Friday, May 10, 2013

Grand Junction Housing Snapshot, 1st Q 2013

The demand for real estate continues to be soft in Grand Junction. From employment to foreclosures, and from home prices to apartment vacancies, the region appears to be facing some downward pressure on demand right now.

Employment is one of the biggest factors in driving demand for real estate, and we find that Grand Junction continues to face some headwinds. According to the Household Survey, the labor force size in March fell to a six-year low for March. That is, compared to previous years, the month of March in Grand Junction showed the smallest labor force in any March since 2007. This means fewer people are looking for jobs in the area, and this will have an impact on overall household income.

The unemployment rate is calculated using the labor force totals, and we find that the decline in the labor force is helping the unemployment rate move down in Grand Junction in spite of lackluster job growth. The labor force size as of March 2013 was down 7.3 percent, or 6,100 people from the March 2009 peak. We might compare this to metro Denver, where the job force hit an all-time high for March during 2013. We could also compare to the Greeley area where the labor force is near an all-time, after peaking for March (so far) last year. The first graph shows total labor force for each month:

The next graph shows total employment in the area. We can see here that employment growth has been  small, and that total employment is up only about 800 jobs (1.1 percent) from the 2010 trough over the past three years.  

According to this measure, total employment in Grand Junction is down 8.7 percent, or 6,700 jobs from the March peak in 2008 to March 2013. 

The Household survey has its limitations due to small sample size, so I've compared against the Establishment survey of payroll employees to check. The Establishment survey shows that Grand Junction employment in March was down 7.4 percent, or 4,700 jobs from the 2008 March peak.

The next graph shows the payroll employment, and here we find that the year-over-year growth rate in total employment has been declining since January. By contrast, statewide total year-over-year employment growth has been trending upward, with recent growth rates over 2.5 percent. In Grand Junction, growth rates have been below 2 percent in recent years. We could also note that the year-over-year growth in GJ has been smaller in recent years than during the recessionary period of 2002.

The next graph shows the House Price Index for GJ from the Federal Housing and Finance Agency. We can see that (through the end of 2012) the index has basically flatlined since 2011, and is way down from the bubble-like peak levels reached during 2007 and 2008. 

When compared year over year, as I've done in the next graph, we see that growth has been hard to find in the Grand Junction HPI. There has been only one quarter of YOY growth since 2008. I compare that in the graph to the metro Denver HPI which has shown four quarters in a row of growth. Indeed, during the fourth quarter of 2012, the HPI in GJ was down slightly (0.2 percent) from 2011's fourth quarter. 

Another indicator we can note is the index of completed foreclosures.  In the next graph, I've indexed the number of completed foreclosures in Mesa County next to the number of completed foreclosures in all metro counties combined. Here, we see that the combined metro total (the green line) shows a slow and steady decrease in completed foreclosures since 2008, while Mesa County completed foreclosures (the blue line) is way up from 2008 levels.  In fact, in all metros combined, the number of completed foreclosures is down more than 70 percent since 2008 (as of March 2013). In Mesa County, on the other hand, the number of completed foreclosures (as of March 2013) was up 350 percent since 2008, rising from 12 in January 2008 to 54 in March 2013. Compared year over year, the March total for completed foreclosures in Mesa County was down 27 percent, but that's not enough to bring totals down much from the highs at which they presently remain. 

 The next graph shows new housing permit activity in Mesa county. In this case, we find that total permits (both multifam and singlefam combined) at year-end 2012 were at the lowest rate seen since 1991, which is a 21-year low. There was a total of 323 singlfam permits and 12 multifam permits during 2012 in Mesa County. This is the lowest total yet since permits activity started moving down in 2007.

We can compare this to Colorado statewide, in which building permits hit a 5-year high during 2012, growing about 75 percent from 2011 to 2012. This is statewide: 

If we look just as the first three month of this year (in the next graph), compared to the first three months of previous years, we do find a small increase of 25 percent in Mesa County, and a rise to a five-year high. Of course, these totals remain well below even the relatively weak years of 2003 and 2004. If we compare to the same time period statewide, we find that statewide, singlefam permits were up 54 percent, and multifam permits were up 147 percent for the three-month period, when compared to 2012's first three months.

Finally, we look at the vacancy and rent data from the first quarter's vacancy and rent survey. Here we find that the vacancy rate hit 11.8 percent during the first quarter of 2013, rising from 10.4 percent during the first quarter of 2012. It was also way up from the fourth quarter's vacancy rate of 9.7 percent. The next graph shows vacancy rates since 1995: 

The softness in the rental market seems to reflect the overall softness we're finding in the region. As a result of the higher vacancies, rents headed down sharply during the first quarter of year, returning to levels not seen since 2006. We'll likely see the average rent number head back up again somewhat in the second quarter, but we should note that even at the first quarter average rent of $554 in the region (which was down 11.4 percent from last year's first quarter avg rent of $625), the average rent is still above what was common for the region prior to the oil and gas boom. Indeed, in spite of a relatively weak employment situation after 2009, the average rent in the region never fell very much from the elevated post-2006 levels. 

 The final graph shows the average rents in various regions adjusted for inflation. Rents tend to be fairly flat when adjusted for inflation over the long term. As we can see in the graph, however, real rent growth in Grand Junction from 2006 to early 2009 was really quite large, rising 12.3 percent in real terms from the third quarter of 2006 to the third quarter of 2009. Even after the unemployment rate in GJ rose above ten percent for most of 2010, the drop in the average rent was quite moderate. The drop during the first quarter of this year may signal a correction to that. It's too early to tell, however.

Referring back to the home price and foreclosure data, one might argue that the substitution effect should be pushing down vacancies, even in the face of a stagnant employment situation. That is, a lack of demand for purchase housing related to foreclosures and falling prices should be driving people into rental housing as a substitute. This is no doubt a factor, but in some recent regression analyses (discussed in part here), we found that the substitution effect was weak compared to the effects of employment. That is, when employment drove a rise in the demand for multifamily housing, it also drove a rise in the demand for singlefamily housing. So, employment is the dominant factor, and when it's weak, both multifamily and singlefamily experience soft demand.