Edd Gillespie & Associates | Real Estate Appraisal & Consulting

A recent article in the Washington Post by Simon Johnson and James Kwak commented on the diversion of investment capital into housing to the neglect of productive endeavors.  They said:

“For the long-term health of the economy, we want that money to flow into capital investment by the business sector because that is the best thing we know of to boost long-term productivity growth…

This may seem like an obscure point, but basically it means that even with the low rates of the Greenspan Fed, and even with all that cheap money from overseas, we couldn’t get it where we needed it to go because it was being sucked up by the housing sector. And it was being sucked up by the housing sector because lenders earned fees for making loans that could not be paid back, and banks earned fees for packaging those loans into securities, and credit rating agencies earned fees for stamping “AAA” on those securities, and all sorts of financial institutions — including those same banks — loaded up on these securities because they offered high yield and low capital requirements. In short, we had a dysfunctional financial system that failed at its most fundamental job — allocating capital to where it benefits the economy the most.

 This chart from Tim Duy illustrates the decrease in national capital investment over time,

http://economistsview.typepad.com/timduy/2009/10/hawkishness-dominates.html

Colorado has not been exempt from the “dysfunctional financial system” and is experiencing a lot of the fallout in the form of foreclosures, tight lending and unemployment following the exploded “mortgage bubble.”  Although the fallout may not be as large here as it is in other parts of the United States, it appears that recovery may not be any faster.  Over time Colorado, with the exception of 2007, has been the recipient of a greater portion of the capital investment than its 1.5% of the US population would indicate.

Source:  SSTI

The spike in capital investment during and immediately following the 2001 recession indicates that investment in the business sector may increase once again.

Source:  SSTI

The expansion of capital investment in 2001 apparently did not insulate the economy from the excesses of the financial sector.  What mix of capital investment is right for southern Colorado, and how can it be attracted?

It seems that people who buy houses need a mortgage to close the deal, mortgages require payment and most of those buyers need income to make the payments.  I want to chart the relationship between household income and house prices and I’m digging to find some reliable historic household income and home price data, but in the time being here is a chart of average annual home appreciation from FHFA and average annual unemployment from the Bureau of Labor Statistics:

Sources: FHFA and BLS

The chart reveals an interesting inverse, but not unexpected, correlation between the rates of unemployment and home appreciation in Colorado.  The flush of mortgage money from 2003 to 2005 temporarily impacted the declining rate of home appreciation, but had little effect on unemployment.

 And with respect to unemployment here is an interesting graphic illustration via econbrowser.com, gregmankiw.blogspot.com and innocentbystanders.net comparing what the administration said would happen to national unemployment with and without stimulus and what is actually happening.

The availability of affordable housing is one sign of economic health in a community, but it may be a blessing that only low income communities in southern Colorado actually have.  The scenic southern Colorado mountains have become a desirable place to own real estate.  The supply of land there has remained constant while the demand for “trophy ranches” has increased, and subdivisions and condominiums have added to the supply of second and vacation homes.   The median sales price of homes has disconnected from the US Census estimates of median household income in some of the southerly tiers of Colorado counties.

The following chart compares median income information from the US Census with the median price for 1,300 square foot home reported from the HUD survey of MLS records across southern Colorado.

The blue line tracks the US Census estimates of household income across southern Colorado and shows the trend from Telluride near $60,000.00/yr to Springfield at $30,000.00 per year.  The orange line represents the price of affordable homes of 2.8 times the median income, a commonly used benchmark.  The red line, by way of contrast, tracks the median home price reported by the MLS systems.  The relationship between spikes in median income and spikes in existing median home prices is readily apparent and an intuitive conclusion, but when the benchmark of 2.8 X median household income is applied it is apparent that the indicated median price of affordable housing in many counties in 2007 was substantially less than existing median sales prices.

The median household income estimates indicate that 50% of the people in the county cannot afford the median price of housing; however the median existing sales price indicates that 50% of the houses sold for less than the median price and that results in a balanced market.  It is clear with two or three exceptions that home prices west of Pueblo are significantly exceeding affordability based on median household income.  The likely explanation for the disparity is that while the supply of real estate is certainly local some of the demand for it is not, therefore measuring local household income as an indicator of the demand side of the market may yield a conclusion that has incomplete support.

Studies in the mountain communities of Aspen and Vail have revealed a dearth of housing that can be afforded by wage earners with the result that workers do not live in those communities, making low cost labor scarce, increasing demands on transportation systems as workers commute from more affordable communities and decreasing school enrollments.  All are signs that the economic health of the community weakens as it becomes exclusive and real estate prices rise substantially above affordability.

The chart indicates that conditions in Telluride may mirror the findings in Aspen and Vail, but the remainder of the data indicates the need to ferret out transactions that do not reflect the local markets.