Kalinski: Why are home prices so high and will they come back down?

Let’s be honest, home prices in the Boulder Valley are high, like insanely high, so why are they not likely to fall (much)? Before we examine why high home prices are likely here to stay, it is helpful to quickly examine just how expensive the homes are here in Boulder Valley.

High Prices Everywhere

Any conversation about high home prices in our area must start in the city of Boulder.  At the close of the second quarter of 2021, the average sales price of a single-family home in Boulder was an eye-popping $1,636,000 and the median home price rose to $1,375,000, both all-time records.  Boulder County likewise experienced an all-time high with the average single-family home valued at $1,056,000 — the first time the county average has broken $1 million.  And with the pandemic allowing more people than ever to work from home, the demand for larger homes with more land increased significantly as evidenced by both the mountains and suburban plains both topping the $1 million mark for single-family homes. In fact, literally every area in Boulder and Broomfield counties experienced all-time high home values.

So with record appreciation of homes in our area (40+% year-over-year), and prices becoming unaffordable for many would-be buyers, surely we must be in for a drop in home values, right?  Well, not likely, and here is why:

Lack of new construction

First, for the last decade, home builders have not been keeping up with the demand for new homes.  As the chart below from Navy Federal Credit Union economist Robert Frick shows, our nation’s homebuilders are way off pace.

Second, as has been discussed before in this column, the Boulder Valley is edging ever closer to buildout (the point at which no additional homes can be built under current zoning regulations).  Relatedly, it is notoriously difficult for builders to weave their way through the Byzantine and Draconian approval processes of Boulder and Boulder County, and the pandemic has made this situation even more challenging.

So, it is not likely that significant quantities of new housing stock will be coming to our market.

Lack of resale inventory

Without new construction to help satisfy buyer demand (remember that about 60,000 people commute into Boulder every day and at least half of them would like to live here), we look to the resale of existing homes.  Unfortunately as you can see in the chart below, the inventory of existing homes for sale is less than half of what it was in 2014, which is bad.  It’s even worse when compared to the 2,739 homes that were on the market in 2006 — our current inventory is about 20% of that figure.

The reasons for our lack of current inventory of homes for sale are too numerous to delve into in this article.  Suffice it to say that many people who own homes here like where they live and are worried about finding a replacement home if they move.  In fact, more older residents of Boulder plan to “age in place” than ever before.

Given the above discussion, the paucity of homes for sale in our area (both new construction and existing homes) are likely to be the norm for the foreseeable future.  Likewise, it seems that the demand for homes in our area has only been strengthened by the pandemic, a trend that is likely to continue.

As such, the structure of our real estate market appears to be built to support these extremely high home values.

Is there any good news?

The one bright spot for would-be home buyers in our area is that the spring fervor appears to be abating somewhat and we may be headed for a slightly more “normal” fall, where home prices tend to trail off slightly as we approach the end of the year.  So, while many buyers will still find the prices to be outrageous, if you are serious about owning a home here, this fall may provide you with a window of less competition and slightly lower prices.  And you can have the peace of mind that home values are not likely to seriously drop going forward.

Jay Kalinski is the owner of ReMax of Boulder and ReMax Elevate.

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