Boulder Real Estate Insight

For this Boulder real estate insight, I’m pulling some of my comments from an article I read recently by Lawrence Yun. Mr. Yun is the National Association of Realtors’ Chief Economist.

Yun said that he was in disagreement with the conclusions that a writer at the Wall Street Journal put forth in an article about home ownership and appreciation.

If you have thoughts or questions about what’s going on with the value of your home, call or email me so we can take a hard look at the market in your neighborhood.

What struck me is that Yun said the WSJ article questioned the wisdom of people thinking that their home was a good tool for generating wealth. Maybe that’s true, as so many people thought they could get into their ‘wealth-building’ plan using real estate to make a ‘quick buck’.

Historically, home ownership as an investment strategy has never been a fast return prospect. That’s what got so many people in trouble I think. I had several first-time home buyers in recent years talk about how they planned to sell their home in a year or two to get a larger home. The first home they were looking at was sometimes larger and proportionately more expensive than the last home their parents owned.

Lawrence Yun hits the nail on the head when he says that real estate prices are a local issue. He reminds us that there are only four states — California, Florida, Arizona, and Nevada — where real estate prices have fallen at a double-digit rate.

We get caught up in the national stories about falling stock prices and falling real estate prices, and too often attempt to apply a broad brush to a very small surface. Let me remind you that you should look closely at the specific city or town you live in, and more appropriately, the local neighborhood sales and pricing trends.

Yun goes further and says that an interesting note is that these four states CA,FL, AZ and NV are showing the largest buying trend as buyers take advantage of lower prices. He says “Anecdotal reports of multiple bids suggest prices may be bottoming out in these areas.” Sounds like to me homes are not only for sale, but ON sale and buyers know it.

Thinking about how the math works? Here’s a part of Mr. Yun’s article that I just couldn’t summarize:

Home Prices

Experts say you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income. OK – let’s look at how that works in real life. If home prices rise (on average) at an inflation-adjusted rate of 2.5%-3% a year, then nominal home prices can be expected to increase about 4.5%-6% a year. In other words, if a household buys a $200,000 home today, then that home will be worth $310,000 in 10 years, $505,000 in 20 years, and $823,000 in 30 years, assuming a 5% home price growth. Given that most homeowners have 30-year mortgages, all the debt will have been paid off at the 30-year mark. At that point, the $823,000 is pure equity. If home price appreciation increases further – say at 6% – that home will be worth $1.08 million in 30 years. Given America’s poor savings rate (that’s a different issue altogether), any form of savings discipline such as a monthly mortgage payment helps Americans accumulate wealth.

One of the last points I want to make that was reinforced by this prominent economist’s comments is that it tends to come down to jobs. To predict pricing trends, you would have to be able to forecast where job and income growth would be strongest, and where home buyer households will want to live.

I’ll add another quote from Mr. Yun’s comments to reinforce the mantra that all real estate is local:

I remember a story in my local neighborhood paper several years ago about two homes that looked exactly alike. Both homes fetched roughly the same price at one point. But at the time of the Journal’s recent story, one home was worth more than double the other – not because of any physical differences in the homes, but because of neighborhood characteristics.

I’m asked regularly why one home sold for a higher amount than another. It almost always comes down to location. Or sometimes it’s the location… or it could be… yes. I don’t mean to be glib, but we have to stop getting distracted by notions that wall street prices, or real estate prices in Florida, are necessarily changing prices in the Boulder real estate market. Demand for one neighborhood or localized area over another area DO indeed affect real estate values.

If you find you’re considering a change and have some questions about real estate in our area, please send me an email or give me a call so we can talk about what’s important to you right now.

-Zachary Epps, full-time professional Realtor® and EcoBroker®

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