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Is Boulder County in a Housing Bubble?

As demand surges, inventory tightens, and home prices continue to rise in Boulder County, the question on everyone’s mind is: Are we in a bubble? Earlier this month, a group of my colleagues presented on this topic: Duane Duggan, RE/MAX of Boulder; Kelly Moye, RE/MAX Alliance; Mike Malec, RE/MAX of Boulder; Monique Cole, Pedal to Properties; Lou Barnes, Premier Mortgage Group; and Rick Miller, Land Title Guarantee. In this blog post I’ll break down their findings.

What is a Bubble?

First, let’s define “housing bubble.” The Brookings Institution writes that the term is most often used to refer to a situation in which “excessive public expectations of future price increases cause home prices to be temporarily elevated.” During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by significant price increases. So, they buy a house that they wouldn’t normally be able to afford, and when the bubble eventually “bursts,” they are left with an unattainable mortgage payment and lose value on the home they paid top-dollar for.

What Creates a Housing Bubble?

The presenters noted six factors that can create the perfect conditions for a housing bubble to develop:

  1. Rapid Price Appreciation

When home prices outpace inflation, this could be an indicator that a bubble is on the rise. With inflation around 3% and homes appreciating at a rate of 8-14% in Boulder County, this is potentially an issue in our area.

  1. Home Flipping

If more homes are being bought and sold for a profit than for long-term use in an area, that can lead to overinflated prices. With an average home price of $659,275 in 2016, Boulder County’s price point discourages “flipping,” and has not been found to be a significant issue.

  1. A High Percentage of Mortgages in Default

If a large share of buyers obtaining mortgages later end in default, that is a sign that the bubble could be nearing a burst. With Boulder’s strong income and 4.9% unemployment figures, as well as strict mortgage requirements, our economy is healthy and the percentage of lenders defaulting on their mortgages is extremely low.

  1. Home Prices vs. Rent Prices

During the peak of a bubble, it often costs more to rent than to buy due to swelling home prices. The average rent in Boulder was $1,721 in 2016—higher than the cost of many mortgage payments. Low interest rates have helped to offset the cost of rising home prices, so buying is still a more financially savvy option for many.

  1. Too Many New Constructions
    Building too many homes to satisfy the area’s need can spell disaster for the long-term. With building restrictions, the high cost of land, and lack of development opportunities in Boulder County, we have the opposite problem—not nearly enough new construction to satisfy the demand. According to its definition, we can’t be in a bubble when demand still outpaces supply.
  2. Home Prices Compared With Wages

Have rising home prices kept pace with the wages of locals? While our job market is strong and incomes are higher than in surrounding areas, our locals struggle to afford a median-priced home. This could be an issue in the future.

We Are in a Shift, Not a Bubble

In the words of Lawrence Yun, chief economist for the National Association of Realtors, and Dennis Lockhart, former president of the Federal Reserve Bank of Atlanta, we are in a “shift,” not a bubble. They remain optimistic that we are not heading toward a recession. Though the inflation and interest rates may rise, home prices will continue to increase and the market will remain strong.

Thank you to my stellar colleagues for this extremely informative presentation!

 

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