The Colorado Connection: Housing and Marijuana

Housing prices have surged in Colorado of late. Two years ago The Denver Post reported on what it already called a “new mini-bubble” in which the sellers of many homes had “three or more bids to choose from.”

But matters have gone much farther since. The reporter would not now need to use the prefix “mini” in front of “bubble.” By May 2015, as a blog sponsored by Denver area realtors then observed: “Homes priced under $500,000 in Denver and the suburbs [were] selling quickly, often with multiple offers in just days or hours.”

Nor is the boom limited to the Denver area. In the southwestern part of the state, The Pagosa Springs Sun reported in November 2015 that “median home prices have surpassed pre-recession levels” in much of that region. Home ownership is out of reach for many families, and rents tell the same story of sharp ascent.

“In many communities [The Sun reported] actual rents were up to 45 percent higher than the Fair Market Rents determined by the Department of Housing and Urban Development (HUD).”

 

The Question of Cause

To some extent, the low-interest-rates policy of the Federal Reserve has caused a revival of the real estate market across the country. But Colorado’s boom has stood out. Why?

A possible explanation, or rather two possible explanations, involve the leadership role that Colorado played in the normalization of marijuana policy. Amendment 20, legalizing medical marijuana, was ahead of the curve in 2000. Colorado more recently protected its avant-garde status with the enactment of Amendment 64, allowing for recreational cultivation and use, in November 2012.

One theory of the housing bubble might focus on the investment decisions of the marijuana entrepreneurs this policy shift has engendered. After all, as Ellis Smith recently told MJINews in a telephone interview, the cash earned by a marijuana entrepreneur “burns a hole in your pocket—it’s hard to say what you will do with it except that you will spend it.”

Keeping a lot of cash on the premises of a marijuana-related business entity, in shoe boxes or the equivalents, has obvious drawbacks and for reasons often discussed in these pages the banking system is largely unavailable.

Smith, once a hands-on cultivator himself, founded American Cannabis Company (OTCQB: AMMJ), a Denver-headquartered industry consultancy that also produces private-label customer products. Asked whether some entrepreneurs in the state in recent years might have used housing investments as banking alternatives, he said nothing very encouraging about the theory except that it “could be true for some.” By definition such a trend would have increased demand, creating some upward pressure on prices. But definitions don’t suggest how much.

 

Real or Symbolic Banking Change

Another perhaps more obvious source of greater housing demand is the movement of people into the state in recent years. That may give rise to another hypothesis.

Lauren Davis, an attorney who specialized in marijuana related cases, discussed the housing boom and related issues with MJINews recently.

She said that banking is more difficult for marijuana entrepreneurs than it has to be even given the federal-regulatory role with the interstate banks and given the federal government’s continued criminalization of the product. There have been efforts to address this via the Colorado legislature, by allowing state-licensed marijuana businesses to create, in effect, uninsured credit unions. “There is something they could do, but the legislature has chosen to punt,” she said. The bill was scotched.

Davis explained that the banking lobby objected, saying that it didn’t want to balkanize the industry, with different sections of banking seeking special rules. She finds such reasoning unpersuasive. “No other business is in the predicament” of facing a hostile federal government despite being state legal, so it seems unlikely this would set a precedent for a general balkanization, she said.

Nonetheless, the promising legislation “succumbed to the banking lobby, producing bills that sound good on paper but that have zero teeth and that don’t solve the problem.”

Gov. John Hickenlooper signed the largely symbolic substitute legislation in June 2014.

 

Migration and the Margins

But does all this have a close connection to the housing boom? Davis thinks not. “I don’t think that’s where the connection is,” she said.

There is a connection, she thinks, but it’s demographically much more broadly based. She believes there is an influx of people into Colorado who want to live there, in part because this particular sort of recreation is now lawful there, and these new residents all have to have a place to live.

Smith finds merit in this connection, as well. Census figures indicate that roughly 4% of the population of Colorado in 2014 had lived in another state in 2013. For purposes of comparison, the corresponding figure for New Jersey would be 1.45%.

Is cannabis behind some of those moves? Smith said, “A small patch of the [incoming] population consists of cannabis refugees for sure,” both hobbyists and patients. That small patch is probably less than 10% of the whole, but that is enough to matter. Prices, the economists tell us, move because of decisions on the margins.

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