Good News From Louis Barnes, Boulder Real Estate: a local perspective.

Louis Barnes at Boulder West Financial wrote a very pertinent article recently that seems to still apply to our current local Boulder real estate market situation. It’s a good bit of contrast and comparison to the national media position and even though this was written a few months ago it’s worth reading again… so in the interest of balance and also relevance to our local situation here’s Louis’ article entitled “Good News”

Given the drumbeat of “Colorado Tops Foreclosure List” headlines, it’s fun to bring news that a crucial housing-market indicator says that this difficult interlude is coming to a close.

The vacancy rate for apartments is the seven-county Metro area has fallen into the healthy zone for the first time in six long years. Rents have begun to rise in three countries (Douglas, Jeffco and Denver) for the first time in the same period (not great news for tenants, but they have enjoyed a long stretch of artificially low rents).

All through the 1990s and until the technology bubble blew in 2001, the Metro apartment vacancy rate was in the 5 percent range, little more than move-in-move-out, and rents steadily rose. That rate soared to 12 percent in 2002, stayed stuck at 10 percent in 2003 and 2004, and only last year slipped to single digits. Rents fell hard. This week the Apartment Association of Metro Denver announced a sudden, 2nd-quarter tightening in the rental market: Boulder, Broomfield, Jeffco and Denver down to 7.0 percent to 7.5 percent vacancy, Adams and Arapahoe in the 6 percent range, and Douglas all the way down to 5.7 percent.

In the last 30 years here, rental vacancy has defined conditions for home sales, and especially turns in the market. When vacancy is high and rents are low, tenants have no motivation to take the first step to ownership, to buy a condominium or townhouse. When that starter market is locked up – as it has been, just as it was from 1983 to 1989 – the middle and upper ends of the market are likewise locked up, starved of buyers. The end of the miserable 1980s market coincided precisely with a drop in vacancy from high teens to the 6 percent range.

Given the foreclosure numbers, and the not-so-hot sales conditions Metro-wide, why the vacancy drop? Some observers say the foreclosures are driving people from ownership back to rental, but I think that theory belongs in the “Tales of the West” category. There aren’t enough foreclosures to account for the increase in tenants. This tightening market is coming the old-fashioned way: more jobs, good ones, and more people.

Economist Rich Wobbekind at CU has had the situation dead right for two years now: Colorado’s job market has been recovering at a rapid pace. Total employment is back where it was before the Technology Fairy left, and in the 1st quarter, Colorado personal income growth ranked 5th in the United States. Rich says it’s the most broadly based job market in Colorado history, the only soft sector still technology (which probably accounts for higher rental vacancy up here, Boulder/Broomfield and Jeffco). “More people”: out-of-state migration to Colorado is rising steadily, and I expect that the illegal immigration population is under-measured.

If overall Metro economics are so much better, why the foreclosures, and why the year-over-year 10 percent decrease in Metro home sales, and 25 percent increase in un-sold inventory? The problem remains as it has been: the wildly excessive subdivision of land from the Broomfield-DIA axis all the way to Wyoming, Weld County the leading perpetrator (Weld now can claim the lowest home-value appreciation rate in the United States, and one home in 66 in some stage of foreclosure). Interest rates are doing some harm, especially the absence of adjustables as cheap loans for purchase.

Another Tale of The West: the foreclosure wave has been caused by new types of risky mortgages. A new study of nearby foreclosures says the average foreclosed mortgage itself to have done the harm. For a loan to go bad in a year and a half it was a bad idea in the first place, and the chief contributor to local trouble has been shoehorn lending by builder-lenders in combination with excessive construction, and semi-phony “purchase incentives” undercutting resale prices.

With the rental market now in place, the last piece that we need is an abatement in that suicidal subdivision and construction. Then we go about normal business.

By Louis S. Barnes, II

Boulder West Financial Services

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