Latest Case-Shiller Home Price Index: Denver metro home price index up 10.2 percent

During December 2015, home price growth in the Denver area, according to the Case-Shiller index, remained at some of the highest levels seen in a decade, with year-over-year growth at 10.2 percent. That's down from November's year-over-year rate of 10.8 percent, but up slightly from December 2014's rate of 10.1 percent.

The first graph shows the year-over-year comparisons for the past decade:

We can see that growth is topping what it was during the nationwide housing bubble that existed prior to 2008. Clearly, for-sale housing demand remains rather robust in the region (at least as of December).

Compared to the 20-city composite index for home prices, Denver continues to see even greater growth. In fact, metro Denve rgrowth has been almost double the 20-city composite growth in recent months:

As noted here, as of December 2015, employment growth in Metro Denver has been slowing, but apparently not enough to bring down the sizable growth rates we've been seeing in home prices in recent years. Global and national economic trends do show reasons for concern about slowing economic growth, and we do see slowing employment growth stateside, but it seems we'll need current trends to persist longer before we see significant changes in for-sale housing demand in these numbers.

Military spending by state: Colorado ranked 18th

With the arrival of the presidential primaries (and especially the one in South Carolina), i'm reminded that military spending can be a major factor in state level politics. Some states owe very large portions of their state's GDP to military spending, and it's not a coincidence that Southern states are known for their pro-military voting blocs. Many states in that regions have economies intimately tied to their local economies.

To see where Colorado fits in this, we can look at a 2011 study conducted by Bloomberg that examines military spending by state. The key factor we'll look at here is the amount of  military spending in each state, compared to the overall GDP.

When mapped out, it looks like this:

This statistics is not to be confused with total military spending. California, for example, receives much more military spending, overall, than Colorado does, but proportional to their overall economy, military spending in California is smaller in California than it is in Colorado. 

In Colorado, military spending is equal to 4.3 percent of the state's total GDP. We could compare that to a top-ten state like Virginia where military spending is equal to 13.9 percent of the state's economy. In South Carolina, the percentage is 5.7 percent. 

The state least dependent on military spending is Minnesota where the percentage is 1.1 percent. 

As a region, the Rocky Mountain Region outside Arizona is not largely dependent on military spending, with both Wyoming and Idaho in the bottom ten:

All in all, Colorado ranks in the middle at number 18. The amount of military spending the the state if fairly large for a state of our size and population, but thanks to a highly productive work force and lots of non-military federal spending, the overall comparative size of military spending in the state does not put us near the top of the list.

Colorado Springs permits hit four-year low

During December 2015, single-family permits in Colorado Springs were tied with January 2015 for the lowest level of permits reported since December 2011. There were 124 single-family permits reported during December 2015, which was the same amount reported during January 2015.

The first graph shows single-family permits, by month, over the past fifteen years:

During 2015, permits peaked during the summer, as usual, with 311 permits reported during July 2015.

For December, though, if we compare to other Decembers, in order to take seasonal factors into account, we find that December 2015 was the least active December in four years:

December's numbers are not enough to suggest a downward trend in themselves, although the trend since 2012 has rather clearly been a flat one, with little movement up or down.

Nevertheless, sedated permit activity may be reflecting lackluster job growth that has been a factor in the local economy.

Multifamily Permits 

But what about multifamily permits? Multifamily activity is so sporadic from month to month, it's difficult to see much from monthly data, but with the end of 2015, we now have annual data for 2015. Looking at the year as a whole, we find that 2015's multifamily-family permit total was the lowest recorded since 2012, and is thus at a four-year low:

2015's multifamily development appears to come from a single project.

Not surprisingly, we also see that the average rent in Colorado Springs has been heading upward in recent quarters as little growth in new supply leads to a squeeze on existing housing supply. A lack of solid growth in single-family construction will contribute to this as well.

There are no dramatic trends to identify here, although it does not appear that the Colorado Springs economy is something we would call "robust." For now, the housing economy in the region shows signs of holding steady, although continued declines in job growth growth will lead to declines for housing demand in the region.

(All permit data is from the US Dept. of Commerce.)

Northern Colorado job growth holds steady

Along with the Denver area, Northern Colorado — i.e., the Greeley and Ft Collins metro areas — has long been one of the more economically robust parts of the state. This has held true since the end of the 2008-2009 recession, with significant job growth in both metro areas.

Historically, Ft Collins has tended to see more growth than Greeley, but thanks to recent growth in oil jobs, Greeley has experienced very large growth levels.

During December 2015, payroll jobs grew 3.6 percent over December 2014, with 5,400 jobs added. During November 2015, payroll jobs grew 3.1 percent, or 4,600 jobs, year over year.  I n general, job growth appears to be holding steady in the Fort Collins metro area (which includes Loveland):

In fact, job growth in the Ft. Collins area has outpaced the last expansion from 2003 to 2007, when job growth hovered around 2 percent.

Meanwhile, in Greeley, job growth reached very high levels, topping out at 9.7 percent during July of 2014. Across Colorado, job growth rates have tended to come in below five percent over the past 20 years, so the job growth rates over 7 percent in Greeley during 2014 and early 2015 do show remarkable growth in employment in the region.

Much of this growth was due to the growth of oil extraction jobs in the region, and not surprisingly, we have seen that growth taper off as the price of oil has fallen quickly over the past year. Nevertheless, with job growth rates still near four percent, it would premature to say that job growth in the Greeley area is looking to disappear.

During December 2015, the year-over-year increase in payroll employment was 3.7 percent, or 3,800 jobs. During November 2015, YOY job growth was 3.8 percent, or 3,900 jobs:

Clearly, a decline in the demand for oil jobs has affected the region, but it's not clear just how large of an impact this will have.

Data source: Data comes from the BLS's establishment survey which features payroll employment, and thus measures the number of jobs in the region. This is not to be confused with the Household Survey that measures number of employed persons.

(All employment data is from the Bureau of Labor Statistics. These numbers are from the "Establishment Survey.")

After slow recovery, job growth fading again in Colorado Springs

A look at the unemployment rate in Colorado Springs suggests that things are going swimmingly. In fact, they're back to the old boom levels below five percent. During December 2015, the unemployment rate, was at four percent which was down from 5.1 percent during December of 2014:

The last time unemployment rates were generally this low was back during 2007, before the 2008 financial crisis and during the last boom.

The problem with the unemployment rate, though, is that it is a function of both labor force size and employment. That is, if people give up looking for work, leave town, settle for a part time job at a low wage, decide to live on student loans, or retire early, all these things can reduce the unemployment rate, even in the absence of any job growth.

If we look at payroll job growth, however (from the Establishment survey) we find that job growth has been slowing and has been in a downward trend for the past ten months.

During December 2015, payroll employment growth was at 0.8 percent, which was down by about half from the previous December's growth rate of 1.5 percent. In other words, December's employment was up by a mere 2,100 jobs, year over year. A year earlier, durign December 2014, job growth had been up by 4,100 jobs, year over year:

Moreover, job growth has never returned to the sort of job growth we saw before 2008, and it has taken seven years for total employment in Colorado Springs to get back to where it had been before the 2008 crisis. This next graph shows how many months went by before employment returned to previous peak levels. It begins with June 2007 as month 1, and then proceed to the right as each month passes with total employment below the peak level. You can see that employment finally returns to its peak level at the  85th month (more than seven years), which was December 2014. Since then, employment has continued above the old peak level:

This recovery time, by the way, was 26 months (or more than two years) longer than what was needed to recover all lost jobs following the dot-com bust in 2001. In this case, jobs peaked during June of 2001 and finally recovered during May of 2006:

(All employment data is from the Bureau of Labor Statistics. Payroll numbers are from the "Establishment Survey" and unemployment percentages are from the "Household Survey.")

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.