Thursday, May 25, 2017

A Deeper Analysis of Boulder Real Estate [Market Update]

by Osman Parvez
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If you've been warming the bench on the sideline, hoping the Boulder real estate market falls apart, I've got bad news for you. 

Let's talk about market conditions. My blog post from yesterday is a good place to begin. Now, let's dig a little deeper with an analysis of inventory by price range. 

Remember: Intelligent real estate decisions are based on a deep understanding of market conditions. There is no substitute.

The first two charts below (green bars) break out stand alone, single family house inventory. I cover town homes and condos (attached dwellings) further below. 

For the detached house charts, prices start at $500K and increase in $100K tranches to $1MM. Above $1MM, buyers tend to have greater price elasticity as their range expands. Accordingly, the tranches increase by $200K, all the way up to $2MM. I included the $2MM+ tranche, but in reality, it's a catch-all for prices up to $6MM. If you're shopping in the $2MM+ range, there are a lot of options and each one needs to be analyzed individually. 


The entry level in Boulder now starts at about $600K for a basic 3 bedroom, 1 bath ranch in Boulder (click HERE for examples). Homes in compromised locations such as along Moorhead, Baseline, Table Mesa, or Foothills Parkway are below this price point, typically a 10-12% discount. 

Expect to pay $615,000 to $675,000 for a basic 1,000-1,100 SQFT ranch in average condition and on a quiet street.  Add a premium for a north/south orientation, a basement (finished or not), and larger lot size. Table Mesa and North Boulder neighborhoods sell for a premium to Park East and Martin Acres.   

What about lower priced houses? As of this writing, there are only 10 homes priced below $600K on the market. All are in compromised locations or have other material deficits. The $600K to $700K tranche is representative of Boulder's true entry-level, with a little more than 20 homes currently on market. 


To buy something more akin to modern home standards, say 2,000+ square feet on the main and 4+ bedrooms, expect to spend at least $800K (examples that sold this spring). Less and it's likely compromised in some way. 

Keep in mind there are pockets of unusual activity and higher prices. 17th and 18th street, for example, have seen a number of basic ranches that fetched an excess of $800K in bidding wars. This is driven by buyers with significant expansion plans (i.e. pops) and the general desirability of the neighborhood. You could say it's the new Newlands. 

In past real estate cycles, there was a large build-up of higher end homes available. This time around, the market looks more evenly balanced and selection actually drops above $1.6MM. 


Next, let's look at how price impacts percentage under contract. Starting with the $600K price point and moving up towards $1MM, between 45% and 58% of available inventory is under contract. From $1MM to $2MM, it drops to between 37% and 45%

This difference is not severe, but it is worth noting. It's not quite like the tale of two markets we saw in the 2006-2009 down-cycle, where high-end inventory piled up. For now, the market is far more level. Even the lowest performing tranche, the $1.0 to $1.2MM range (examples), shows 37% inventory under contract or less than 3 months of supply. 6 months of supply is what most analysts consider a healthy and balanced market. 

Now, let's switch to attached dwellings (condos and town homes). 


The entry level price point for Boulder condos is $200K to $300K. For that price, you can expect to find a 1 bedroom unit with an HOA in the $200's/month. Selection is slim with only 15 units currently on the market. Inventory in the next tranche, $300K to $400K is much better, with almost 30 units on the market.  In this price range, it's possible to get a 2 bedroom unit in a central location, with easy commuting to CU campuses or Google. Most of these units have basic finishes, deferred maintenance, and high student density.  

The biggest deficit in the spectrum of options in Boulder remains a shortage of non-student, high quality but not high-end, 2 and 3 bedroom units. Note: In the coming weeks, expect a major announcement from the Peloton with a fresh injection of supply.  

Most downsizing, young professional, and young family buyers of town homes will want to start their search north of $500K. In this price range, you can expect 2 bed, 2 baths with reasonable square footage. You can often also get a garage or storage unit for the toys. At the moment, there are only 20 units on the market. 



Cap rates have fallen back to earth and many investors have set their sites on sub-markets like Longmont and Lafayette. That's good news for Boulder buyers. You may not be competing with cash buyers, but the absorption rate remains high across the spectrum. In the $300 to $500K range, more than 70% of inventory is under contract. From $500K to $900K, the percentage ranges from 55% to 14%.  Then there's a blip for higher-end attached dwellings in the $900K to $1MM range where once again, 80% of the market is under contract. That's what happens when there are only 5 options available. The $1M+ market has just under 40% under contract

Conclusions  
The bench has been a bad place to be for the last 8 years. Prices have risen markedly and although we are in deep historic territory for bull markets, there is little evidence the market is running out of steam this summer.  It's true, inventory has begun rising. Prices have also fallen back below asking prices. Still, the absorption rate remains shockingly high, across nearly the whole spectrum.  

Now is a smart time to sell property, particularly if it's in a compromised location or has significant deferred maintenance. If you're buying, I strongly recommend focusing on lower risk assets - defined by depth of market and high liquidity. Avoid unicorns. If you're considering getting into the remodeling/expansion business, you should also have a serious conversation about your tolerance for construction cost overruns and lengthy delays. 

If you'd like to have a private conversation with me about your real estate strategy, give me a call. I work with primary home buyers and investors. My goal is to help you make a smarter real estate decision. ph: 303.746.6896. 


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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. 

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