U.S. Housing Market Conditions, First Quarter 2003: National Data

Colorado Springs, Colorado
After 10 years of rapid growth, 2002 marked the end of a boom that made the Colorado Springs metropolitan area one of the fastest growing economies in the nation. The previous 10 years were marked by rapid growth in advanced technology—computers and telecommunications—that brought new firms to the area and kept employment growth at an average annual rate of 4.5 percent. With the onset of the national recession in 2001 and continued weakness in the advanced technology sector in 2002, many firms that once brought rapid growth announced closures and layoffs, resulting in the direct loss of 6,000 jobs.

Although improving toward the end of the period average nonfarm employment in the 12 months ending February 2003, was 1 percent below that of a year earlier. The February 2003 unemployment rate of 6.1 percent was an improvement from the 6.8 percent recorded a year earlier but is well above the recent low of 2.6 percent in December 2000. The Census Bureau estimates that since April 1, 2000, the population has continued to grow at a relatively strong rate of 2.3 percent a year despite a significant slowdown in area in-migration.

The outlook for the remainder of 2003 is uncertain. Nonfarm employment recorded gains for the fourth straight month in February. The economy has begun to show signs of a turnaround as increased defense spending in the area and a buildup at Fort Carson Army Base began to help the local economy. However, the recent deployment of 12,000 Army personnel from Fort Carson to the Middle East Gulf region has affected the economy, particularly those local businesses that directly serve the installation’s population. The budget department of the city of Colorado Springs and the Southern Colorado Economic Forum estimate that the deployment will decrease civilian employment by more than 2,000 jobs, or close to 1 percent, by the end of the year. With the prospect of an improved U.S. economy and new businesses locating to the area, net employment growth is expected to begin by the end of 2003.

The pace of single-family home construction has not declined from the near-record production level of 2002. The total of 1,065 single-family permits recorded during the first quarter of 2003 was virtually identical to the level recorded in 2002. Builders report some slowing of sales but the inventory of unsold finished homes remains stable. In a March 2003 study David Bamberger & Associates reports that builders are shifting production from more expensive homes to entry-level and standard homes under $230,000. Approximately 75 percent of the new homes sold in 2002 were below that level compared with 50 percent in 2001. The second most active price range with 20 percent of the market was move-up homes priced from $230,000 to $430,000. Luxury homes over $430,000 accounted for only 5 percent of the total. The report notes that single-family lot acquisition has been increasingly difficult for the small-volume builders and could limit production in 2003 and 2004.

The existing sales market, supported by low interest rates, remains balanced despite the slower economy. The Pikes Peak Association of REALTORS^® reports that sales activity during the first quarter of 2003 is down only slightly from last year’s near-record pace, and the average single-family sales price increased by 5.3 percent to $201,500. Condominium sales activity fell by 12.5 percent during the same period to an average sales price of $127,800. The condominium market’s performance reflects soft conditions in the rental market and less interest by investors in purchasing units. At the end of March 2003, the number of active listings for single-family homes and condominiums was up from a year earlier by nearly 30 and 40 percent, respectively, suggesting that conditions will become much more competitive this year.

Even with a weak economy and softer conditions in the rental market, construction of multifamily units remained strong until recently. Developers, looking at the high rents and low vacancy rates of the 1990s, lined up projects based on the expectation that the market would continue to grow rapidly. In 2001 and 2002 the level of construction was the highest since the mid-1980s; at the same time employment declined and record low interest rates allowed many previous renters to become homeowners. In addition, the rental market was hit by the deployment of troops from Fort Carson, many of whom resided in off-post civilian rentals. A first-quarter 2003 apartment survey by Doug Carter, LLC, reports a 12.5-percent vacancy rate, up nearly three times that of 2 years ago and at the highest rate since 1991. Rent concessions are widespread and can be as great as 3 months’ free rent.

Builders have begun to respond to the weaker market by postponing starts. The number of multifamily units permitted during the first quarter of 2003 was down by 55 percent from the same time last year.

The cutback will become more pronounced during the remainder of 2003 because few large apartment developments are expected to start construction this year. There are approximately 1,500 apartment units currently under construction that will enter the market this year. Vacancy rates are expected to increase, and soft market conditions will continue through the end of 2003. The market should begin to turn around by early 2004, but recovery will depend on how soon the troops return and how quickly the economy begins to grow.

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