Explosive Situation

It has felt strange in the last couple of years to watch money fall from the sky onto Boulder rooftops while the rest of the country suffers in a flat, or down real estate market.

Boulder has worked hard on its quality of life in the last thirty years, and we had more than our share of natural paradise to start out with. Hard work brings a sense of due reward, as opposed to markets like California, where the quality of life has not been so well cared for.

But there are thousands of communities which have worked as hard as we, where home values languish.

Certainly, the national economy plays a part. The economy has been in a stumbling recovery for nearly two years, marked by only one bright 90-day interval in the Fall of 1992.

However, in the circular world of economics, the recovery remains weak because real estate markets have not responded to the lowest long term interest rates in a generation.

Real estate is supposed to lead the economy out of recession, not the other way around. Recessions generate low interest rates, and low interest rates should have an explosive effect on real estate.

Why not this time?

For spectacular ignition, real estate markets need three key condition: healthy local incomes, low prices in relation to those incomes, and limited supply. Migration -- people moving to your town -- adds to the force of the explosion.

Boulder has been early to recover because it had been in the tank the longest, its market slipping into illiquidity as early as 1983. Boulder's incomes have had ten years to grow relative to prices.

Meanwhile, most of the rest of the country enjoyed a boomlet until 1988, leaving real estate prices relatively high compared to local incomes. It that same 1983-88 period, exceptionally foolish financial institutions funded development of apartments and homes beyond any conceivable need. This excess supply was a principal cause of the abrupt end of the boom in places like New England.

Despite all that old supply, and only five years after the boom top, lower interest rates have suddenly changed the income-to-price relationship in favor of purchasing power.

Two years ago, if your family had $1,500 per month available for principal and interest payments, at 10% you could borrow $170,000.

Now, at 7.5%, the same %1,500 per month will get you $214,000. Adjustments in purchasing power like that lead to extraordinary price pressure. (In Boulder, incomes were already so high and prices stuck at 1983 levels that low interest rates merely added another stick of dynamite to a dozen stick pile.)

Still, there is no new national real estate boom.

The oddest part of real estate markets is that all the condition can be right, and nothing happens.

In Boulder in 1989, the incomes were in place, the prices low, the refugees already arriving from California, but it took two more years until the big bang.

Real estate needs a detonator, a blasting cap of some kind. It is necessary to have some loud noise to get the herd moving; otherwise, it just stays put, grazing on belly-deep grass.

Nothing works better than a whiff of competition, followed by the sense that a bout is about to be missed.

Often, maybe always, the bang is set off by the least advantaged: the tenant. Having your rent go up is a scarcity event that makes you do something about it.

The immediate catalyst for Boulder's boom was the drop in the rental vacancy rate to below 5% in the summer of 1990, and sharply higher rents. Only then did Fred turn to Ethel and say, "You know, for the rent that thieving S.O.B. wants us to pay, we can buy a better place."

The Freds and Ethels did just that. The condominium and starter home markets were the first to surge.

The Boulder shock wave should soon hit in Denver, where the apartment vacancy rate is falling near 5%, and the construction of new apartments hit zero last year.

That huge, late 80's over-supply of apartments is rapidly being absorbed everywhere, except poor old California. And there is little new supply because banks (still embarrassed by their last mistake) don't want to lend to build apartments.

It may not be in 1993, or even 1994, but forecasts for the American economy to stay flat, without inflation, and with low interest rates are due for a surprise. The forecasts will change about six months after you read reports of an unusual shortage of apartments leading to higher rents.

The next cycle benefiting the "haves" will be touched off by higher expenses for the "have nots." That phenomenon leads to a philosophical discussion I'd just as soon stay out of.