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Home Price Analysis for Colorado Springs
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By the Research Division of the National Association of REALTORSฎ
Executive Summary
With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Colorado Springs metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in good shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.
The local market has very favorable home price-to-income ratio and even better mortgage servicing cost-to-income ratio. The latter ratio is currently below the local historical average. It implies no widespread financial overstretching to purchase a home in the region. Any respectable gains in the local job market will translate into substantial home price gains.
Price Activity
The current price of $214,200 is about the national average.
The median home price rose 6% in 2004 and 22% over the past three years.
Home price growth had been better than the national growth rate for most
of the past 15 years, thanks to many new residents arriving to Colorado.
But prices slowed in 2002 and 2003 from weak job market conditions.
Affordability
Because the prices have risen faster than income in recent years, the ratio
of price-to- income has been rising strongly. This measure is frequently
cited to imply that there is a housing market bubble.
Mortgage rates declining to 45-year lows have been a major force in
boosting home prices in recent years. Lower rates allow homebuyers obtain
a larger loan without necessarily increasing monthly mortgage payments.
A more relevant measure for assessing the risk of a home price bubble is
the median mortgage servicing cost relative to the median income. This
ratio is well below the local historical average. It implies no widespread
financial overstretching to purchase a home in the region. It in fact implies
a capacity for a robust rise in home prices.
Local Fundamentals
Job cuts have been severe in 2002 and 2003. But the labor market has
turned for the better with 6,000 job additions in the past 12 months.
The region added in the past five years an estimated 33,000 new housing
units of which 28,000 were single-family units.
The ratio of five-year job gains to five-year new home constructio
shows the hangover impact of the housing shortage, or housing surplus.
In our case, the local market is suffering from a housing surplus as the ratio
is close to zero. Once the job market turns around, the jobs-to-new home
ratio will steadily improve.
Other Factors
Nearly half of all loans were with adjustable rate mortgages. Therefore,
some homeowners could feel the pinch of higher rates over time.
However, only 16% of the loans is likely to have loan-to-value ratios above
90%, so the foreclosure risk is rather minimal. (That is, prices would have
to decline by more than 10% to have a measurable impact on foreclosure
rates.)
Baby boomers are in their peak earning years have been active in
purchasing second homes, which many consider as their future retirement
homes. The baby boomer impact will continue for another 10 to 15 years.
Colorado has seen an influx of retirees into the state. The local region will
likely get a slight lift in home sales as a result.
Stress Test
Price declines in the local market are unlikely according to our stress test.
The local housing market will experience a price decline of 5% only under
extreme unlikely scenarios of a much higher interest rate environment. For
example, mortgage rates rising to 11% in combination with 13,000 job
losses could lead to a price decline.
Various scenarios that could lead to a price decline of 5% are shown below
Such scenarios are highly unlikely. Most credible forecasts predict the
region will create jobs (possibly even up 10,000) over the next 24 months
and mortgage rates will hover around 7% by the end of 2006, which bodes
well for future price gains.
Even in the unlikely event of prices declining by 5%, most homeowners will
maintain sizable equity build-up in their homes. The table below shows
the home equity gains if prices were to fall by 5% by homebuyers at various
years of purchase.
Housing equity will most likely continue to accumulate to local
homeowners. The equity gains under three price growth scenarios are
presented below. One scenario assumes a historical conservative price
appreciation of 1.5% above consumer price index inflation. With most
credible inflation forecasts pegged at 2.5%, home prices can expect to rise
by 4% per year under normal circumstances. The two other scenarios
assume slightly below (1.5%) and slightly above (6.5%) the normal rate of
appreciation.
The local market is more likely to appreciate at an above-normal rate
because of the current very attractive low mortgage servicing cost
conditions and from the rising number of retirees in the upcoming years.
Additional Discussion Points
Home price declines are very rare. In fact, the national median home price
has not declined since the Great Depression of the 1930s. Stock market
collapses, the OPEC oil crunch, economic recessions, and even wars have
not negatively impacted national home prices since the 1930s.
There have been few times when local prices declined. In nearly all these
cases, the price declines were accompanied by sharp prolonged job losses.
It is difficult to foresee a price decline in a job creating economy.
Homes trade far less frequently than financial assets (about one home sale
every 7 to 10 years for most homeowners). There are also larger
transaction costs associated with selling a home due to the lengthy careful
examination demanded by home buyers and sellers. Therefore, home
prices are not prone to fluctuations as in the stock market. There are
neither panic sells nor margin calls associated with homes.
Many non-quantifiable factors could be important for this metro market in
determining home prices. Access to cultural life, the quality of museums,
nearby local and national parks, water views, exclusive neighborhoods,
weather, the international airport, city vibrancy, restaurants, and a host of
other non-quantifiable factors could have an important influence on the
overall pricing.
There are immense tax benefits to owning a home. These tax
considerations were not considered in the analysis. For example, the 1998
law permitting primary owner occupants to trade down without having tax
consequences. Also most home sales results in no capital gains tax. In
addition, long-term capital gains tax rates were reduced in 2003, thereby
providing higher return for home investors. These positive benefits, if
accounted for in the analysis, would have shown an even stronger case for
housing fundamentals in supporting home prices.
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