Since 2013 our real estate market has seen double-digit annual price appreciation values, and our agents are often asked, “Are we in another bubble”? Lou Barnes, Mortgage Banker at Premier Mortgage Lending (and Colorado Real Estate Broker since 1978), gave a phenomenal presentation this morning to the WK Real Estate brokers answering that exact question and more about our current market conditions and why we’re seeing the appreciation values we’re seeing.
Boulder County Home-Price Appreciation
1. Are we in a bubble?
To answer this question, let’s take a look at the three typical intrinsic causes of a bubble:
- Excess supply (too much new construction and/or new subdivision of land)
- Single-industry underlying economy (i.e. North Dakota’s current fracking boom)
- Foolish lending
As of right now, in the Boulder County market we have too little supply and one of the most diversified economies in the world – so cause one and two are out. We’re also seeing lending being too restrictive rather than too expansive, negating cause number three. What does this mean? It means no bubble.
2. Lending is too restrictive
A healthy rate of default for loans is around 5%. This is due to natural unforeseen circumstances such as job loss, family emergencies or life changes. We’re currently seeing less than 0.5% default for the 2013-2015 time period. This means a large number of people who can most likely make reliable payments and afford a mortgage are being prevented from obtaining a loan due to the current rigorous loan criteria. As the below graphs illustrate, the people with less than 660 Ficos are the group of people being denied loans, and jumbo loans (larger than $424,100 in most counties, $529,000 in Boulder County) are harder to get than they should be.
3. More jobs in Boulder County
According to national statistics, a county as large as Boulder typically has about 145,000 jobs compared to the number of households. We actually have 190,000. This means, based on housing inventory, at least 45,000 people drive from outside of Boulder County into Boulder County every day. Besides creating interesting traffic patterns, it also creates more demand to buy in the county. More demand with limited supply means higher prices. The whole of Boulder County now resembles the City of Boulder in terms of excess demand for limited supply.
4. Shortage of inventory
As the below graph clearly demonstrates, we went from overbuilding in Colorado in the 2004-2007 time period to a significant decrease and shortage of new home builds in 2007-2015. Thus, we have limited inventory supplies, again creating increased housing prices.
5. Vacancy rates likely to rise
As of right now we’ve seen an unusual increase in rents over the last few years. More apartments are being built and rent increases are slowing down. Rents are most likely to stabilize, even possibly go down for two reasons: 1) renters simply can’t pay more after the big hikes of the last four years, and 2) the one segment of supply which may overbuild is apartments.
6. Are we heading for a recession?
There is no sign of recession in the local economy. Our next housing downturn, no matter how far off is likely to come from national or international causes. The Fed has entered a rate-hiking cycle which could last for several years. The cycles historically end in surprise recessions. One advance marker: when short-term rates rise above long-term (technically an “inverted yield curve”), easiest to see by comparing the yield on 2-year Treasury notes to 10-year ones. The chart below shows the historical pattern back to the late 1970s, the graph line is 10s minus 2s — whenever 10s minus 2s results in a negative number, recession ahead. The second risk is international: the same globalization which has helped nearly every national economy has also disrupted them, and political groups which have been harmed are now pushing hard against globalization. Protectionism and trade war can result.
This post was co-written by Lou Barnes, Mortgage Banker at Premier Mortgage Lending (and Colorado Real Estate Broker since 1978)