"Better Sell Now Before Prices Fall" - So Says the Realtor [Analyze This]

by Osman Parvez
At my Rotary meeting today, a club member mentioned that a Realtor told him house prices are down 2% in Boulder this year.  

I almost choked on my coffee.  

"Um...what are you seeing?" he asked. 

Great question. Let's look at the data to review the past and get out the old crystal ball to talk about the future. We're overdue for a market update. 

Boulder Market Conditions
One of the problems for real estate buyers and sellers is a lack of market transparency. Public information is poor in quality and although presented nicely on websites like Zillow, it's erroneous. Zillow cares about audience size, not accuracy. That's how they make their money. The Boulder market is very small, which also leads to statistical significance errors due to sample size. 

I'm fairly certain the Realtor running around Boulder telling people that prices have fallen 2% is more interested in getting new listings than offering relevant, actionable information on market conditions. In other words, his statistics have one clear beneficiary: himself. People respond to fear. That's why click-bait exists. 

Want the facts? Take a look at the table below. This is what is really happening:

Sales volume for typical houses (see below for a description) is down 7.7% from the first quarter of last year. The sales volume drop isn't particularly meaningful. The market is still constrained by very little inventory (less than 2 months of supply, 6 months is considered normal). Meanwhile, the average sale price was $867K this year, a drop of 0.9%. Sadly, with such a small sample size and a wide range in prices (standard deviation of over $450K!), the change in average price also doesn't mean much.  

If you're looking for a better statistic to measure price changes, consider finished and total $/SQFT. This measure climbed 9.9% and 9.2%, on average, respectively. The median increased 6.3% and 8.1%. It's still far from perfect, but it's a better measure for price changes. 

Is the market slowing? Yes, there are legitimate signs of the beginning of a slow-down but average sold price is not one of them. Better measures in market performance: the % of asking obtained by sellers dropped from 101% to 98%, on average. Days on market also climbed from an average of 75.9 to 78.4 (or median of 53 to 58, if you prefer). That's still very fast, by the way, but it's definitely a signal.   

Does the slowing market impact all price ranges and locations? Of course not. Some neighborhoods, price ranges, and property types have almost no inventory and a line of buyers waiting. Ask anyone who has tried to buy an entry-level house lately.  Meanwhile, some higher-end sellers overshot and are now making big price reductions, lending the appearance of the market dropping as a whole.  

Want proof? Here's a list of Boulder homes with +$100K price cuts. Only two are under contract after slashing their prices. Note the price range and locations of the homes in that link. Let me know if you see a pattern. 

Calling the Top
My prediction is that the market will soon be nearing the end of a cycle. The industry is cyclical, after all, and this has been one of the longest expansions in modern history. The bottom was 8 years ago! 

At the same time, the Colorado job market is strong and we are now at what economists consider full employment. Strong job market, net positive immigration, and exceptionally low inventory are a recipe for stable and increasing prices - not a broad sell off. The state demographer is forecasting that Boulder County will add another 6,656 households in the next 3 years. We almost certainly won't be adding that many housing units. Where do you think all those people will live? Hint: not in the City of Boulder.  

As I've written many times, nobody has a crystal ball but I'll share my prediction: As the cycle ends, I expect most of the market will skid sideways and begin to track inflation once again. Short of a Black Swan event, only prices in weaker locations will see major price declines, and even then, it will be short lived. 

If you're buying in this market and you're concerned with short term capital preservation, I recommend choosing carefully. Focus on safe assets, not risky ones. Only pay a premium if you see yourself occupying the property for 5 years or longer. Choose real estate that is in high demand, at price points where the buyer or tenant pool is deep. Only pick locations that have a long track record of liquidity. 

What house types, price points, and locations are safe? Talk to your real state professional

If you own property in compromised locations, on busy streets or that is otherwise less than optimal, now is a good time to consider selling (there's a reason that so many houses have suddenly hit the market on Moorhead). Only sell if you have alternative investments that will perform better. It's not only the real estate market that is nearing the end of a cycle. Equity prices have reached historic levels, not through fundamentals but - as one of my friends pointed out at happy hour yesterday - via multiple expansion.  That's not a recipe for sustainability.

About the data: 
No proper analysis is complete without an understanding of the underlying data. The table above is based on the following data set. 

- City of Boulder proper, no Gunbarrel or mountains, as defined by an arbitrary map drawn by yours truly. I don't care whether it's annexed or not, neither do most buyers. 

- IRES data only, no duplicates from ReColorado. The MLS turf war is still ongoing. This means a small portion of sales data is missing.
- Affordable housing excluded, naturally. 

- 3 bedroom plus properties only. No unicorns.

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.