Why Is There Such a Shortage of Homes to Buy? – Part 2

Posted by Duane Duggan on Tuesday, May 22nd, 2018 at 2:19pm.

This two-part series of articles describes the variety of reasons why housing inventory is very low in Boulder County. 

Legalized Marijuana and Craft Beer

Part and parcel of very low unemployment rates and competitive job recruiting in Colorado as indicated in Part 1 of this article, are the thriving legal cannabis and craft beer industries that have added an extra boost to our economy. With the boom in grow rooms, dispensaries, and brew pubs, the surge in jobs in these thriving sectors are attracting employees not only in state, but also out of state. In addition, we hear stories from Realtors and mortgage lenders about transplants who have moved to Colorado specifically for our marijuana laws. The more people choosing to move here, the more pressure on our already tight inventory.

Record Low Interest Rates 

As employment has continued to improve, we have also witnessed record low interest rates for an extended period of time. Low interest rates combined with job growth and low unemployment has meant that a greater number of qualified buyers have entered into the housing market. Because there are so many qualified buyers in the market place, competition for available properties has become fierce, especially in the lower half of the price range. The graph below, derived from Freddie Mac statistics, shows historic interest rates back to 1971.

Mass Purchase of “First Time Homes” by Investor Groups

Towards the end of the recession, lenders across the country took back thousands of homes in foreclosure and sold off big bundles of homes to investors. Because the investors were able to buy housing stock in bulk at a very low price, they have, for the most part, kept this housing as rentals and have not introduced many of those homes back to the for-sale market. 

Colorado Construction Defects Law

The construction defects law – which made it easier for condo owner associations to sue builders in multi-million-dollar lawsuits – has also had a significant impact on our current housing market. Driving around the Front Range, for example, you see all sorts of new buildings that look like new condos, but most of them are not condos – most of them are apartments to be leased. That’s because developers don’t want to take on the liability that the construction defects law places on them. Due to current strength of the rental market, the developers are finding it is better to build and rent as opposed to build and sell the individual units. This is keeping a huge supply of entry-level housing off the market.    

Lack of Increase in Capital Gains Exemption

Before May 7, 1997 the only way to avoid paying capital gain taxes when selling your home was to upgrade to a more expensive house within two years of selling your old house. Sellers who were age 55 and older had an additional once-in-a-lifetime option of exempting $125,000 in profit from their home sale. In the 1997 Taxpayer Relief Act, the home sale exemption was updated: a single person could exclude $250,000 in gain and a married couple $500,000 in gain when they sold their personal residence. The only catch was that the owner needed to live in the home two out of the last five years to qualify for the exemption. This rule change made it much easier for someone to sell their home and downsize without paying taxes.

In the recent Tax Reform 2018, this protection from capital gain taxes has been kept in place. However, this issue today affects our housing inventory, especially in Boulder. In 1997 the average price of a single-family home in Boulder was about $350,000. Today the average price of a single-family home in Boulder has risen to $1.2 million. Yet the home sale exclusion has remained the same at $250,000 for a single person and $500,000 for a married couple. The current capital gain exemption no longer provides an adequate incentive for an owner to place their home on the market – and this keeps housing inventory low. 

Waiting for “Stepped-Up” Basis When First Spouse Dies

With home prices having risen substantially, the capital gains exemption for home sales is no longer a strong incentive to put your house on the market. In many cases, when the gain is well over $500,000 it makes sense for a married couple to wait until the first spouse dies. That way, if the surviving spouse jointly owns the home with the right of survivorship, half of the home’s value will be transferred on a “stepped up” basis and will not be subject to capital gains taxes. In addition, the survivor, now single, will qualify for the $250,000 home sale exclusion. Waiting for that first spouse to die leaves another home off the market.

Seller Who Doesn’t NEED to Sell—Why Sell Now? Wait Longer and It Will Sell for More 

In times of an appreciating market, the seller who doesn’t really have a motivation to sell will just wait to sell at a later date with the expectation that the home will be worth more. With sustained home value appreciation in the Boulder market, we are seeing sellers willing to wait longer. Once sellers sense the market is slowing and has reached its temporary peak, there could be more properties coming on the market. 

In conclusion, the Boulder market has been in an appreciation cycle since the end of the recession in 2012. Most real estate cycles enjoy five- to seven- year upswings. Because of the many multi-faceted factors listed in this article, we are likely to see a strong market for a period longer than the typical real estate cycle.


About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.

For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611


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