Home builders in cautious mode

Continued low interest rates, coupled with a strong regional economy and a population of high-wage earners sufficient to support continued building of new homes and sales of existing ones are maintaining the strength of the housing market in Northern Colorado and fueling continued well-being in the construction sector.
That is the assessment of local builders and economists concerning the health of housing throughout the region.
"There is cautious optimism," said Aletha Langham-Godwin, president of the Home Builders Association of Northern Colorado and owner of Mark Twain Homes in Fort Collins. "We will have to wait to see what other factors will affect construction."
During the last quarter, the three months of the typically active spring building season, 1,082 construction permits were issued for single-family dwellings. That is an 11.5 percent decline from the 1,233 permits issued during the same period last year, but still strong, local housing market experts say.
July, the first month of the new fiscal year and the last month for which figures were available, rebounded with 339 permit requests, compared with 329 for the same month in 1996.
For all periods and areas in the region, valuation increased about 10 percent.
For people who remember the slow-growth years of the late 1980s, the current boom may come as something of a surprise. But to those who are in the business of building homes, they eye the current health of their industry with skepticism.
"Anybody who has been in this business knows that what goes up must come down," Langham-Godwin said.
Still, with Colorado˜s unemployment well below the historically low national rate of only 5 percent and regional unemployment at barely 3 percent, these remain high times for an industry that has had its share of low points.
While no one believes the phenomenally high growth rates of the early 1990s will return soon, there is some comfort in a rate of growth that is both healthy and stable.
"Jobs in Northern Colorado will sustain high growth," said Brian Boos, a Northern Colorado home builder, "but certainly not the growth we had from 1992 through 1994."
Boos has noticed a downturn in starts by his company, which operates in Greeley, Johnstown and Windsor. But there has been increased activity elsewhere.
"Our market in Windsor has dropped about 20 percent," Boos said, "while our market in Greeley has gained 10 to 15 percent."
Locally, Greeley may represent the closest thing to a bargain for buyers; however, it is a marginal bargain at best.
"The median income in Fort Collins is $50,000," said Stephan Weiler, assistant professor of economics at Colorado State University and a regional economist. "A lot of the new jobs being created in the region are not at that wage level and would not qualify potential buyers for homes being built."
Langham-Godwin agrees: "We need housing for people not making that kind of money."
But builders are cautious, she said, due to the historically volatile nature of Colorado˜s structural unemployment problem in some sectors and its effect on housing demand and sales.
"I feel like I am heavily invested now," Langham-Godwin said, referring to her company˜s three current projects in Greeley, Fort Collins and Loveland. "We˜ve had a lot of growth in Colorado the last three or four years. That doesn˜t mean it is going to continue."
"We are braced for a slowing period from the pace of 1995," Boos added. "We are definitely going to slow down a bit."
What worries economists is the potential effect on the industry of a hike in interest rates or worse, a nationwide recession.
"Colorado used to be a counter-cyclical economy," Weiler said. "That means when the local economy was doing well, the national economy was down the tubes. That is no longer true."
So, with their fate now so closely linked with the larger national economy, local builders cast a cautious eye eastward toward the Federal Reserve Bank in Washington, D.C.
"The one thing that could kill us all right now," Langham-Godwin said, "is a rapid rise in interest rates."
Weiler agrees.
"Interest rates have been incredibly low for so long," he noted. "Housing starts will continue to jump at a vicious rate only as long as rates are low, then go through the floor at the hint of a problem."
Nationwide, builders typically work on a profit margin of 3 percent to 5 percent. Even a slight uptick in the discount rate could boost financing costs quickly to a level that would result in a flood of housing inventory too expensive to be maintained by builders.
For example, the median home price in the Fort Collins area now stands at $150,000, average for an area with a $50,000 household median income, using the three times annual income multiplier recommended by financiers of new housing.
At 8 percent, a mortgage holder will pay $1,100 monthly, plus taxes and insurance. But only a one-half percent increase will raise that monthly payment $100, or $1,200 annually. That moves entire bodies of people out of range of qualifying for purchase. It also results in slower sales, high inventories, a cessation in building and layoffs in the construction industry. The effects then ripple through the economy.
"That is why housing is the best economic indicator in the nation," Langham-Godwin said.
That could pose a problem for an economy so heavily invested in construction-industry starts and employment.
"Colorado tends to focus its recessions in the construction sector," said John Green, a professor of economics at the University of Northern Colorado in Greeley. "The severity of our downturn in bad times tends to depend on how large the construction sector tends to be."
Right now, it is quite large, or, as Weiler says, "whenever you are walking around, they seem to be building just everywhere."
Also, Weiler said, no one yet knows what effect on housing will result from recently enacted tax-code reform. He expects that to produce incentives to sell and an increase in inventory, though no one yet knows the effect.
Still, local builders and economists are also local residents. They see much to recommend the current, slower pace of growth.
"It˜s hard on everybody when growth is so rapid," Langham-Godwin said. "Hard on builders, suppliers, everybody. Constant growth is easier for cities, builders and banks to deal with. So, we would like to see growth continue at this rate."
But, she added on reflection, "that˜s kind of euphoric, because you don˜t usually have that, do you?"