Big-Data Firm Forecast: Northern Colorado Home Prices Crash!!!
(In the model’s first-ever week of analysis)
By Louis S. Barnes, Mortgage Banker, Premier Mortgage Group
On Sunday, April 16 the Denver Post business section led with news from Location Inc. that Northern Colorado home prices will hold until late 2019 and then will fall 21% by 2022. With such a huge market shift being predicted, we decided to ask Lou Barnes, our local mortgage and market expert what his thoughts were on the matter.
If you’re a current home owner, you’ll be happy to know that Lou predicts some movement in the market over the next few years, but rather than a steep reduction in appreciation values, he sees more of a low-slope price appreciation or even a flat appreciation value rather than a significant decrease in property values. Read on to hear his supporting argument.
Location Inc. rolled out its proprietary model, “Scout Vision” on April 6. It has no historical home-price performance record. Location’s prior businesses have been data-mining location-based statistics for insurance, crime, direct mail, and retail and corporate relocation. Location Inc. says that its primary metric is the relationship between local income and local prices, trying to measure affordability. Not bad as far as it goes.
However, affordability must be measured by changes in income and prices over time, not in one concurrent snapshot. Incomes tend to grow slowly and steadily over time, in a healthy regional economy like ours a percent or two or three faster than the rate of inflation. Front Range incomes currently, and for the past several years, have grown 4%-5% per year.
But home prices since 2013 have surged as much as 50% in many areas from Castle Rock to Fort Collins west of I-25. Why is that not an overshoot? Because spurts like this are typical, and not just in Colorado.
Back up to 2000. The Front Range had enjoyed two strong jumps in price in the 1990s, the first catching up after the flat 1980s, the second based on technology job growth. In 2001 the tech boom fizzled. We overbuilt (and over-loaned) from 2004-2007, and then were hit by the Great Recession. Yet, from 2001 until 2013, Front Range prices remained flat. We had our foreclosure patches with price declines, but overall… flat. No bubble, no bust.
That pattern indicates that home prices and incomes were in some equilibrium in 2001. Strong 1990s, but no bust afterwards.
While we worked through the tech bust, overbuild, and recession, very quietly and nobody noticing…Colorado added almost one million people to its population. Incomes in Boulder County grew by 50%. And home prices were the same until 2013.
As has been said many times of the stock market, nobody rings a bell when a boom starts. It just starts. In 2013 after the longest delay on record (back 55 years) home prices began to rise, and we began to deploy a huge increase in accumulated purchasing power. Increases in income during our boom are almost irrelevant; accumulation of income during a prior protracted period of flat prices is central.
Also important is supply of the most fundamental commodity: land. Real estate booms tend to overshoot because booms trigger over-building. Today west of I-25 the northern Front Range is fundamentally out of land for construction. During this boom we have built housing for only about half of the new population.
We’ll see if Location Inc. is still in the prediction business five years from now. (Sidebar: I cannot help but object to spreading scare-stories as a promotional tool.) Either way, for us and our homes, the odds favor some moment in the next few years when we’ll run out of accumulated purchasing power, and, as we’ve done over and over, move into a time of low-slope price appreciation, even flat appreciation for a while.
But, so long as our local economy behaves and our population grows, land scarcity will protect us from busts. We are a big metro area now, and we may overbuild in spots, or types (apartments), but a home is as good an investment as ever, given some patience.