Back To Trend
Back to Trend
The Comp Reset
Supply in the High Plateau
November and December are always transitional months in the markets we cover. The buyer pool is significantly smaller since it’s not at the top of everyone’s list to pack and move during the holidays; at the same time, sellers are typically unwilling to price their homes more aggressively since spring (and the buying season) is only a few months away. This time of year becomes more about finding the “weak hand” rather than making broad conclusions about the trajectory of the real estate market. You’ll see some listings get into bidding wars at the same time that others are aggressively lowering prices in search of any offer — this is what happens when there is less liquidity (read: activity) in the market.
Back to Trend
First, I want to take a quick minute to say “thank you” to those people who sent me some really nice messages over the last few weeks regarding the most recent editions of these insights. Writing these posts and chatting with our network about what’s happening in the world, capital markets, and real estate market is a passion of mine, and it’s always really great to get your (positive) feedback. Thank you very, very much.
The “high plateau” is a phenomenon that’s been discussed in this series of posts for a long time. In case you’re new, we’re referring to the “high plateau” as the market condition in which we’re currently operating. The plateau was caused by the Fed’s aggressive actions to get inflation under control by raising short-term interest rates. At the same time, the Fed’s commentary on expectations for the path of inflation caused longer-term rates to increase, which in turn, caused mortgage rates to increase substantially. Since the market spent so much time in a low-mortgage-rate environment, it will take time for pricing to reflect more expensive financing costs for home buyers, and therefore, the pace at which current owners sell is much, much lower than historical trends. (The increase in mortgage rates from 2.5% to 7.5% has significantly outpaced income growth, so there are some people who want to sell but can’t afford to get into a new home at higher rates, and that lowers the frequency at which sellers are coming to the market.) If there is less supply coming on the market, pricing still won’t come down as much as the mainstream expects even though homes seem relatively unaffordable. That’s the “high plateau:” less supply, higher prices, & seemingly unaffordable prices.
Those who are looking to get into a new home right now should be very happy about the inflation data that came out this week. Tuesday’s core inflation data showed the first month with less than 3% annualized increases in quite some time and the producer’s price index last Wednesday showed DEFLATION instead of the moderate inflation that was expected. Last week also included data that showed declining import/export prices, weaker industrial production, and weaker retail sales. This kind of data is exactly what the market was hoping to see to put risk back on: the 10-year treasury rallied from interest rates around 4.7% down to 4.4% and the S&P 500 is up nearly 10% off its low from the end of October.
This economic cycle won’t be “over” until Core PCE (inflation) registers multiple months at or below 2.0%, and even though inflation is still too high, the market was right to take some immediate relief and cheer that interest rates might not have to stay as high for as long as it was previously thought. Here’s the problem, though…. Inflation allows companies to drive prices higher, and that’s why equity markets tend to be more correlated to inflation than anything else. So, if earnings guidance is coming down (as it was this past earnings season), consumer spending is falling, and inflation is falling, what will be the driver for higher corporate profits in the near term? As much as lower inflation will be needed in order to declare that interest rates peaked, the equity markets will need to survive further earnings downgrades before we can call the “all clear.”
The Comp Reset
Supply in the High Plateau
Let’s check in on our trusty table summarizing the current conditions in Denver’s housing market within a 10-mile radius around downtown:
Heatmap of the Denver housing market for the 10-mile area surrounding Union Station as of November 15, 2023 (REColorado).
“The Comp Reset” implies what it sounds like… The “high plateau” has been going on for long enough that historical data is now from the same market regime. As a result, the new data is being compared against historical data from similar market conditions, so we can draw better year-over-year inferences. For example, pending activity in October was relatively flat versus the activity in 2022 and registered a 3.0% gain. In October of 2022, however, the number of pending homes was down nearly 50%(!!!) from October of 2021, so the data was extremely noisy. As you might recall, interest rates really didn’t start to come up until after October of 2021, so the reason for the noisy data was the shift in mortgage rates from the pre-plateau regime to the “high plateau.” Now that the “high plateau” has been in existence for nearly 18 months, the last few months of data are much, much less noisy. Going forward, there should be much less noise in the data unless there is another major shift in the treasury curve (which we don’t expect to happen).
If you do a Google search for Colorado’s population increase over the last few years, you’ll find a few different data points that suggest our population increased 15-22% from 2010 through 2022 when there were 5.8 million residents in the state. So, for all intents & purposes of this blog post, let’s just assume that our population increased 12% from 2013 levels and that Denver metro’s population increased at the same rate as the population for the entire state.
The market has borne most of the effects of higher mortgage rates without pricing taking a huge dip, so we need to be watching the pace of new supply to get a sense of when the next catalyst might have a chance to take prices down. In 2013, there were an average of 6,026 homes on the market in our statistical market area at the end of any given month; in 2023, that number is 2,403. So, available listings on the market are down over 60% on average even though the population has increased by 12% during that time… This is why prices aren’t coming down, and they likely won’t in a material way for some time. Also, in 2013, an average of 3,200 new listings hit the market every month compared to 1,800 in 2023. (When we discussed that people are selling at a slower pace, this is the data that proves it… the population has increased by 12% but new listings are down more than 50%.)
If we assume a constant pace of homes going under contract, then it will take at least 10 months for supply to build to a point when prices might come down in the Denver metro area. At 1,800 new listings every month and 1,400 of those going under contract, there is a balance of 400 units that do not sell. With the current supply sitting around 3,000 units and the average monthly absorption standing at 1,500, there would need to be at least a total of 7,500 units (~4,500 more units) on the market before sellers will get desperate enough to drive prices down. If we assume 400 units go back into building the supply each month and we need 4,500 more units, then it will take at least 10-11 months before we see prices come down.
Here’s the moral of the story: don’t want for prices to come down because there’s a very, very good chance that they won’t for an extended period of time. Instead, buy a home that you can afford on your budget with current mortgage rates, and use the upcoming macroeconomic turmoil to refinance your mortgage when rates come down. If you wait to buy when rates come down, it’s very likely that you’ll encounter more competition as that’s what we’re hearing from pretty much everyone who wants to buy a home right now.
