Lots and lots of lots waiting for new home buyers

The standard formula for unsold properties holds that over 18 months’ inventory signals an unhealthy market. By the first quarter of 2006, both Larimer and Weld counties had crept over that threshold.

“The 18-month calculation figures that it takes about 18 months for someone to develop a property from the paper or planning stage on through to the completion of infrastructure,´ said Steve Kawulok, commercial department manager for The Group Inc. Real Estate in Fort Collins. “For homes, because it takes about six months to build, we think a balanced supply is six to eight months.”

Larimer County’s inventory showed 22.3 months worth of vacant developed lots and Weld County 27.3 months. Larimer County’s new home sales backlog for that same period is slight, at 8.2 months, and Weld shows a 9.2-month inventory.

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“We’ve watched this now for the last year,” Kawulok said. “Weld was hotter than Larimer, so developers responded by opening up a lot of new subdivisions, more than the market could absorb. It’s the classic supply and demand, so they’ll have to slow down their openings of new lots and subdivisions.”

Mark Bradley, broker/partner with Realtec Greeley, said the upward trend in inventory generally reflects the national trend.

“What we’re seeing, both regionally and nationally, is that home building has slowed down and there’s a fairly large inventory of lots. To catch up, I think we just need to keep growing the economy.”

Weld overbuilt

Kawulok said Weld County developers overbuilt, based on the rate of absorption that occurred in 2004 and 2005. With the slow turnover in properties, however, he suggested they might need to consider adjusting lot prices, a move that could continue to shrink their profit margin.

Bradley theorized a 2001 piece of legislation also may have led to the present oversupply.

The bill required developers involve mineral owners at the very earliest stages of the process. The theory was to avoid such problems as homeowners later learning their living rooms were built on top of a well.

“There was a rush to get a lot of projects through,´ said Bradley. “It forced developers who had projects in the queue to move before these rules came into play. Developers in Greeley, Dacono and Firestone were most impacted because there’s so much oil and gas.”

Greeley’s large inventory of vacant commercial and industrial properties also has had an impact. The former 94,000-square-foot StarTek building has stood vacant for a year and the 34,000-square-foot Swift rendering plant has been vacant for over three years.

Yet Bradley said Realtec is starting to see signs of life in previously dormant areas, from warehousing to manufacturing, areas that traditionally lead to an increase in jobs.

Kawulok also said a potential increase in Colorado’s population could help turn the residential figures around. U.S. Census Bureau figures reveal the state is experiencing more births than deaths, while more people are moving into than out of the state.

“Our population increased by about 40,000, from natural means, and about 27,000 through net migration, Kawulok said, “so we’ve added people, but not a huge amount.”

Still, the downward trend in residential numbers is cause for concern. While 2004 was a good year for residential lots, with a slight increase of 3 percent to 5 percent in overall sales, 2006 has shown a distinct downward trend from 2005.

“The overall market, including resale homes, is showing about a 10 percent drop-off, although it’s more dramatic in new construction,” Kawulok said.

In addition to this excess inventory, Northern Colorado has lost a large portion of an important audience. During the low-interest-rate environment of 2004 and 2005, many young renters were enticed to buy outside the normal cycle.

Catch-up period

“In 2006, as interest rates rose, a lot of people who would have blossomed into home buyers have already bought,” Kawulok said. “Now that demand has been used up and there’s no new demand to replace it. We’re in a catch-up period and it’s going to take us time to recover.”

While other Northern Colorado cities are posting uncomfortably high figures, although none as high as Berthoud’s 76.8 months’ oversupply, Loveland appears to be sitting in the catbird seat.

That city posted an on-target, 18.3-month inventory of vacant developed lots and a 6.9-month inventory of spec homes.

Kawulok credited Loveland’s healthy figures to its new status as “the place where the population center begins.”

“Loveland has developed a lot of new amenities, with the shopping center and hospitals. It’s drawing new people to the area. If you’re relocating from Denver Metro, it appears (the intersection of) Interstate 25 and U.S. Highway 34 has become the place to be. They’re the focal point of our local economy. Given that, the housing market of Loveland is the healthiest, from the supply-and-demand viewpoint.”

Once considered a less-expensive buy than Fort Collins, Loveland property values are now neck-and-neck with its northern neighbor.

Kawulok also espoused a refrain heard by many in the industry: Non-traditional amenities and creative designs are now key to drawing the modern homebuyer.

“We’re seeing more buying decisions being made by design features. The more artistic a builder and developer can be, the more attractive their products will be to the home buyer. They’re not just selling sticks and bricks; they’re looking for that sense of design and experience.”

To accommodate this trend, some developers have begun to carve ponds, hills and waterfalls into previously barren properties.

“We’re not saying it’s a sinking ship,” Kawulok said. “We’re saying the builders and developers need to be very careful about their business decisions and that they’re delivering a product that’s different from the rest of the competition. The curve of demand is going down and supply is going up.”