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Home Price Analysis for Boulder
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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 Boulder metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing
equity gains, particularly for homebuyers who plan to remain in their house for the long run. Because prices have risen faster than income, the ratio of price-to-income is currently above the historical norm. This measure is frequently cited to imply that there is a housing market bubble. But this ratio is a misleading measure in assessing bubble prospects. A more relevant measure is the mortgage servicing cost relative to income.
This ratio is at a manageable level. It implies no widespread financial overstretching to purchase a home in the region. Any respectable gains in the local job market could translate into further home price gains.
Boulder Top 20 Metros National Average Comment
Price Activity
Risk Factor
Income is per capita income times average number of person per household
Servicing cost is the mortgage obligation relative to income at the prevailing mortgage rate Nationwide, there has been an increased use in exotic mortgage loans of interest only and adjustable rate mortgages. Though, such data are not readily available for the local market, it is likely following this national trend. Therefore, rising interest rates will place some homeowners in greater risk of default. But the risks are mitigated from recent healthy job gains. Given the favorable housing affordability, significant gains in home prices are certaintly possible,
particularly if the job market strengthens.
September/October 2005
Price Activity
The current price of $346,200 is 70% above the national average.
The median home price grew 4% in 2004 and by 9% in the past three years -
a significant deceleration compared to the growth rates in the 1990s.
Prices were essentially flat in the 1980s. But the growth in the technology
sector and the accompanying job gains in the 1990s dramatically boosted
prices. Job cuts in the tech sector in early 2000 held back price growth.
September/October 2005Affordability
The ratio of price-to-income has been trending down in the past three
years. Also the ratio is not dramatically out-of-line compared to past
historical trends. By this measure, there is certainly no price 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 currently below the local historical average. It implies no
widespread financial overstretching to purchase a home in the region and a
huge potential for a significant price gains.
September/October 2005
Local Fundamentals
The job market has been improving. There have been 4,800 payroll job
additions in the past 12 months. Many new job holders seek their own
housing units.
The region added in the past five years an estimated 11,000 new housing
units of which about 8,000 were single-family units.
The ratio of five-year job gains to five-year new home construction shows
the hangover impact of the housing shortage, or housing surplus. In our
case, the local market is a bit oversupplied as the ratio is less than zero.
With recent job gains and the expected continued economic expansion, the
jobs-to-new home ratio will likely steadily increase.
September/October 2005
Other Factors
There is no good information regarding interest-only loans in the local
market. But if it reflects a national trend of a higher usage of interest-only
loans, then some homeowners could feel the pinch of higher rates over
time.
The baby boomers in their peak earning years and have been active in
purchasing second homes, which many consider their future retirement
homes. The baby boomer impact could continue for another decade.
With many top southern retirement destinations getting quickly
unaffordable in the past five years, some retirees may turn to more
affordable regions of the country. Perhaps, the local region gets a slight lift
as a result.
Primary Vacation Investor/Rental
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 much higher mortgage rates. For example,
mortgage rates rising to 9% in combination with 4,000 job losses could lead
to a price decline.
Other scenarios that could lead to a price decline of 5% are shown below.
September/October 2005
Such scenarios are highly unlikely. Most credible forecasts predict the
region will create at least 5,000 jobs 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.
Year of Purchase
Housing Equity after 5% price decline
(home price appreciation + principal payments on
mortgage)
1980 $286,321
1985 $255,175
1990 $237,851
1995 $167,167
2000 $67,101
2001 $42,247
2002 $22,158
2003 $17,415
2004 $1,938
2005 -$17,310
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 due
to highly educated workforce and if many Californians (who have
substantial housing equity) relocate to Colorado as they have in the past.
September/October 2005
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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