Are more twenty-somethings living at home in Colorado?

Household formation has long been an issue central to the demand for real estate. If people move out of their parents homes and create a new household, then a new housing unit will be demanded. If two people move out, and get one unit together then one new unit will be created out of two. If both people can afford to get their own apartments, then two new units will be created out of two.

Economic prosperity has long been connected to economic prosperity. If incomes are low, or housing costs are high, people will either stay at home or take on additional roommates to afford housing. If wages are high or housing costs are low,  more people will demand more units. This is moderated, of course, by people cohabiting for romantic/family reasons, such as marriage. In that case, two households will reduce to one even when economic times are good. 

Nevertheless, on the whole, there is reason to believe that when incomes and economic prosperity increase,  people tend to demand more housing units.

Are Young People Now Too Poor to Move Out? 

Last year, the New York Fed published an analysis on how many 25-year olds were living with their parents.  Here are their results: 

In 2003, between 20 and 30 percent of twenty-five-year-olds lived with their parents (using our measure) in twenty-five of the forty-eight states. By 2013, all forty-eight states had parental co-residence rates of more than 30 percent. Indeed, for twelve states, the parental co-residence rate for twenty-five-year-olds had risen above 50 percent. Four states—Maine, Minnesota, New Hampshire, and Vermont—saw the rate at which twenty-five-year-olds live with their parents increase by more than twenty percentage points between 2003 and 2013. Parental co-residence was highest in Mid-Atlantic and Southern states in 2003, but by 2013 it was highest in the Northeast and Midwest. 

So, for the period of 2003-2013, there was indeed an increase in the number of people living at home. Here's what it looked like in 2003.  Colorado is in the 20%-30% range: 

But, by 2013, here's what it looked like. Colorado is in the 30%-40% range: 

In both cases, Colorado is ranked among the states with the fewest 25-year olds living at home. 

The NY Fed report goes on: 

Parental co-residence increased steadily for both age groups from at least 2003 through 2012, followed by a leveling off or slight decline in 2013. The chart also shows one measurement of household formation—homeownership—which has been decreasing for both twenty-five- and thirty-year-olds since 2007, the end of the housing bubble and the start of the Great Recession. While thirty-year-olds were twice as likely to own a home as they were to live with their parents in 2003, we find that they were equally likely to own a home or live with their parents in 2013. 

So what are the reasons for this? The report attempted to address that too: 

Our results demonstrate that local economic growth is a mixed blessing when it comes to building youth independence: Improvement in youth employment conditions enables young people to move away from their parents, but rising local house prices are estimated to have forced many young people to move back home. These two effects partially offset each other. 
However, the relationship we observe between rising student debt and co-residence with parents is clearer. The chart below presents a state-level scatter plot of the change in the rate of living with parents from 2008 to 2013 against the change in average student debt per graduate. 

It reveals a clear positive correlation between a state’s student debt growth and the rate at which its twenty-five-year-olds live with their parents. The regression line in the chart indicates that a $10,000 increase in student debt per graduate in the state is associated with an additional 2.9 percentage point rise in the rate of living with parents. (Estimates in the staff report that account for changes in the local economy and other factors tell a similar story.) 

So how does Colorado compare in terms of student debt? Fortunately for us, the Dallas Fed released a 2014 report on this, and the map looks like this: 

In Colorado, the mean (average) balance was $26,215, which puts it at 16th highest nationwide. 

Based on this statistic alone, then, we'd expect Colorado to have high rates of people living at home. But that's not the case. Colorado has  some of the lowest rates of people living at home. As a possible explanation, we might look to the fact that that Colorado has the 12th highest median income among the states. 

According to Census data, Colorado household median income was $60,940 in 2014, which put it above the national median household income of $53,657. (The highest state median income was found in Maryland at $76,165.)

Colorado may have relatively high student debt, but it's incomes may be  factor in making up for that. Moreover, in this case we're looking at average student debt and median incomes. The median incomes suggest that the incomes reflect a relatively typical income level.  It's why we often prefer the median over the average. But, the student debt level here is an average which means it could be skewed  up by a small number of people with very large debt levels. From this we might conclude it is indeed plausible that, at least in the case of Colorado, student is not the dominating factor in the growth of living at home. 

Related post: "A Better View of Poverty Rates: We Must Consider the Cost of Living." 

Inflation-adjusted rents in Metro Denver still near all-time highs

The 4th Q 2015 vacancy and rent survey showed that vacancy rose to a five-year high while rents were flat from the 3rd Q of 2015 to the 4th Q. Year-over-year, though rent growth was still substantial.

The rent data released by the Apartment Association's survey, however, are just nominal rents, and are not adjusted for inflation. So, I like to take a look at rents in terms of 2015 dollars only, so we can compare more accurately with rents as they were in previous business cycles.

We know that nominal rents are currently near the highest levels ever. But where are they once adjusted for inflation?

Well, it turns out that even when adjusted for inflation, the average rent in metro Denver is still near all-time highs.

In this case, the fourth quarter average rent for metro Denver was $1,292, which is equal to the third quarter and up from the average rent during the fourth quarter of 2014 which was $1174.

However, it wasn't that long ago that the average rent was still below where it had been during the dot-com boom days in real terms. Specifically,  the average rent hit 1,084 during the fourth quarter of 2000. That level was not passed again until the first quarter of 2014. During most of the period from 2001 to 2001, the average rent was actually falling in real terms:

So, when adjusted for inflation, we do find that rents really do go down, as they did during the housing boom and many households were leaving rental housing behind for purchase homes. The foreclosure crisis and lackluster income growth since 2009 (among other things), however, has made rentals relatively more attractive in recent years, and rent growth has now surpassed the dot-com days. 

As  a final note, let's look at  the unemployment rate versus the vacancy rate. Historically, the two have often trended together, and this was especially true before 2008:

Since 2008, though, the vacancy and rent has become less sensitive to employment trends, perhaps due to a relative decline in the attractiveness of purchase housing, and the fact that household formation has tended to outpace multifamily construction in recent years. With the fourth quarter's sizable increase in vacancies, it is unclear if this signals a trend, although vacancy rate may be responding the the continued decline of job creation in metro Denver.

All data comes from the Apartment Association of Metro Denver's apartment vacancy and rental survey, and from the Bureau of Labor Statistics.

Job growth flatlines in Pueblo and Grand Junction

Although job growth has slowed in Colorado, the year-over-year change is still positive. That is, new jobs are still being created, according to the Establishment survey. The situation is a bit different in Grand Junction and Pueblo, however, where the latest Establishment employment survey shows that in December, total payroll employment actually went down, year over year.

Practically speaking, though, jobs were simply flat in both cases. In Grand Junction, for example, payroll employment was flat at 62,000 jobs with no change to speak of from December 2014 to December 2015. We do see a general trend of decline since early 2014:

In Grand Junction, payroll employment growth hit 3.2 percent (a gain of nearly 2,000 jobs) back in March of 2014, but it's been declining since, and has been flat over the past four months. In fact, total employment in Grand Junction hasn't much budged from the 62,000 jobs mark for the past six months. 

In Pueblo, payroll employment was also essentially flat at 61,000 jobs in December. Employment growth had reached 3.9 percent (a gain of more than 2,000 jobs) in February of 2015, but has been falling since (this is YOY change):

The employment situation in GJ and Pueblo reminds us that the happy economic data we've been hearing about Colorado for the past couple of years has largely been driven by developments in northern Colorado and the metro Denver area. Oil employment in northern Colorado has helped push up overall job growth in the state, but southern and western Colorado have different experiences.

Historically, at least over the past 30 years, Pueblo has tended to have weaker  job growth than metro Denver and the state overall.

It's harder to generalize about Grand Junction, however, as GJ experienced enormous booms in the late 70s/early 80s, and also again from 2006 to 2008. GJ has seen lackluster growth ever since the 2008 financial crisis, however, and has in some ways not shared in the benefits of the expansion that has occurred in Colorado and the US since 2010.

(All data from the "Establishment Survey" which measures payroll employment for larger employers. This measure counts, jobs, not employed persons.)

Colorado in top ten of states in well being index

Every year, Gallup releases its "Well Being Index" which measures the following: 

• Purpose: liking what you do each day and being motivated to achieve your goals
• Social: having supportive relationships and love in your life
• Financial: managing your economic life to reduce stress and increase security
• Community: liking where you live, feeling safe and having pride in your community
• Physical: having good health and enough energy to get things done daily

Out of all US states, Colorado comes in fourth, behind first place Hawaii, then Alaska and Montana. Wyoming rounds out the top five for fifth place. 

Colorado is in the top ten list, yet again. In fact, according to Gallup, "Hawaii and Colorado are the only two states that have made the list of the 10 highest well-being states each year since 2008."

The Western US in general is notable for having high well being scores: 

Why does the West do so well? Well, the stereotypes about Colorado and west are often true. There is a lot of entrepreneurship, physical fitness activity, and community involvement among Westerners. Moreover, homicide rates are low in Colorado (and also in Wyoming, Utah, and Montana) adding to the "community" measure contained within the index for those states.

Climate may be a factor as well. For example, New Mexico, in terms of statistical data, is nearly as unhealthy and low-income as Mississippi. So why does New Mexico rank so much higher by this measure? It may have something to do with perceptions of how much control one  has over one's economic life and physical well being. 

See here for more on this from Gallup.

Home prices: Denver Case-Shiller index still near 15-year highs

Employment growth in metro Denver may be tapering off, but as of November, home prices certainly weren't.

According to Case-Shiller's report for November, released last week, the Denver home price index was up 10.8 percent, year over year. That's down slightly from September's 10.9 percent YOY increase, which was the largest increase seen in the Denver index since 2001 at the end of the dot-com boom.

While the highest YOY increase recorded in the past 20 years was 14 percent in 2001, November's growth rate of 10.8 percent is nevertheless a very large increase.

Denver's home price growth is outpacing the nation overall as measured in Case Shiller's 20-city index, which showed a year-over-year increase of 5.8 percent for November.

In thsi graph, I've compared Denver to the 20-city index, and you can see Denver's been outpacing the larger index for a while:

As Colorado has had stronger job growth than the nation overall, it is not shocking that home price growth has also exceeded the nation overall. A better job market has brought more demand both from people who were already here, and from new residents relocating for work.

Based on median income data, though, it's safe to say that home prices have indeed been outpacing incomes, which creates an affordability issue, and a question as to how sustainable the home price growth can be.

Payroll employment growth in Metro Denver hits 4-year low

According to the Establishment employment survey, total year-over-year payroll employment growth fell to 1.7 percent during December 2015. This was the lowest growth level seen since October 2011, when the growth rate was 1.6 percent.

Growth rates in payroll employment have been generally falling over the past 11 months, and the growth rate had been 4.1 percent during February 2015:

Growth rates have not fallen off this quickly since 2008, although the growth rate itself remains at relatively robust levels compared to the last economic expansion between 2003 and 2008.

In terms of employment totals, there were 1,398,000 payroll jobs in December 2015, compared to 1,374,000 payroll jobs one year earlier. That's an increase of 24,000 jobs over the year.

So, we're still looking at increases, but the rate of increase in each month has been falling.

Unless this trend reverses itself, of course, we will be facing negative job growth by the end of 2016.

(This data is for the Establishment survey which measures total payroll jobs, and not the number of persons. A person with two or more jobs could potentially show up as three jobs in this survey.)

The measure I'm using here is total nonfarm employment for the Denver-Aurora-Lakewood MSA, not seasonally adjusted.

Statewide Colorado

The metro Denver numbers show a bit more of a downward trend although the overall percentage increases are pretty similar at this point. As of December 2015, the YOY growth rate was at 1.8 percent, which translates to a gain of about 47,000 jobs from December 2014 to December 2015. In total, there were about 2,559,000 payroll jobs in December.

To compare to Denver, we might say that metro Denver was humming along with more growth than the state overall for much of 2014 and 2015, but both are now seeing growth around a little under 2 percent. Denver's growth rate has come down to match the state's rate.

Employment growth for the state is also down near 4-year lows:

Statewide, growth is being helped along by Northern Colorado economies while it's being dragged down by sluggish job growth in Grand Junction and Pueblo.

(This is the nonfarm payroll employment data for Colorado, not seasonally adjusted.)

All data used in this article is from the BLS.

Colorado continued to outperform nationwide job market in late 2015

Colorado's unemployment rate has been below the national rate since 2012. As the Colorado economy has begun to outpace the national economy in recent years, this gap has grown.

As of December 2015, the national unemployment rate was 4.8 percent, while it was 3.3 percent in Colorado.

Indeed, unlike the US unemployment rate, the Colorado rate has returned to its pre-crisis levels last seen in 2007.

Oil extraction activity has certainly been a factor here, and we have not yet seen any effects of closing oil operations as the price of oil has fallen. We may know more after we've seen February's employment data.

How Colorado performs compared to the nation overall, and to other states will also continue to affect the decision of out-of-state residents to migrate to Colorado. As I noted here, Colorado has outpaced most states in in-migration in the past year.

With job trends like these, it's not surprising that many have elected to recently move to Colorado from other states:

Home loan payoffs in Colorado up 40 percent through third quarter of 2015

The number of mortgage loans paid off in Colorado was up 37.7 percent during 2015’s third quarter compared to the same period of 2014. Payoffs also rose rose 13.6 percent from the second quarter of 2015 to the third quarter of the same year. 

Public trustees in Colorado released a total of 89,618 deeds of trust during the third quarter of 2015, up from 2014's third-quarter total of 65,094.  

Typically, a "release of a deed of trust" occurs when a real estate loan is paid off whether through refinance, sale of property, or because the owner has made the final payment on the loan. Release activity generally rises as refinance and home-sale activity increases, and thus can be viewed as an indicator of real estate loan activity, including home refinance activity. 

Release activity rose to a nine-quarter high during the third quarter, and was the third quarter in a row during which release activity increased. 

Comparing the first three quarters of each year combined, we find there were 166,205 releases during the first three quarters of 2014, compared to 233,135. That's a year-over-year increase of 40.3 percent. 

Looking at annual totals, we find that 2015, as of the third quarter, is on pace to exceed 2014's totals by a comfortable margin:

Trends in release activity varied by county, however. For the first three quarters of 2015, compared to the same period of 2014, percent changes in release totals ranged from a 92 percent increase in Douglas County to a drop of 4.5 percent in Alamosa County:

Although there are exceptions, the counties with the highest-income households and the most expensive real estate have traditionally experienced some of the highest levels of growth in release activity since those areas contain more households and real estate that will qualify for refinance deals. 

The significant increases in release totals in 2015 point to continued increases in home refi activity and, to a lesser extent, home sales activity as well. Moreover, release activity tends to increase as mortgage rates fall.  In 2013, we saw release activity surge following a period in which mortgage rates fell below 4 percent. We are now seeing a similar surge in the wake of mortgage rates again falling below 4 percent in late 2014:

Some other issues of note: 

The third quarter of 2015 showed the largest total for the third quarter since I began collecting this data in 2008.  I break it out this way to identify any seasonal issues:

County comparisons: 

Colorado foreclosures fell 8.4 percent in 3rd quarter

During the third quarter of 2015, Colorado public trustees reported 2,058 foreclosure filings and 1,089 sales at auction (completed foreclosures).  During the third quarter of 2014, there were 2,246 filings and 1,433 sales. Comparing year-over-year for the third quarter, foreclosure filings fell 8.4 percent and completed foreclosures fell 24.0 percent.

Comparing the third quarter of 2015 to the second quarter of 2015, foreclosure filings fell 9.8 percent from 2,282 to 2,058. Foreclosure sales rose 2.4 percent from 1,063 to 1,089 during the same period.

During the first nine months of 2015, there were 6,212 filings and 3,297 sales. For the same period of 2014, there were 8,505 filings and 4,760 sales. Comparing year over year, filings fell 27 percent and sales fell 30.7 percent.

Below is a time series showing quarterly totals in foreclosure filings and sales. The large dip in sales shown during the second quarter of 2008 can be attributed to a change in the foreclosure time line that took effect on January 1, 2008 and led to a large temporary dip in the number of foreclosure sales during March, April, and May of that year.

There are not large seasonal changes in foreclosure activity in Colorado, although the third quarter tends to be the most active quarter for foreclosure sales in Colorado.

Statewide, there was approximately 1 completed foreclosure (foreclosure sale) per 1,897 households for the third quarter of 2015. The map shows that there are few hot spots for foreclosure left in Colorado, and those that remain, such as San Juan County, are very small markets where a single foreclosure can move foreclosure rates up quickly.

No metropolitan county was found among the top ten counties for foreclosure sales rates. Most of the counties in the top ten were mountain and rural counties including Delta, Las Animas, and Fremont counties.

Pueblo and Mesa counties reported the highest foreclosure rates of the metropolitan counties. Pueblo County reported a foreclosure rate of one foreclosure per 665 households while Mesa County reported a rate of 1 foreclosure per 654 households. See Table 3 for full listing.

Boulder County reported the lowest foreclosure rate among metropolitan counties with 1 completed foreclosure per 10,435 households.

For a detailed list of each county, see the full report:  

2015_3rdQ Foreclosure Report

Denver-area multifamily housing permits peaked back in 2014

Measured in new building permit activity, multifamily building in the Denver-aurora metropolitan area appears to have peaked in 2014, and has been slowly declining since.

Using the Census Bureau's residential building permit data for this metro, we can look at how many permits were for buildings with more than one housing unit. In other words, this data is NOT for single-family houses, although townhouses are included. (This also includes for-purchase condos, so we're not talking only of apartments here.)

Since month-to-month swings are so large for these types of units, I've put it together looking at three-month moving averages (includes data up through December 2015). All the graphs in this article are for the Denver-Aurora metro area:

What we see here is that the 3-month average through December 2015 was 500 units which was down from the 3-mo average for November 2015, which was 713. This is all down from the peak of 983 units reached during October of 2014. Overall, we do appear to be seeing a slow downward trend that's been in place since the fall of 2014.

Generally, permit activity remains above what it has been over the past decade, although not equaling the huge multifamily housing boom that occurred at the very end of the dot-com boom back in 2001-2002.

Measuring the percent change year over year, we find that December's three-month average was down 37 percent, year over year. That's the largest drop recorded since August 2010, or 65 months ago:

In fact, 8 of the past months have shown negative growth by this measure, suggesting multifamily builders are definitely pulling back from the big-growth period that lasted from 2010 to 2013.

Building permits can be seasonal as well, although multifamily tends to be less season than single-family. However, let's look at the totals separated out by month so we can better take seasonal factors into account.

Looking at the 3-month average for December 2015 we see that the month's total of 500 was the lowest December total in 4 years, coming in behind the December total for 2012, 2013, and 2014. We find a similar trend with September and August, which were both also at a 4-year low. October 2015 was at a 3-year low for that month, and November was at a 2-year low for that month.  Overall, we can say that the second half of 2015 shows real declines in overall multifamily permitting activity.

The most recent vacancy and rent data for the metro area suggested that demand is softening, with the vacancy rate hitting a six-year high. There were questions about whether or not the industry had overbuilt. It's possible, although, even with condos included in this data, it seems that the industry has already been in the process of winding down from peak levels for more than a year. 

Metro Denver Rents and Vacancies: Vacancy hits 5-year high, rents flat

The apartment vacancy rate in metro Denver surged to a five-year high during the fourth quarter of 2015. According to the latest vacancy survey from the Metro Denver Apartment Association, the metro-wide vacancy rate during the fourth quarter of 2015 was 6.8 percent, which was the highest vacancy rate recorded since the fourth quarter of 2009 (measured in %):

Much of the increase in vacancy stemmed from vacancy rates over ten percent in Downtown Denver where an enormous amount of multifamily building has occurred in recent years. The vacancy rate was 5 percent during the third quarter of last year, and 4.7 percent during the fourth quarter of 2014.

Meanwhile, the average rent in metro Denver flattened off with a metro-wide average rent of $1,292 during the fourth quarter of 2015. The average rent was 1,291 during the third quarter of 2015 and 1,168 during the fourth quarter of 2014 (measured in $). 

Although the average rent was essentially unchanged from the third quarter to the fourth quarter of 2015, it remained up significantly, year over year. From the fourth quarter of 2014 to the fourth quarter of 2015, the average rent in metro Denver was up 10.6 percent. Yes, that's a drop off from the previous four quarters — all of which had YOY increases over over 12 percent — but a YOY change of over 10 percent still shows very strong growth (measured in %): 

And for those interested in the median rent, we don't see much of a difference in the trend here. The median rent did actually fall, however, from the third quarter to the fourth quarter, unlike the average rent. This fact does suggest, though, that what's driving the fall in rents is not just drops in the newest and most expensive units. Rents were falling in median-priced  units as well. If falling rents were being driven only in the most expensive units, we'd see more of a fall in average rents that was more comparative to the change in median rents (measured in $). 

Here are the two measures compared (in $): 

While the industry will likely scoff at the idea that there's any real softening in the market, the fact is it's too early to know how global trends will affect local markets. With collapsing oil prices affecting northern Colorado, and weakening economies in most of the US's biggest trading partners, including Canada, Japan, and China, there are reasons to be cautious. 

Real estate markets have continued to benefit from demographic changes, however, as population growth, and growth among the educated and employed have helped demand for real estate. 

Bank of Canada Holds Overnight Rate at 0.5%, Following Multiple Cuts in 2015

Last week, the Bank of Canada announced it would stay at 0.5 percent for its target overnight rate (the equivalent of the Federal Funds Rate in the US).

Many had believed that the BOC was leaning toward another rate cut, but those seeking an additional cut to stimulate Canada's troubled economy were disappointed. The dropping oil price has heavily impacted Canada's economy, just as it has been taking its toll on oil-industry-heavy Western states in the US.

The overnight rate was cut twice in 2015. From 1.0 to 0.75 in January 2015 and again to 0.5 in July. While the recent hold-steady policy provides a respite from 2015's cuts, the overnight rate has been at very low levels since 2009. the BOC has been relatively hawkish compared to the Fed, although not by much:

Now, unless you count the EU as a whole, Canada remains the US's largest trading partner. (And Canada is one of Colorado's largest trading partners.) So what happens to the Canadian economy does indeed matter to American investors and consumers.

Fortunately for Canadians, and for Americans who are adept at investing in Canada, Canada's economy has been relatively stable in recent years. Canada avoided the a collapse in housing markets, and in the wake of the 2008 financial crisis, Canada was said to have "gotten things right."

Indeed, Canada's central bank had pursued easy money less aggressively than the US in the early years of what would become the US housing bubble, possibly lessening the effects of malinvestment into the housing sector.

And the BOC has generally been more stable in terms of its overnight rate:

Nowadays, however, there are genuine concerns about the Canadian economy "headed off a cliff." Given that the US exported more than 260 billion dollars worth of goods to Canada last year, that's not great news for the USA, either.