Blowing bubbles

Note: This article is a sidebar to this issue's feature story, "Town Shopping."

"A town does not just wake up one morning and decide to become a real estate boomtown," says Spenser Havlick, a professor emeritus at the University of Colorado’s school of architecture who served for 22 years on the city council of Boulder, Colo. — a real estate boomtown even by the Rocky Mountains’ skewed standards. "It takes a combination of factors, many of them often controlled by outside entities looking for good investment opportunities."

There’s no shortage of these "outside entities" in the West these days.

"More Americans have footloose sources of income — investment income, pensions, etc. — that allow them to choose their place of residence," says University of Montana economist Thomas Power. Add to that a housing market that has outperformed the stock market in the past five years, and you’ve got a lot of people with a lot of money looking for a place to plant their capital.

Other forces are at work here, too — forces that have contributed to the much talked-about "real estate bubble," and that could someday burst that bubble.

Tax codes and public relations

Without certain pieces of our federal tax code, places like Silver City, N.M., and Jarbidge, Nev., might remain dusty backwaters forevermore.

Tax breaks encourage lots of people to buy second homes, for example (HCN, 10/25/04: Window Shopping: Part-time paradise). Federal tax code gives a bonus to those buying homes, even second ones, by allowing them to deduct mortgage interest on their tax returns.

Another set of tax policies encourages wealthy real estate investors to buy and sell additional homes. Under Section 1031 of the federal tax code, if you sell real estate for a profit, you can defer federal income tax on the profit if you reinvest it in other real estate within six months. So you could sell your California holdings and reinvest all the profits in Silver City or Jarbidge, and avoid paying any federal income taxes on the deal for a year — or for as long as you like, if you keep selling out and buying elsewhere.

And of course, the media help hype certain real estate markets. The February 2006 issue of Mountain Living magazine, in an act of seriously bad karma, listed "Top 10 Undiscovered Towns" right next to sidebars titled "Best Place to Buy Land" and "Best Fractional Ownership." (Featured in the issue, in case you’re crossing towns off your list, are Bisbee, Ariz., Saratoga, Wyo., Taos County, N.M., and Grand County, Colo.)

It’s not just print media. A National Public Radio documentary five years ago (pre-Shovel Brigade, it should be noted) put Jarbidge, Nev., on many peoples’ mental map, including mine. The Emmy Award-winning TV show Northern Exposure did the same for Roslyn, Wash., where the show was filmed. Many in northern New Mexico blame the film adaptation of John Nichols’ novel, The Milagro Beanfield War, for drawing attention to the area between Santa Fe and Taos.

This kind of attention can get a town’s economic powers that be dancing a jig, of course. Many Western burgs have employees whose main gig is attracting media attention. Basically, all publicity is good, unless it includes the word "Superfund."

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