Aug 202016
 

“The only function of economic forecasting is to make astrology look respectable.”  ….….economist Esra Solomon

Market forecasts tossed out by real estate agents should be taken with a truckload of salt, but our clients want to know what the future holds for housing prices and investments, so we try to provide some perspective when we can.  And the perennial question we’re asked any time we’re seeing price run-ups like the one we’re seeing now  is whether we’re in a bubble that’s likely to pop.  Our best guess on this is, “No.”

The best long term data we have on pricing  in our local Colorado markets is the Federal Housing Finance Authority’s House Price Index.  This index has tracked prices nationally, by state and by metropolitan areas across the US since the early 1980s.  This chart, compiled using FHFA data, illustrates home price increases and decreases on a quarterly basis for the US, Colorado, the Denver Metro Area, and Boulder County, beginning with the first quarter of 1984.

Appreciation_FHFAHousePriceIndex_AnnualChange_600

Over the past three decades, these  data indicate that Boulder County’s average rate of price appreciation was 5.1%, compared with 4.2% for the Denver metro area, 4.1% for Colorado, and 3.7% for the US as a whole.  This chart also shows, however, that these average rate increases aren’t the norm.  To the contrary, if we define the average as price increases in the 4-6% range, prices are increasing faster or slower than that about 3/4’s  of the time.  On the high side, prices have increased at a 6-15% rate about 34% of the time in Boulder County and 36% in Denver.  On the low side, they’ve increased at a less than 4% annual rate 40% of the time in Boulder County and 32%  in Denver.  And prices have actually dropped about 10% of the time in Boulder County and 23% in Denver.  Far from representing “the norm,” price increases between 4% and 6% are relatively rare, representing about 16% of all quarters over the past 3 decades in Boulder County and 9% in Denver.

Appreciation_FHFAHousePriceIndex_FrequencyofRates

But even if annual price increases well in excess of the average are common in our markets, doesn’t the current run-up in prices seem a bit extreme?  Not according to these data.  In brief, the price run-up that we experienced between 1992 and 1996 ran for 17 quarters, with an average increase of 10.7% increase in Boulder County and 8.3% increase in the Denver Metro Area.  From 1998 to 2002, the “price bubble” ran for 18 quarters with average increases of 10.1% for Boulder County and 9.9% for Denver.  So far, our current price run-up has run for 13 quarters, with average increases of 9.7% in Boulder County and 11.3% in Denver.  Generally, these annual increases are pretty comparable to what we’ve seen before, and this “boom” has run about a year to a year and a half less.  In a word, with respect to price increases, it looks pretty normal.  And if we look at average prices since the end of our last “boom” period, the average price increases from the 3rd quarter of 2002 to date are running at 3.3% for Boulder County and 3.1% for the Denver Metro Area, a point or two below our longer term average.

And the norm over the past 30 years in our market just doesn’t include bursting bubbles.  As FHFA data indicates, we’ve only had two periods of price depreciation in Boulder County or Denver from 1984 to 2016.  Both lagged earlier price run-ups substantially and both were associated with national or world-wide recessions…each characterized in its time as the worst since the Great Depression.  Our markets aren’t impervious to downturns associated with widespread recessions, but they don’t seem susceptible to boom/bust cycles either.  Boom cycles just seem to be followed by slower than average appreciation rates.  One might call it a boom/coast market.

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