You may have heard that real estate is a seasonal market
as well as a cyclical market. Both statements are true, though a much greater
extent for the former than the latter.
From a seasonal perspective, Front Range real estate
follows a well-worn path every year that mirrors the temperatures outside
– the coldest temps in winter also bring the coldest market conditions
and the fewest sales. As the temperatures rise, so do sales, building to
the peak sales months in June, July and August.
From a cyclical perspective, the pattern is not nearly as
obvious. In fact, the theory that real estate follows a cyclical pattern
is sound, but the notion that the cycle is the same each time and can be
predicted with such certainty as to name it “the 7-year-cycle” or the
“18-year cycle” is suspect.
The theoretical underpinnings of a real estate cycle can
be summarized as follows: during an expansion phase, home values rise as
jobs, income and the new residents those jobs attract all increase. This
phase draws builders to the market, who construct lots of new homes.
According to the theory, the cycle eventually shifts from
an expansion phase to a contraction phase as too many properties come on
the market and incomes fail to keep pace with rising home prices. In the
contraction phase, home values fall, or more often, just level off and
plateau for a few years as the market “recharges” for another expansion
phase.
All of the dynamics that comprise this cyclical theory are
forces that can easily be seen in our market today. So clearly, there are
real world underpinnings to the theory. But acknowledging the existence
of these forces is one thing; attempting to predict when the balance of
these forces will shift from expansion to contraction is a whole
different ball game.
In fact, at a recent presentation about the future of real
estate along the Front Range, analyst Lou Barnes flat out said he simply
does not believe you can predict market cycles based on preordained cycle
times. According to Lou, statements like “we are 7 years into a cycle so
there must be a downturn coming,” are nothing but guesses with little
statistical support.
Lou, who is a nationally syndicated real estate columnist,
worked at the Federal Reserve, studied the Front Range market for over 40
years, says “show me the data” for
any market prediction based solely on a cycle.
And after presenting over 40 detailed charts and graphs on
everything from Colorado loan default ratios, to new housing starts, to
maps of developable land west of I-25 from Colorado Springs, to the
Wyoming border (and there isn’t much!), it became clear that Lou has the
data to back up his hypotheses about the Front Range market. I wanted to
share a few of my big take-aways from his presentation:
- From a lending perspective,
today’s market has absolutely nothing in common with the bubble
market of the early 2000s, which was largely created by loose
mortgage standards. Credit was too easy then, and it’s arguably too
tight now. One market is an apple, the other an orange.
- The scarcest commodity
along the Front Range is the land and the development rights beneath
a single-family home. The land is what appreciates in value. The
home on top of the land is actually a depreciating asset. And even
the “land” associated with a condo, aka the right to occupy the air
space, is a scarce and appreciating asset, albeit to a lesser
extent.
- The Front Range,
especially on the west side of the corridor from the Springs north
to Fort Collins, is transitioning from a “kingdom of sprawl” to a denser
way of living.
- The Front Range is
unquestionably a desirable place that offers a high quality of life,
but it is not alone in attracting new residents. We are part of a
much larger US migration pattern of people moving from rural areas
to urban and suburban areas. This migration is massive and on the
scale of the post-World II migration of Americans south and west to
the Sunbelt.
Lou’s presentation and take-aways reminded me to keep the
big picture in mind when thinking about real estate. Market shifts occur,
but they are tough to predict and certainly don’t follow a predetermined
cycle or schedule. Much easier to get a handle on are your own needs,
wants, and dreams. And lastly, Colorado is a great place to live, and
always will be.
A Refreshing
Look at the Question “What is my House Worth?”
Let’s take a look at some of the stats for our area to get
a better idea of what is going on in the local housing market!
In Arapahoe County for Jan 2018, the average sales price*
was:
- $380,000 for Single
Family Homes (up 8.0% from 1 year ago)
- $239,000 for
Condos/Townhomes (up 12.6% from 1 year ago).
In Douglas County for Jan 2018, the average sales price*
was:
- $470,000 for Single
Family Homes (up 6.2% from 1 year ago)
- $308,250 for
Condos/Townhomes (up 8.2% from 1 year ago).
*Median sales price based on a six-month moving average
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