates and doing the math. It may be financially advantageous in the long run to pay $10,000 more than you wanted to today, in order to avoid a higher interest rate and/or the rising prices that may greet you 4 months from now. Both parties are getting their needs met, if they weren’t the deal couldn’t happen.
When the supply begins to creep back up and meet demand, sellers will find that it takes longer to find the right buyer and buyers will find they have room to negotiate. With little new construction in the City of Boulder, we will find ourselves a bit behind neighboring communities (Lafayette, Longmont etc) in this regard.
When interest rates go up, the monthly payment a buyer can afford will not change, but the amount of house they can buy, will. Little fluctuations in our real estate market – totally normal!
Remember… Even when the market was at it’s worst and prices dropped, mortgages became harder to qualify for (think appraisals coming in lower and lower) and many buyers sat cautiously by, waiting to see what would happen, there were investors (cash buyers) scooping up “deals”. This could be you! Plan now (YOU’VE GOT TIME) and use that cash to qualify for the deals if/when the market shifts and the buyer once again has the upper hand. No… You are not “taking advantage” of a seller. Business is business and if that seller didn’t need to sell, their property wouldn’t be for sale. Buyer and Seller have the same goal and should be structuring a deal whereby they both get their needs met.
It’s the real estate circle of life! For every thing there is a season… And a purpose.