Bad News, Good News

It is hard to analyze real estate markets. Though last Sunday's Daily Camera story on local home sales got a 9.0 for difficulty, the content pratfall set some sort of record for low overall score.

"Growth Boom Easing," bugled the front page headline. The story asserted that growth controls are the reason that fewer new homes will be built next year, and that the growth boom had been caused by a "housing market that was drawing more people to the area."

I hate to break the news, but the reason fewer homes will be built next year is that the ones built this year aren't selling. For that matter, not much of anything is selling the way it did last year.

Further, in the metaphysics of real estate, houses don't "draw people." Demand from people for houses motivates construction. Growth control does play an important role, but it's the reverse of the one suggested in Sunday's paper. Growth control doesn't reduce demand, it magnifies demand, which shows up as disproportionately high prices.

Our recent surge in home prices is largely responsible for the even more recent decline in sales. Good news, bad news. However, the decline in sales is so abrupt this Fall that the rate of sale is likely to rebound soon. Bad news, good news.

Blanket statements about housing markets are dangerous because each house is its own unique universe. However, there are some solid statistics to support the general "price caused" and "rebound on the way" theories, above.

Perhaps the best single indication of housing market health is the raw number of sales, not average or median prices, which are too easily skewed by changes in the mix of that which has sold.

October statistics, the most recent available for Boulder County, show overall sales of homes down 25% from the same month a year ago -- double the decline of early Summer. Community by community analysis shows an even more extreme slump. Single family home sales in Boulder, Louisville, Lafayette, and the unincorporated County fell almost 40%, while Longmont and Broomfield held about even. Also holding even were condominium sales.

Note that the sharpest declines in sales were where prices had risen the most, and where growth control has created the greatest scarcity. Affordable housing continues to sell just fine: condos everywhere, and homes in the eastern and northern parts of the county.

The rate at which homes are selling is comparable to 1988, probably the worst year (proportionate to housing stock) in a couple of generations. The Colorado economy was terrible in 1988, and now it's in excellent shape. Just as the rate of sale was unsustainably high 1991-1993, in late 1994 it's unsustainably low.

Unsold inventory is piling up fast. A Camera Business Plus article was as well done on Tuesday as the Sunday piece was poor. Business Plus quoted reports of a 75% increase in unsold new homes in 1994 versus 1993.

The relationships between rates of sale and inventory are more important than the inventory buildup itself. 1993 sales exceeded inventory by a 7:1 ratio, meaning less than a two month supply on hand. In 1994 sales have fallen almost as fast as inventory has been built, and the ratio is down to 2:1, a six month supply, and rising.

The more quickly listings add up, the more attractive shopping is for buyers, and the sooner the number of sales will pick up. Price appreciation is a different, slower matter related to long term gains in income, which result in accumulated purchasing power. It may seem odd, but we seem headed for a rebound in sales, and maybe a strong one, but only modest increases in prices until local incomes grow.

Most commentary on the cause of the slower housing market (other than the Sunday Camera) blames higher interest rates. The data do not support the conclusion.

In the Denver metro area in October home sales fell 21%, and in November 25% (the sharpest drop in 10 years), both versus the same months in 1994. Whatever is causing home sales to fall in Boulder County is doing the same thing to the rest of the Front Range. If the cause were interest rates, the same pattern should appear on a national basis, but it's nowhere in sight. National home sales in October rose a half percent to a level only 3% below 1993.

The single, crucial difference between the Front Range of Colorado and the rest of the US is that prices boomed here in the early '90's. That price boom was most extreme in Boulder County, and in Boulder County was more extreme the closer you got to Boulder.

The problem is prices. Good news, bad news.