As most people were preparing for the holiday season and the start of a new year, analysts and economists were churning numbers and thinking about the economy ahead. Already, a number of my colleagues have suggested the number of new jobs, the level of retail activity, and how many housing units will be constructed in the coming year.
In almost every forecast, the job growth of over 50,000 new jobs next year will be higher than we experienced in 2005 and housing starts are generally expected to fall slightly from this years amazing 45,000 plus new housing units. Retail spending is expected to remain strong in the coming year, growing at a rate of 5.5% or more. Equally important, most state and local economists believe that wage and salary growth, and thus personal and household income, will grow strongly in the coming year. All in all, the analysts and economists are a pretty optimistic group this year in Colorado.
Given the rough consensus on next years economy, the real story is underneath the forecasted numbers. Like an iceberg, the important part is often unseen. This past year, we economists have discussed some of these differences in perspective by focusing on the question of whether a housing bubble exists in Colorado.
The answer to this question really depends on where you stand. If you are looking at it from the perspective of the nation or the Rocky Mountain region, you will have one answer. If you are thinking in terms of Colorado or one of the local sub-markets in our state, you will have yet another answer.
My short answer is, yes, we did face a housing price bubble throughout 2000 and 2001. This bubble never burst, however; instead, it has slowly deflated over the past several years. Local and state housing prices grew at twice the rate of the nation on average, from 1995 to 2000. This was a period of strong growth throughout the United States. From 2000 to today, the nation saw even stronger growth with housing prices on average growing slightly more than 10% a year. During the same period, our state average housing price has only grown slightly more than 5%. The Denver market is the prime example of this price appreciation change, lowering from a 10.3% annual increase in the late nineties to just over 5% a year for the past five years.
The major sub-market of Colorado Springs saw the reverse occur, much like the nation as a whole. Colorado Springs experienced a growth in appreciation from 5.7% a year in the late nineties to a stronger average 6.5% increase during each of the first five years of this decade.
However, price appreciation does not tell us the whole story. Another factor to consider is the relationship between Median Household Income and Median Housing Price. This index of Housing Opportunity (conducted by the NAHB and Wells Fargo Bank) shows that all the major metro sub-markets in Colorado are more affordable than the national median comparison. Surprisingly Boulder, which is often considered our most expensive metro sub-market, has a higher opportunity index rating than the nation on average. In this case, higher means more affordable.
A third way to think about this question is to ask how many years of the household median income are required to purchase the median house in an area. In Boulder, it would take 3.4 years, in Fort Collins 3.1 years, and in Pueblo (our most affordable metro area), it would only take 2.6 years. The national median levels would require a full 4.4 years of income. Now obviously, we dont put all of our income strictly into our housing purchase or rent, but it gives you some sense of the comparative affordability of housing within Colorado.
This quick review of the data provides you a good sense of why I, for one, believe that the housing bubble existed and has deflated, but never burst, generally in Colorado. Most of our communities are quite affordable places to live in the country. Even recent statistical evidence points to a reasonable appreciation and return in our local markets. If employment growth levels are around 50 60,000 new jobs a year (resulting in corresponding levels of population growth), these normal market conditions should continue into the coming year or years.
