The Spring Ramp
The macro world was pretty slow last month unless you're into Bitcoin — Wow! The US equity market is digesting earnings, and data on the job market, inflation, etc., hasn't been all that exciting or definitive. March is the time of year when buyers start emerging from the woodwork, and the real estate market along the Front Range begins to heat up. So, we're going to focus this month's discussion on Denver's housing market and our predictions for the next several months. All signs are pointing to the market being absolutely _________ (read more to find out).
The Skim:
The 10Y is Whispering
Demand – Constant
Supply – WOW.
The 10Y is Whispering
Having a conversation with real estate professionals about their opinions on the future path of interest rates is always a deterministic exercise. Without fail, they claim, "Rates are coming down shortly, and it's going to be an unbelievable time to buy soon!" (The buyer pool shrinks as rates climb, so everyone in real estate and mortgages is invariably rooting for lower interest rates.) Over the last 24 months, we've endeavored to disrupt the pattern of perennially optimistic bond investors in the real estate sector, guided by our insights into demographics and inflation. However, recent developments in the capital markets suggest it might be time to reassess our stance, a shift we're considering with utmost seriousness.
Despite Federal Reserve Chairman Powell assuring Congress at the start of March that he wasn't eager to escalate rates, the treasury market appears to be challenging his commitment to maintaining higher rates. In the past month, the 10-year U.S. Treasury note fluctuated within a narrow range between 4.19% and 4.36%. Now, interest rates are veering downward. By the market's close on March 6, 2024, the 10-year interest rate had dropped to 4.1% (and further), aligning with the 50-day moving average and nearing one of the last supports before potentially sliding to 3.8%.
You might wonder why interest rates are decreasing while wage inflation persists and the Fed Chairman aims to elevate rates—a valid inquiry. (Just today, moments before finalizing this piece, the Consumer Price Index data emerged hotter than anticipated, nudging the 10-year rate slightly upward...) Our best explanation for the recent dip in rates is technical. When the interest rate breached the lower end of the 4.19% range, it indicated the exit of bond sellers at those prices, prompting the market to seek a new equilibrium. As of March 12, 2024, that equilibrium is at 4.04%. This bond rally could be a reaction to investors interpreting wage inflation figures and positioning for a potential opposite trend, a common occurrence when a consensus forms around a prediction, especially one endorsed by yours truly.
Once assets break from trading ranges, the strategy flips and previous levels of support become future levels of resistance. As a result, we are very closely watching the 4.19% level again. Trading back above that level would put the 10Y back in a range of the unknown, while a failure at 4.19% followed by another failure at 4.05% would seem to confirm a summer of lower interest rates.
Demand – Constant
Supply – Building!!! WOW.
Let’s check in on our trusty table summarizing the real estate market in the Denver metro area:
Data taken from REColorado on Mar. 10, 2024. Area covers the circle with a 10-mile radius surrounding Union Station in downtown Denver, CO.
The last two months feel very different at our brokerage (it’s kinda cool using the B-word these days), and it seems the data is finally confirming some of the things that we’ve been seeing for the last few weeks…
New Supply is HERE! — The first thing that jumps out is that supply is starting to build rather quickly versus last year. Over the last two months, approximately 600 more units hit this year, and based on the last two years of data (and without any elasticity in demand) this should add about two weeks of supply to the market.
Active Supply is Building — Commensurate with the increase in new supply is also the increase in active supply on the market; there are 700 more homes on the market in the 10-mile circle around Denver at the end of February than were at the same time in 2023.
Pending Activity Increasing — Even though hundreds more units were available at the end of February, only 50 more homes went under contract this year versus last. The trend (third row from the left) is steadily picking up from last fall, and we expect this to continue…
Sold Activity is Picking Up — Sold activity always lags pending (and listing) activity, so we don’t expect to see any volume pick-up register until the summer.
Prices are UP — MORE Supply and HIGHER Prices? What is this, 2007…?!
What the HECK is going on? And is it sustainable?
The short answer is “yes.” We think so.
The meteoric rise in real estate prices was further exacerbated (at least partially) by the psychological and logistical impacts of a hot market. It might seem great to sell your house into a market with bidding wars at every turn until you need to find a house to buy… Then you decide to stay where you’re living until things calm down. There are a lot of transactions that didn’t happen over the last few years because finding replacement properties was impossible, and we think it’s constructive that homes are starting to come on the market at a faster clip. The new housing supply is being met with some relief from the capital markets. The rally in the 10Y treasury is leading to lower mortgage rates, and buyers are coming back to the market to take advantage. Both our team and brokerage have had several clients come back to buy a home this season who were casually sniffing around last fall. Rates are at the lower end of the range over the last year, and so it seems like a good time to buy.
In the short term, we think this is extremely constructive for the market, and the question is how quickly demand will come back… Will the market slowly start to wake up like last year and allow supply to build thus leading to a nice cushion and orderly process this summer? Or will the drop in mortgage rates coupled with the demand for replacement buying suck up the new supply and lead to another incredibly tight buying season?
It’s probably 50/50 and Blue Pebble is leaning toward the hot real estate summer. Just like the national picture is going to be determined by the path of the jobs market, Denver’s economy and housing market are impacted by the jobs market, too. (If everyone is getting fired in one city, they’re going to move to other cities to find work.) Recently, the news has been pretty good on the jobs front, and that suggests continued demand for housing in the Denver metro area. Strong regional growth with easing financial conditions is typically a good combination for the housing market. Throw in Colorado’s strong real estate market seasonality, and the next few months could get a little nuts.
The longer-term question is more dependent on when the jobs market shifts. So long as employers are adding jobs and unemployment remains low, wage growth will likely continue to exceed inflation and that will continuously support 3-5% home price appreciation, annually. At some point, though, the labor market will have to turn around to stop longer-term inflation issues, and we will see how robust Denver’s economy (and our housing market) has become. Even though we’ve read and heard some anecdotal information about people leaving Colorado for cheaper states, our group is seeing strong inbound demand and more buyers than sellers which is more consistent with a strong economy and jobs market, for now…
Thanks for stopping by this month! Please, reach out if you have any questions and click here if you want to sign up and receive next month’s edition in your inbox.
– Jared
