Absorption rate foretells construction in Routt County
Forecasting tool measures Routt’s statistics to predict when building permits could pick up
March 28, 2010
Yampa Valley Partners debuts new forecast
The construction forecasting tool developed by Scott Ford, of the Routt County Economic Development Cooperative, is a part of a much larger comprehensive Economic Forecasting newsletter Yampa Valley Partners has developed. YVP Executive Director Kate Nowak said the first edition of the forecasting newsletter would be released in early April. It covers the following areas:
■ Retail Trade: Gross Retail Sales forecasting based on an index value correlated to national sale
■ Employment: Predictive indices based on the relationship of work force and jobs
■ Real Estate: Routt/Moffat Housing affordability index (using the same methodology used by the National Association of Realtors). Normalized foreclosure ratio that allows for comparability between counties/state and national numbers
■ Construction: Forecast of residential building permits
■ Transportation (Air): Number of flights and load factors used to identify trends
■ Energy: Coal — Forecast of production in Moffat/Rio Blanco and Routt
Natural Gas — Production and Price forecasting
Steamboat Springs — The rate at which homes in Routt County are selling suggests that it could be a year or more before the residential construction industry mounts a meaningful comeback.
"If people are hoping the construction industry will pick up this summer, they can't hold their breath long enough," said Scott Ford, who leads the Routt County Economic Development Cooperative. "We see very limited building activity on the residential side, and there's nothing in the current picture that says this will change in the next year."
He's basing his prediction on new insights he has gained by marrying two sets of data whose union gives Steamboat Springs what he calls an inexpensive tool to reliably predict when construction activity might rebound or, for that matter, enter a decline.
Ford, who has been helping Yampa Valley Partners create its Community Indicators publication since its inception, has always yearned to discover ways to use statistics to give businesses in Northwest Colorado tools that can be used to glimpse the future. Now he's convinced that he's found one.
There is a predictive correlation, Ford said, between the absorption rate of residential property listed for sale on the Steamboat Springs Multiple Listing Service and the number of building permits that will be issued 12 months later.
"Like all forecasting tools, it is a broad brush. I like to describe it as a compass," Ford said. "A compass can help point the way north. The better and more accurate the compass, the higher the cost. This forecasting tool is relatively inexpensive to produce. It points the general direction, and it identifies trends."
After studying 11 years of data supplied by the Steamboat MLS and the U.S. Census Bureau (by way of the Routt County Regional Building Department), Ford can say that when the county's real estate market is absorbing residential listings at a rate of 2 to 3 percent of the total each month and sustains that rate, Routt County's home building industry will be relatively active (Moffat County isn't included in the forecast because it does not report building permit activity to the U.S. Census Bureau.)
Taking it a step further, if the pace of sales picks up, that surge will be seen in building permits issued almost exactly 12 months later. Conversely, when the monthly absorption rate dips below 2 percent, look out below. Building permit activity will dry up as it has early this season.
"Logically, what I think begins to happen is that when the supply narrows, a subset of folks, and it does not take many, begin to think of building vs. buying," Ford said. "If you are moving to your dream community, you likely want to build your dream home."
Realtor Doug Labor, of Buyers' Resource Real Estate, said he helped a client close this week on a foreclosed home in Silver Spur Estates at a price that converted to about $177 per square foot.
That number might be difficult for a contractor to match, especially when a building lot is part of the price. However, he surmises that builders and subcontractors are revising their cost to build in order to compete for business.
Labor said his clients, a couple with a toddler, were able to transition from a one-bedroom condominium to a single-family neighborhood.
As of Thursday, Labor said, there were 2,123 properties of all types listed for sale on the MLS, and of those, 1,282 were residential properties. Of the total number of residential properties, 240 (19 percent) were new product.
"That probably has to get absorbed before people would think about building," Labor said.
Of the new homes, 119, or half, were condominiums, 47 were single-family and 63 were townhomes or duplexes. The balance of the sales involved live/work units.
After looking back to 2000, Ford can see that permit activity responds in almost every instance to a change up or down in the absorption rate that isn't reflected until a year later.
Ford is not suggesting a cause-and-effect relationship, just a correlation that is strong enough to rely on to make forecasts. The size of the recovery or decline doesn't always match up with the magnitude of the rise or decline in absorption rate, but the change in direction always is mirrored.
So the bad news is that although the number of contracts for home purchases has jumped a little this month, the absorption rate in February was just three-tenths of 1 percent. It's a clear signal in Ford's mind that the issuance of building permits in February 2011, and probably beyond, will remain in the doldrums.
"From a predictive perspective, we should not expect any meaningful increase in residential building permits until the ratio of sold homes to existing inventory begins to exceed 2 percent," he said. "When sales of existing homes exceeds 2 percent of available inventory, we can reasonably predict that building activity will follow in roughly the same order of magnitude."
Ford has concluded that the time has come for professionals in the building trades to confront the reality that, "I'm going to have to change my business model or do something else."
— To reach Tom Ross, call 871-4205 or e-mail email@example.com