Simply put, it can not get any better. The record real estate year that was 2017 is burned into memory. That market has created an unreal reality, but like a volcanic eruption or wildfire in June, it also has created it’s own weather.
The 2017 Sales Year eclipsed records for single-family unit sales, condo/town house unit sales, average price, median price, lowest monthly measured inventory, highest number of units sold in a single month, fewest active listings ever available (both in terms of the market’s peak in July as well as the miserly 1350 for sale on January 1, 2018) and the highest average permit price. The following two slides show a market that out-performed expectations in shocking fashion:
As we crystal ball into 2018, the statement “what comes up, must come down” is on the minds of an increased number of buyers. This has to be a bubble right? Prices have to come down eventually, right?
Why that is not going to happen:
First, the CPA’s job security plan, also known as the Tax Cuts and Jobs Act that was the most substantial change to the tax code since Ronald Reagan’s second term. This is a massive change in many ways, none of them making things simpler and no one will be filing their taxes on an index card in 2018. The idea of the tax cut was to give citizens more of their own money and in theory, that should be enough to stimulate even more real estate purchasing. The reality is that the middle class still has a big stake in the Colorado Springs market, and the middle class tax cuts are being undone by student loan pressures and rising insurance costs. The Millennial Generation can be criticized for being entitled and having champagne tastes; but they also are the most debt-averse, commitment-averse, brand-conscious and dare I day, economically-thoughtful generation in history and the Tax Cuts and Jobs Act gives very, very little for that generation. Considering that this is real estate’s future, that’s a real problem for all of American real estate sales. There’s even less reason for someone in their 20’s to buy now that the Tax Cuts and Jobs Act has passed, and they’re needed on the bottom of the real estate ladder.
Review: How the Last Bubble Unfolded in Colorado Springs
At the present time, the Colorado Springs Real Estate Market is tilted to the hands of sellers and it will remain so for the next 2 plus years. When the market started to weaken in 2006 before the recession it was supply-side driven. Sales remained at a near fevered pitch, but anyone could tell the market was changing because a lot of homes were coming on the market. Between July 2005 and July 2007, the number of listings available increased by 50% from 4600 to 7062. That combined with horribly-relaxed loan underwriting guidelines lead to a foreclosure crunch that saw a 17% average drop in value, locally. But here are some other drivers: At that time, interest rates “made more sense” than they do today. Interest rates today are 3.99% for a Freddie Mac 30-year fixed rate. The national real estate landscape is addicted to house money, and while we can’t help but project higher rates every year… they never happen! Money at the start of 2018 is cheap, cheap, cheap. Rates in July 2006 were at 6.5%. That means a buyer at 6.5% would have 26% less buying power than a buyer at 3.99%. Ouch. A rate surge helped cool off the 2006 market. Our market might hit 3000 total single-family listings for sale this summer. It hasn’t seen 3000 for sale since 2015. That might actually help sales increase because it would feel less like a take-it-or-leave-it market for buyers. Three thousand units is around half the number that were for sale in the summer of 2006, and even if demand somehow ends up at only 75% of what it was last year, that’s still more buying than what was happening in the summer of 2006. Add to that Colorado’s incredibly low unemployment and diverse economy, and our local market is not going to “pop” anytime soon.
But where it gets scary is what can make the national market go “pop”. All it takes is one pin to pop a balloon, and while the national economy is humming, it also is a lot more complicated than things around here. The things that would send shivers through the national economy are large-scale acts of terrorism, a political/constitutional-crisis, the start of an international war, or a Wall Street collapse. Name another time in the last 25 years when any of the four seemed as, um, possible, as any of the four are now?
Of the four, the last one may be the most probable, simply because it has been on a longest winning streak for almost nine consecutive years. The fragility of it all was seen when Michael Flynn pled guilty to a single charge in the Russia Investigation and an ABC News reporter erroneously reported that Mr. Flynn had provided direct information to President Trump related to the crime for which he was charged. This information, retracted within a matter of hours, sent Wall Street down 350 points. It’s like the entire system is simply waiting for the other shoe to fall, not sure which shoe it is that just might fall.
Making projections on global currency devaluation and geopolitical events is not the point of this post. It is to say that what appears to be smoothly operating machines (the national economy, our local real estate market) is getting by on more than a little good luck. As they say in football, recovering fumbles is entirely a game of chance. Just saying… just because yesterday was sunny, don’t assume tomorrow will be as well.
Be a smart participant in the real estate market.
What has happened in the wave of buying is that buyers are now getting shut out because they can’t afford to buy. Just today, buyers with very reasonable, middle-class desires had to be turned away. What they wanted was pretty similar to what their friends bought with me two years ago. Except what their friends bought is now worth 20 to 25% more, and there are 35% fewer homes to choose from. December 2017 had a wrinkle of data: monthly sales were lower in December 2017 than they were in December 2016. We had not seen that in a long-time, but it happened because inventory levels were so low that buyers decided not to buy something lousy.
Here is what we projected at the start of 2017 and how it panned out.
Projections were really close on average price, really close on median price, really close (almost dead-on) with number of homes listed for sale and also quite close on single-family permits.
The misses were on the interest rates (why these didn’t go up when Wall Street went up 20% doesn’t make any sense) and the number of units sold. These two worked hand in hand as we projected rising prices plus lower debt-affordability due to rising interest rates would reduce purchasing. Well, rates were better in 2017 than in 2014 and the same as they were in 2013.
Denver has seen a draw down in terms of sales activity and we expect that same affordability gap to impact the Pikes Peak Region. Our 2018 Projections are in line with the sorts of price growth and sales seen from 2014 through 2016, treating 2017 as an outlier year of radical abundance: Roughly translated, we expect 5.5% to 6% growth in price (a slight cooling off) and single-family unit sales between 2015 and 2016 sales performance. Where growth will remain strong is in the over $300,000 market. As recently as 2015, 71% of all single-family sales were less than $300,000. Last year, it was only 58% of all single-family sales that were less than $300,000. For that matter, sales $400,000 to $600,000 will represent a larger segment of the marketplace. The high-end will also see growth in the MLS market as the cost to build “just what we want” is starting to exceed affordable budgets and the dirt is getting further and further away rom the city center. If you are a general contractor who wants to go after $100,000 to $300,000 scrape jobs that reimagine 15-40 year old foothill homes, there’s a big market out there.
So to conclude, let’s take an old-fashioned S.W.O.T at the Pikes Peak Region’s Real Estate Market as of January 11, 2018
- Very low inventory
- Very high demand
- Interest Rates that remain historically low
- Unemployment Rates very low; Job Growth Robust
- Relatively Affordable Prices compared to “Big City” Denver, as well places like Fort Collins. Our 2017 $285,000 median price is only 69.5% of Denver’s $410,000 median price and 76% of Fort Collins $375,000 median price.
- Low Inventory means buyers have very little to choose from and this creates a take-it-or-leave it feeling that eventually dampens home-buying enthusiasm
- Rising costs are pricing many buyers out of the market and creating affordability problems
- Builders are not keeping up with demand. Even at our projected 4000 single-family units in 2018, that will be 65% as many units as were built in 2005. Additionally, builders are fixated on a price tag higher than the average asking price, building for a different audience than the audience that “needs” the inventory
- A genuine lack of infrastructure makes building further east or north or south more and more painful for commuters
- Just to needle some folks, we’ll add one more: stuff worth buying, and with it, the mindset that always plays it like it was always played. Where’s the art? Where’s the cool? Where’s the risk? Where’s the development that has detached 900 square foot guest houses in the backyard? Where are the compost bins and why can’t you recycle your Coke can or sushi tray at King Soopers?
- Our New Rule of Thumb: 1.5 miles east of I-25, west to the mountains. That’s “the corridor”. It’s almost built-out and it’s increased in value disproportionate to points further removed for the last four years consecutively. It’s the part of town that’s remarkable and like nowhere else. Real Estate 101 is every piece of dirt is different. “The Corridor” represents our region’s biggest and most notable strengths.
- Put your investment dollars in the path of where rail to Denver will have to eventually end up. This is a 10+ year play, but real estate is a lousy short-term investment. So using ten-year eyes, ask yourself this: where would the nearest light rail station likely go? Here are three no-brainers: Downtown; somewhere between Corporate Center and Woodmen; somewhere between Northgate and Monument. If the private sector concentrates their investments in these areas, the public sector will eventually have to connect the dots for them.
- See our keeping-it-real discussion above on national threats.
- Add to that a possible return to violent climate, as our incredibly dry winter could make for horrid fire conditions by spring 2018.
Based on information from the Pikes Peak REALTOR Services Corp. (“RSC”), for the period January 1, 2011 through December 31, 2017. RSC does not guarantee or is in any way responsible for its accuracy. Data maintained by RSC may not reflect all real estate activity in the market.
Additional data for our Annual Report Series provided by Colorado Springs Home Builder’s Association, Pikes Peak Regional Building Dept., The Gazette, The Denver Post, www.FHFA.gov, www.HUD.gov, www.Zillow.com, Fannie Mae, Freddie Mac, Colorado Springs Business Journal, Mortgage Bankers Association, www.Census.gov, www.SpringsGov.com, www.ElPasoCo.com, www.cospringstrails.com, www.bea.gov, www.city-data.com, Fort Collins Board of Realtors, www.corelogic.com, www.TheDeptofNumbers.com, www.TheBalance.com, www.CNN.com, www.BLS.gov., and The Colorado Springs Business Alliance.