Utah Real Estate Prices Going California-Style?
Published On: September 4, 2017 Posted by: Jeremy Peterson
Real Estate prices in Weber County have seen an unprecedented run since the market trough in 2012. Indeed, 2017 has seen real estate values increase over 10% since the start of the year. In April of this year, after looking at the charts, I surmised that we had reached a top in real estate prices. Inflation adjusted prices had blown past our 2007 peak which signaled that we might be due for a turn.
What I didn’t fully understand at that time was the scale of the forces at work creating our price run. Since 2010, Utah has been building homes at a pace that does not meet demand. This deficit in housing is about 36,000 housing units presently. Why is this the case? Builders have “right sized” their businesses to avoid future near-death experiences like they endured during the 2008-2012 housing crash. This self-limiting factor has meant a shortage of housing units of about 6,000 per year which has been accumulating year over year.
Besides builder hesitancy, supply is short for several more reasons. First, there is less and less land available to build on in Utah. In Salt Lake County, for instance, there is about 10 years of land left to develop. After that, you have to start finding places to tear down and redevelop. If Utah’s population projections are fulfilled and we double our population in the next 25 years, it could mean up to 1/3rd of developed areas there would require redevelopment to accommodate the new residents. Weber County has much more land available than Salt Lake County, but there is a limit to how far west housing can be built. Meanwhile, municipalities also shun higher density developments in favor of traditional quarter acre lots with 3 bed 2 bath homes. Finding room for everyone we be an ever increasing challenge.
The second factor afflicting the effort to increase the housing stock is a lack of labor. Immigration policies, love them or hate them, have had a real impact on the labor force that builds homes. Immigrant labor fled Utah during the Housing Crash. This number is reflected in Ogden’s demographics which saw its Hispanic population actually decline during this period. Since then, the population figures have held steady without the increase one would have expected had previous trends returned. This shortage in labor has left builders in the lurch. Delivery times for new construction are about double what they used to be. What traditionally would take three months now takes six or more to finish. Also, job preferences are shifting away from the trades which means local kids would rather spend time at a desk writing code than in the field swinging a hammer for a living.
A third factor affecting builders is the costs of materials. Hurricane Harvey will affect Utah buyers significantly because of the portending spike in the cost of building supplies. Houston saw 100,000 homes destroyed or damaged. Houston also regularly sees 32,000 building permits issued annually. The damaged and destroyed homes will need to be rebuilt along with all the new construction already slated. This extra demand on supplies will increase prices and put a pinch on Utah builders and buyers alike.
Concurrently, these supply side headaches are all happening in an environment of robust demand in Utah. The demand had been fueled by fever pitched job creation which sees Utah at the top of the nation in many aspects. This demand is a mixed blessing. It provides healthy income. Yet, it has also created the housing crises. You can thank state policy for steering the economy in this direction.
Utah’s economy used to be commodity based. Mining and natural resource companies dominated Utah’s employment. Places like Kennecott, Geneva Steel, and uranium mining operations put meat on Utah’s table. But, during the late seventies and eighties, commodities sank and the fortunes of these companies and their employees fell with them. Utah’s real estate market entered a deep and prolonged period of stagnation. Utah policymakers were keen to the causes of the subsequent economic malaise and pursued policies that diversified Utah’s economy. Finally in 1992 Utah real estate prices began to sling shot upwards to catch up with inflation. The market topped out in 1999, stabilized, and then stagnated again during the next economic downturn. This latest turn upwards in values appears to be following the 1990’s pattern we experienced.
So what does the future hold? Leading experts in Utah real estate have commented that Salt Lake County appears to look like Orange County in the late 1990s. California real estate is notorious for being spendy. It serves more as a store of wealth than as a generator of wealth. Of course, with its high price points, the high cost of entry excludes most except for the most well-heeled of market participants. Personally, I find the prospects of that kind of marketplace discouraging. Nevertheless, I have found it is better to accept the market as it is rather than as I wish it would be.
If such a prognosis is correct and we are experiencing a paradigm shift in the value of real estate across the Wasatch Front, then I have to admit I was wrong in April. The upper limit in house prices may not yet be reached and if present economic forces remain in place, may not be reached for a year or two. While this bodes will for the growth of wealth of current owners, new entrants will find it increasingly hard to get a toe-hold.
It is my hope that affordability will moderate. Nevertheless, I am a realist. Together, we will go wherever the market takes us. May it be a happy place.