Question for you economists - Posted by Craig(CO)

Posted by Frank Chin on March 13, 2002 at 06:58:01:

Hi Andrew:

Glad you enjoy my landlording posts. And yes, the post was meant for you.

I’ve been looking at Census data to determine population shifts, and potential areas to invest in.

The purpose is to get some ideas of long term trend. Its difficult to devine short term ones as it could be affected by a recent plant closing, the weather etc.

I’ve been told to watch the areas of New Jersey midway between NYC and Phildadelphia as a potential hot area. Indeed, from 1990 to 2000, the population of Somerset County increased in the mid 20% range, matching the growth rates of FL and TX. I see the growth continuing due to the availabilty of land to expand, its proximity to NYC, compared to the lack of land availabilty in the NYC area…

The first excercise with Census data I did was to compare what I know about my area to the Census data. I know the vacancy rate is extremly low in Queens County due to the fact that I’ll get 200 people responding to an apartment ad over a two day weekend resulting in 15 applicants.

I’m glad to hear that you work for the Census, and I hope you don’t mind my asking you some questions from time to time regarding questions I may have.

Frank Chin

Question for you economists - Posted by Craig(CO)

Posted by Craig(CO) on March 10, 2002 at 13:22:18:

Quick synopsis:

According to my local newspaper (Denver, CO) growth of newcomers to the state is forecasted to be far lower than in years past. CO gained a net of 64,000 residents per year from 1990 to 2000. Economists are forecasting a net growth of 28,000 - 41,000 this year. In January, the state’s unemployment rate was 5.7% while the national average was 5.5%. In 2000, the unemployment rate was 2.7%. Some speculation as to why there will be fewer newcomers is because of higher unemployment and home prices that are above the national average. Based on the latest stats I’ve seen, the price of single family homes in CO ranges from 220k to 265k, depending on the area. Prices have appreciated at stellar rates during the growth period of the 1990’s.

My question is, based on this information, doesn’t it seem logical that home prices will take a dive? Increase in supply and decrease in demand would seem to put downward pressure on housing prices. If this scenario is true, what investments would make sense at this time in my market?

Thanks in advance.

On the one hand… - Posted by Andrew

Posted by Andrew on March 11, 2002 at 14:59:29:


You gave us some good info, but drew the wrong conclusion. You stated that demand is falling when that’s not the case. The rate of change in demand is falling, not demand itself.

Here’s what I mean…let’s assume there were 100 people living in Denver in 2000. In 2001 there were 120 people (a gain of 20%), and in 2002 there were 132 people (a gain of 10%). Has demand fallen? Nope. The rate of change in demand has fallen. BIG difference.

So we know that 132 people need housing. Now we need to know the supply of housing. You stated that there was an increase in supply, but didn’t provide any stats. For instance, have building permit applications risen, fallen, or stayed the same?

I’m sure the supply is increasing, but has the rate of change of supply decreased to mirror the demand? Sure they’re building houses, but are they building more, less, or the same as in the past? Are they all out of refurbished lofts in LoDo?

Without knowing/forecasting/wagging both supply and demand there is no way to tell which way prices will go. Ahhh…a little Econ 101 really gets the blood flowing!!!

Just my 2 cents…keep the change!


Long Term vs Short Term trends - Posted by Frank Chin

Posted by Frank Chin on March 11, 2002 at 09:11:19:

Hi Craig:

Good analysis of CO. My wife and I dropped by Denver last year on the way to Estes Park, loved the area, and wondered about it, as we heard prices started to stall at the time.

I’m more fimiliar with the situation is my area, New York City. Prices have doubled or tripled since 1983 to 2001 when I started REI. It doubled from 1971 when I graduated college to 1983. It doubled (or tripled) from 1964 when my dad bought his property to 1971.

So property values went up 10 times in the last 35 or so years.

I beleive the LONG TERM trend is still up. I had debated this issue at dinner parties with friends that it simply cannot go up anymore because it has gone up so much already.


There are a number of factors causing prices to increase in certain areas.

1- Skilled labor and Jobs: Industries go to areas where there are skilled labor pools. Labor goes to areas where there are jobs. Successful industries with immense job creation causes an immense influx of population driving up RE values.

Witness the the tech boom and Silicon Valley RE values. Witness the Stock Market boom, and rising NYC RE prices.

2- Transportation Infrastructure. This means seaports, rivers, highways, airports. Labor and Industry favor areas that are within easy reach.

This is why 53% of the nation’s TOTAL population live in a COASTAL COUNTY. These area are the easiest to reach by sea since the beginning of time, or air, since this last century. Because of this, these areas saw the biggest influx of immigrants, driving up RE prices.

Development of inland areas, such as Denver is dependent on how easily people and goods can reach by waterway, or by air.


In the short run, RE prices are affected by:

1- High prices and congestion in the areas favored by industries. Jobs and population migrates to surrounding cheaper areas.

Witness the migration of Siicon Valley jobs to neighboring areas. Witness the growth of Stamford CT as the alternate corporate headquarters to crowded NYC.

2- Recessions. Jobs dissappear, people stay put, and fewer people looking for housing.

3- New Road and Highways: Nearby areas now suddenly accessible finds a migration of people and jobs

4- Housing affordabilty. In the short run, housing prices may rise faster than income, cauisng many not able to qualify.


The question then is, are you a long term investor or a short term one.

In the long run, meaning 20 year cycles, NYC and San Franciso will always enjoy excellent appreciation, and so will major inland cities such as Denver. If you’re a patient long term buy and hold investor, you can’t go wrong buying at any time in these areas.

In the short run, meaning 3 to 5 years, high prices, congestion, recessions will cause prices to fall. You can make money understanding these shorter cycles.

If your time horizon is even shorter, like 6 months, then go for the motivated seller, estates, divorces, job moves etc.

Frank Chin

Re: Question for you economists - Posted by jonH

Posted by jonH on March 10, 2002 at 22:03:35:

Not a economist here, but believe me plenty of economists are watching this. If real estate values did not go up for a long period let alone go down then banks could run into a coladeral problem because of there loan to value thus Greenspan would be very concerned.

I also believe some outside factors are driving up home prices besides demand. Such as Builders Liability, I know with all the law suits over LP siding, stuco systems, ect… builders are paying up to 500% more for insurance. More and more land is deamed wetlands thus limiting supply. Employee law suits and unemployment claims go up every year driving costs up for builders and landlord thus making them pass on costs.

I am in construction and sinse cost go up and houses are still in demand not only for new residences but because of fire, flood and condemnation they have to go up over time just by supply and demand.

So I believe they will go up no matter what, I just could not guess at a percentage.

Re: Question for you economists - Posted by Scott PDeMars

Posted by Scott PDeMars on March 10, 2002 at 18:44:03:

Simply put the many driving factors may not come from out side the state but rather from within. When I started investing 20 years ago. I remember asking my self how can they keep building at this pace? Needless to say I never truely seen a level off for to long of a period. The factors I see internally driving up prices are

Human Nature-the cycle of two things, one young couples having childen and moving up

The youth set the new bases for a price when they graduate from school and begin to look at housing costs what ever IS the price is there BASE perception and THAT to me is the greatest market drive ever.

In the same token that perception is what holds a seasoned investor back many times because he is basing his price perception BACK 5-10 years while those prices no longer are valid the market is driven higher by youth which is one sector of demand

also greed and fear of human nature will lead us in a constant upward pressure like the cycles of the weather.

Just my two cents but human nature is a powerful force

20 years from NOW everyone will have the stories of IF ONLY I WOULD HAVE bought this or that! heheheh


Re: Question for you economists - Posted by David Krulac

Posted by David Krulac on March 10, 2002 at 18:12:59:

I’m not a degreed economist.

With up to 40,000 new residents there will be growth, just not quite as much as 64,000.

How many properties do you need/want to buy? 1 a month?
2 a month, whatever the growth of 40,000 people a year will not have much effect on 24 properties purchased at year or even one purchase a week? imho

CO will be a lot better than places where population is declining, and I would expect that thr rate of growth would decline, while the prices rise, but not as fast as previously.

David Krulac

Re: Question for you economists - Posted by Dave T

Posted by Dave T on March 10, 2002 at 14:08:22:

I hope you don’t mind my input, even though I am not an economist.

You do not give us any data on property appreciation rates in the last couple years, so I will assume that property values have appreciated at or close to the national average in the last few years.

I think that it is unlikely that you will see a dramatic decrease in property values, given the numbers you quoted. More likely, you will see property values stagnate at or near their current levels for the near future.

There is still some growth, so there will still be some demand for housing. New construction and the resale market will satisfy the demand, though you should expect new construction to slow down some.

I doubt that there will be an abundance of motivated sellers – not nearly enough to dramatically drive down prices for the entire market. Sellers who can’t find a buyer will just convert their property to a rental until the market picks up some momentum.

The real estate investment that makes sense at this time is the deal where you make your money going in. This is invariably true regardless of market fluctuations. Your exit strategy may be more sensitive to the current market conditions, so you need to be sure that the property will cash flow should you need to become a landlord during a market slump.

How about these Numbers ? - Posted by Frank Chin

Posted by Frank Chin on March 12, 2002 at 06:22:12:

Hi Craig:

I’ve been studying the demographics of Queens County, NYC, where I live and I found:

Population increase 1990 to 2000: 300,000 persons
Person per household: 2.8
Permits Issued per year for housing units: 2,700

Population increased from 1.9 to 2.2 million.

SO I can see:

Households increasing at: 10,000/year
Housing Units increasing at 2,700/year*

Note* Permits for housing units were graphed at 250/month in an upward trend line with 2700 issued in year 2000.

So the questions I have is:

1- What conclusions can one draw regarding Housing prices?

2- Where are all these additional people living?? I read in the newspapers here the City is cracking down on illegal conversions of one family to two, and two to three etc. Can there be that many illegal units??

I checked the demographics of Broward County FL which increased population in excess of 20% from 1990 to 2000, a smaller population than Queens County, and issued 11,000 housing permits per year.

Frank Chin

Re: Question for you economists - Posted by tang-0-rang

Posted by tang-0-rang on March 10, 2002 at 15:59:09:

Craig asked the question I have been pondering for the last week or so. I also would like to add that the property appreciation rate in the western slope (250 miles from Denver and surrounding area’s) has increased at about 7% in 1998, 7.5% in 1999, and jumped to almost 9% in 2000 and then fell to 7.5-8% range in 2001…according to the local paper.
IF these facts are true (not sure,I need to research a little more) wouldn’t it reflect some sort of leveling off? And with the small slump the economy is in, what are we to see in the future? maybe just a fluctuation? how would someone approach this market?
thanks for your time Dave
Todd Williamson (CO)

Re: How about these Numbers? - Posted by Andrew

Posted by Andrew on March 12, 2002 at 08:48:27:

Hi Frank:

I assume you were addressing your post to me instead of Craig, so I’ll try to answer it. Hope I didn’t give the impression that forecasting prices, or anything else for that matter, is an exact science, it’s definitely not! The “best” economists with all sorts of data and data crunching capabilities can’t give a you solid conclusion. At least not one that I’d bet on. Oh, and they start out making only about $40k with a PhD, so that should tell you something. :wink:

What I was really trying to point out to Craig is that he had only looked at one side of the equation and that we couldn’t reasonably conclude anything with the information he presented. Even with some supply data in hand, any conclusions will rest on some huge assumptions.

Economic analysis usually assumes that tomorrow will look just like today or that some past pattern will repeat, but this happens very rarely. We just don’t know what will happen to wages, unemployment, immigration laws, rent control/stabilization laws, interest rates, etc. It also assumes that peoples behavior doesn’t change, but we know it does. Therefore, any forecast more than a few months out rests more on assumptions than on knowns.

Second, for a number of reasons, the population data are very suspect, especially for densely populated areas like NYC. How would I know this…I work for the Census Bureau. Using population numbers 10 years apart is pretty difficult since what’s happened in the past 3 months is far more relevant than what happened 8 years ago.

If we assume a perfect world with perfect statistics, here’s what I’d say to your 2 questions:

1- What conclusions can one draw regarding Housing prices?

Based purely on the numbers you have, they prices will probably be going up. Then again, how many of these people moved into units that were previously vacant? Has the vacancy rate dropped since 1990 (a long time ago)? Have wages increased? If prices/rents rise, will persons per household also rise? (It usually does.)

2- Where are all these additional people living?? I read in the newspapers here the City is cracking down on illegal conversions of one family to two, and two to three etc. Can there be that many illegal units??

Again, what has happened to vacancy rates in the past few years? Were there many vacant units 10 years ago? Down the street from where my wife used to live (Bay Ridge-Brookly), there are 13 people living in one house. Think the Census Bureau knows that? :wink:

Anyway Frank, I personally put very little weight into the forecasts of economists (including mine). They are static models of a dynamic world. I’m more of the Austrian school persuasion and think you can learn more about your local market by driving around once a month and reading the paper than reading forecasts/charts and crunching government statistics.

By the way, I enjoy your posts and it’s great to get advice from a experienced landlord for FREE.


PS - I had an Econ professor who got his PhD from Columbia in the early 50’s. He used to study for exams by going down to the corner store/bodega and looking at relative prices (hot dogs vs. steak), seeing what was on sale, and what was sold out. Ahhh, the good old days!