Purchasing Power Parity: An Exposition on Grand Valley Real Estate

So some of you may be wondering, why the heck are real estate prices so high in the Grand Valley. A good answer to this seems elusive to even the most dynamite business sleuth. After researching my sources, I have come up with several answers. Not very many of them are what you would expect. In the Grand Valley, we have a strange phenomenon where real estate prices are much higher than the average wage can sustain. The consumer price index listed for Grand Junction in the year 2008 for housing responded with a whopping 103.3. That means that compared to a standard house, Grand Valley residents paid an average of 3.3% more for housing than a standard house in another town. This may not seem like much, but housing as a percentage of household expenses accounts for 1/3 of income. Just think, on a $200k home, that amounts to an average of $6,600 added on to the mortgage. For those of you who scoff at the paltry sum of $6,600 you would do well to remember that for someone making $13 an hour that is a pretty sizable amount. I am impressed that people do as well as they do here. For those who look at the rest of the Consumer Price Index for Mesa County, you will say, but utilities are really cheap for people who live here. While that is true, utilities account for maybe 10% of household expenses, which is not the whopping amount that home prices are. For those interested in CPI ratings for other categories in Mesa County, look on the Grand Junction Economic Partnership website at http://www.gjep.org/grand_junction/col.php.

So, you may be wondering, “What does this all mean for me?” Well, I'm really glad you asked that question. This is where the fun part begins. For those of you unfamiliar with economic terminology, I would like to introduce something to your vernacular. The term purchasing power parity means one thing and one thing only. It means the comparison of purchasing power from one geographic area to another. Wherever economics is measured, you can be sure someone keeps track of this. The basic concept goes like this. When I lived in London in 2004, I was pretty astonished at how expensive it was to live there. One of the main reasons that one could reason was that their currency just cost a lot more than US currency. That is only part of the question. Because in the UK they use the British pound, the currency exchange plays a huge role in the value of their currency. The difference comes in the prices that Brits are willing to pay for things compared to what Americans pay. I will use the simplest analogy possible. In America, McDonald's has the value menu. In the UK, McDonald's also has the value menu. The difference is that in America where something costs only a dollar, in the UK it costs one pound. All of a sudden, a $1 double cheeseburger costs me $2 because the exchange rate is 1.9 GBP to 1 USD. Imagine how indignant I was. And to my unfortunate disappointment, all of the currencies in Europe are more expensive than in the US and therefore every trip to McDonald's was a huge luxury.

Now, imagine all of the restaurants do the same thing, all the grocery stores, all the pharmacies, and you begin to get the picture of why purchasing power parity is so important. On the converse, when Americans go to Mexico, they are surprised at how inexpensively they can live down there. And the principles surrounding why are just the same with the exception that it occurs in reverse. Even within the United States, different regions have different price structures and expense requirements. In New York, for example, their real estate is even pricier than it is in Grand Junction. I know. It is hard to believe, but just go with me on this. The simple reason is supply and demand, but the more complex answer is purchasing power parity. And that explains why a turkey sandwich will cost you ten dollars in Manhattan and five dollars at the Palisade Cafe. Same principle, different scale. So what's the point. Well, I started out with the intention of explaining to you what purchasing power parity is and how it affects our lives. In Grand Junction, unfortunately, we are not blessed with inexpensive housing, but we are blessed with small utility bills.

Another reason we are not blessed with inexpensive housing is also a combination of several other factors. Primarily those being, the Grand Valley is not exactly close to a port or other method of inexpensive transportation. We have the railroad, which is much desired by industry, but in order to attract more business to the Grand Valley, it would be really great if we had a port. Unfortunately, being landlocked is part of the fate of Grand Junction. Another reason is the relative lack of land that is able to be developed. Compared to a place like Denver, that metropolis of massive urban sprawl, the Grand Valley is a small place that does not have much room to grow because of our continual squeezing between the Bookcliffs to the North, the Mesa to the East, and the Monument to the South. While we have not reached densities consistent with Vail, or property prices consistent with Aspen, our combination of scarcity and desirability make our land worth more than say land in rural Missouri. In any case, the point is, each place has a combination of factors that make certain industries and commodities worth more in those places, and ours happens to be land.

Yet another reason for high home prices is the boom-bust cycle that Mesa County experiences as a result of normal business cycle activity. Mesa County contains several natural gas deposits or at least is close enough to them to benefit and that contributes even more to the business cycle extremes we see. When times are good, home prices get pushed higher. The difference this time has been that people who experienced the last housing bubble in the Grand Valley took advantage and bought foreclosed homes for rentals and investments. In the mid-2000's those people reaped the rewards if they cashed in at the proper time. And thus, as a result, many home prices now are out of reach of the average wage earner in the Grand Valley due to the boom-bust cycle that this area experiences regularly. After reading a little more from a book about the history of the Grand Valley, titled George Crawford's Attic, I found that this cycle has been happening over and over again from the time this area was first settled. The pioneer spirit lives on is another way to put it. Always looking for that next gold nugget that will bring prosperity to the area is common.

If you haven't read it yet, George Crawford's Attic by D. A. Brockett is a great book for getting familiar with the development and introduction of people to the Grand Valley area. In it you will find out that land development has been one of the drivers of the local economy since its inception. In particular, mineral wealth has played a significant role in the development of this area, whether those minerals are gold or whether they are natural gas. You will also find out that agriculture has played a huge role in providing economic development for the area. One of the great things about living in Colorado is all the locally grown produce available in the grocery stores and at farmer's markets. In economic development terms, all of those export products provide the best way to create jobs and promote growth. In addition, agricultural production also means this area is allowed to be a little bit more independent of economic factors affecting other places because while not all of our food is raised here, much of it could be.

So, that leaves us with one final question. How does one afford a house in an area where housing is so expensive? That is an answer that is different for everyone, but the simplest way is to share a house with someone else. Habitat for Humanity is a great resource, especially for people in this area. Many people have used the Grand Valley Housing Authority and other great resources as well. A market driven solution would be to produce more houses that people can afford, otherwise known as low-income housing. Some problems with that solution is the attraction of low value housing increases crime and other factors that make life more expensive for the people who live in that area. A nice complement to low-income housing would be tightened lending standards for those homes. That would be a nice counterbalance to make sure that the people who then move into those housing units take care of them and contribute to the productivity of society. Unfortunately, low income people generally have credit difficulties in addition to their other financial problems and so it creates this vicious cycle from which they have a lot of difficulty breaking. I think breaking the poverty cycle would be a great next topic, so we will save that for next week.