March 18, 2003

WILL THE DURANGO HOUSING BUBBLE BURST?

Controversy is nothing new in Durango. Controversy over growth in and around Durango has accelerated recently as several major development plans have come to light. A central question is: Can Durango and La Plata County continue to grow? A related question is: Will the spectacular increases in the value of real property - particularly in the City of Durango - continue to ratchet skywards or will the Durango housing bubble burst?

There is no crystal ball that even the most knowledgeable and prudent expert can gaze into and come up with an answer to the second question. Answering the first question is a much easier task: As long as the world population continues to increase, as long as the United States population continues to grow - even at a modest rate, as long as Durango and La Plata County offer a combination of quality of life, natural beauty, recreational opportunities, and reasonable levels of economic activity, growth will continue.

It is not whether Durango and La Plata County will experience growth, it is whether growth will continue at a pace that will sustain property value increases reflective of those seen over the past several years, or not, even if the opening of new subdivisions and the building of new units continues apace.

Durango properties are "hot" items. The market for real estate in Durango, for a number of years, has been a "sellers market." Desirable properties have gone up and up in value. Especially desirable properties have actually sold above the listing prices, as prospective buyers engaged in "bidding wars." New housing units, especially some condominium units, have "sold out" before the units have been built and in some cases before architectural drawings have been put in final form.

While all of this great for those who sell their properties, it raises "red flags" in the minds of some who have lived through real estate collapses, either here or in other areas. Almost always, that which goes up must come down - at least temporarily.

Durango and La Plata County are not "islands unto themselves." They may be somewhat "protected" from events beyond their borders, and some events beyond their borders that are "negatives" for other areas can be "positives" for Durango and La Plata County. For example, as other areas of the United States "fill up" from a real estate point of view, people from those areas may come to this area. As real estate prices in California, or Aspen, or Telluride become unacceptably high, this area may benefit (assuming that one views the area's growth as beneficial).

Fluctuations in the value of real estate occur. A few of the downturns in our area over the past several decades have been severe. Some have been mild. There is nothing abnormal about most fluctuations. They are a part of life, especially in a capitalistic economy.

It is when either an up or a down pattern lies outside of the range of normal change that caution is advisable. Dramatic increases in the price of any commodity, usually precedes collapse. This was true of the run up of stock market prices in the 1990s. It was true of real estate prices in Florida in the early decades of the 20th Century. It was true of California real estate prices in the late 1970s and early 1980s. It was especially true of real estate prices in Japan in the 1980s.

Rising prices create pressures, especially where "mob psychology" exits (and, where does it not exist in any social, human enterprise?). Eventually the pressures become so great that something has to give. In all of the history of economic bubbles, it has been prices that have collapsed.

That is not to say that the local real estate market is primed for an imminent collapse. It probably is not. If the war with Iraq is brief and largely successful, if the wider United States economy continues to emerge from the recent downturn, if the price of real estate in other "prime" (similar?) areas grows unacceptably high (by buyer standards) and if the perceived quality of life in this area remains high, growth will continue, perhaps almost "independently" of "common sense" and "rational economics."

These are big IFS! They are ifs that can change a "seller's market" into a "buyer's market." Building too many units, too fast, brings about the same result. By definition, a real estate

Since no one can predict the future and since the factors that affect local real estate values are both numerous and complex, what can the individual property owner (or prospective property owner) do? First and foremost, exercise prudence. Buy only those properties that are affordable now and that will hold "reasonable value" if a down turn occurs. If a loan is necessary, make sure it is a loan that reflects the "margin of safely" value of the property; that is, a loan that can be carried through normal down turns in market values.

Be a property investor not a property speculator. It is speculation that gets people into financial distress when bubbles burst. This is true whether the bubble relates of tulip bulbs, stocks, gems, oil wells or real estate.

Owning real estate, especially one's family home is a great investment. Home equity is one of the key elements in a typical family's net worth. The higher the ratio of home ownership in a community - almost no matter the size of that community - the lower are the rates of virtually every "social ill or social problem."

Relative to renting, in part because of out tax laws, owning one's home makes good sense. However, as with all thing economic, there are "good times" to buy and "good times" to sell there are "reasonable prices" to pay and "unreasonable prices" to pay. No one can say what reasonable is or when reasonable will turn out to be unreasonable. But, for now, buying real estate in this area looks like it may continue to be a prudent investment. Maybe.