Slowdown

The first signs of a slowing real estate market appeared in January, but there was no way to tell if it was the real thing.

During the Spring, there were stories among pros that the frenzy was past, that there were fewer competing offers for the same house, and fewer rewards for sellers drunk with appreciation power. Still, the evidence of softening was soft.

Statistics through June showed raw number of home sales proceeding at just about the same pace as 1993, and price gains at 12-15% year-over-year, again just like 1993.

We had to wait until August for hard data which, as always, looked at least a month back into the past. July stats showed a sudden drop in the number of sales, almost 25% down from July 1993. Appreciation figures still reflected good gains, but there was a growing awareness that most of the year-to-date price gains had happened in the last six months of 1993, and little in 1994.

Though we have to wait another month or two for confirmation, August felt like a good, 1993-style month for closed sales. However, toward the end of August, the number of new sales rolled off the edge of a table, and September and October look like a resumption of the July trend, way down from 1993.

At the same time, the end-of-boom indicator is flashing brightly: unsold listings are accumulating on the market. Total properties listed for sale have risen nearly 50% since early Spring.

What happened? Or, better, what is happening, and how long will it last?

Some say that higher interest rates have iced the Front Range boom. I doubt it. Mortgage rates were in the mid-nines for the first year of the late, great boom, higher than they are now, and fell below 8.00% only for the last nine months of the boom. (Higher rates have many a mortgage person ready to get in a warm tub and open a vein, but that's because all the refinance business is gone. Roughly 65% of all 1992 and 1993 mortgage closings were refinances. All done now.)

This boom has ended for an excellent reason, and on time: Boulder County has deployed its available purchasing power. In 1990, there was a huge amount of accumulated purchasing power in the County. Home prices had not moved at all for nine years (1983-1990), but the median income in the County had grown about 60% (honest, and nothing unusual: right on the national average for income growth).

Since 1990, average appreciation of home prices in and near Boulder has been roughly 60%. Time's up. Game, set, match. Back to normal.

Which leads to what happens next. The guess here says that for next few years, prices will move only with inflation, and that sellers will outnumber buyers (normal!). The listing inventory will continue to grow. If the early 1980's are any guide, over the next couple of years the listing inventory may triple from the dead low in late 1993.

What about prices? The key to future price rises is future rises in income. That takes time. At 5% per year income growth, it will be a while before we have our next 20% appreciation year.

The good news is that this boom met its demise "on time." Booms which outpace purchasing power follow the path of Wily Coyote over the cliff edge, still running fine on thin air -- until the fatal look down. See Boston, 1987, where prices today are still under the boom overshoot. Boulder County prices should hold.

Except for two groups of home prices.

The top-priced end of each market in the County (group one) may not have appreciated as much as its owners believe. Homes in Boulder over $450,000, Louisville over $300,000, and Longmont and Broomfield over $250,000 may not be worth any more than they were on New Year's Day. The exhaustion of purchasing power has its most powerful impact at the top end where there are only a few big incomes even in the best of times. If enough top end homes come on the market and stay unsold, some late-1993 prices may not be paid for a while.

The low end of each market (group two) retains a purchasing power benefit. Condos, starter townhomes, and starter detached houses in each city in the County still have good potential for price gains because tens of thousands of people can afford to buy them, and there is nothing cheaper in each class of property.