Starting Up

We hope you had a great holiday season and a very happy new year! 2024 is already off to a better start than last year with the University of Michigan’s victory in the Men’s College Football National Championship. (It also helps that the macroeconomic sprits offered some reprieve on mortgage rates over the last few weeks.) Last month, our discussion about trends in the labor market highlighted an argument the Fed might not be able to cut rates as aggressively as anticipated, and recent data is starting to give us more confidence in that thesis. Let’s dive into the Fed Funds futures markets and see what they say about the prospects of a hot housing market this summer.

… and Go Blue!

The Skim:

1. Jobs. Jobs. Jobs. Fed Funds.

2. Demand – Boring

3. Supply – Boring

Jobs. Jobs. Jobs. Fed Funds.

US equity markets ended the year on their highs as a result of bad positioning into a dovish pivot by Fed commentary. The S&P 500 hit a local high in July and showed extremely bearish patterns in September and October (failure at 433 in SPY) which also happened to be historically miserable times for the markets. With the negative sentiment and positioning, the reversal in the fixed-income markets led to a ferocious short cover in the equity markets. The change in bond prices from 5% to 3.8% in yield only accounts for 8% of the 16% rally in the SPX; the rest of the change, presumably, is a result of “positioning catch-up.” Fourth quarter earnings weren’t all that great, there are rumblings of the credit markets starting to tighten up again, and it feels like managers are being forced to buy into the market at a terrible time.

The rally in the 10-year bond was supported by Fed commentary that considers lowering overnight rates sooner than people had been expecting. That would be a very big deal if it’s true, and we just don’t think it’s going to happen quite as everyone is expecting. The reason supporting our position is jobs (and inflation). The jobs market doesn’t show signs of breaking, and that’s bad news for medium-term inflation expectations. When people in the US make more money, they spend it; so, an increase in wages is a leading indicator of higher inflation. Average hourly earnings came out slightly higher this month than last month and that’s bad news because it’s still too high and now headed in the wrong direction. At literally the same time (it’s published simultaneously), non-farm payrolls came out super hot at 216k vs. 170k estimated. The beat was driven primarily by private business hiring which exceeded expectations by 28k jobs, and that shows even more underlying strength in the economy. 

In addition to the encouraging jobs data, inflation data came out this past week and we don’t believe it points to the Fed having enough room to maneuver rates lower. Some Fed watchers will point to deflationary signs showing up in US PPI or Eurozone industrial output, and we think those should only be things to monitor right now. If lower prices on the inputs side are the result of a sustained contraction in demand, then that will show up a few months from now in corporate earnings (or jobs) and consumer prices. 

As of now, however, US consumer prices came out 3.9% higher than last year which is off slightly from 4.0% in December, and still not anywhere near the Fed’s 2.0% target. The problem presented to the Fed is they aren’t getting their “positive real rates across the curve” anymore. A “positive real rate” is when nominal interest rates, i.e. the yield to maturity of a government bond, exceed the current inflation rate. With the 2-year @ 4.15% and the 10-year at 3.95%, there isn’t a material difference from inflation at 3.9% – no positive real rates across the curve. Add back into the mix that wages are still growing at 4.1%, and we think that means the Fed has more work to do to bring inflation back down to 2.0%. It seems as if they’ve throttled things down from 9.0% to 4.0%, and it remains to be seen if they can make further progress on inflation without breaking the economy. At a minimum, we think the Fed will keep rates higher for longer than the market is projecting, and this should lead to higher, long-term interest rates at some point.

Demand – Boring

Supply – Boring … So, Predictions!

Let’s check in on our trusty table summarizing the market in the Denver metro area:

Data taken from REColorado on Jan. 12, 2024. Area covers the circle with a 10-mile radius surrounding Union Station in downtown Denver, CO.

Unfortunately, there aren’t many eye-popping statistics to point out this month. The past few installments of these Insights focused on the normalization of year-over-year comparables and we are continuing to see that trend. Things normally slow down in December (who wants to move over Christmas & New Year’s…?) and it will be easy for us to comment on the market’s trajectory in March and April.

You did make it this far, and we want to try to make this read worth your time, so here are a few predictions and things to watch out for this year:

1. Prediction: We’ve already seen the low-tick in mortgage rates for 2024. If we are correct that the Fed has more work to do and will need to see positive real interest rates before turning around, then the 10-year treasury will settle into around 4.5-4.75%. It’s currently trading at 3.92%, so we expect a drift higher in rates over the course of the year.

2. Prediction: Denver home prices will be up another 5% this year. Even with supply and Days on Market building into December, one would still expect prices to go up over the next 12-months. We’ve already seen renewed interest from our database to get pre-approved and into the market to shop, so we do think demand will be strong this spring and push prices higher.

3. Watch Out for… The Spring Pop. We normally see prices accelerate more than 10% from January through June each year. Keep an eye out for early season bidding wars and the trend of list prices. If things kick off hot and early, then it will likely continue for awhile.

4. Watch Out for… CPI / PCE Data. Any dislocation in our real estate market will be caused by a blow out in mortgage rates through reacceleration of inflation or blowing out of credit spreads. If consumer prices don’t start trending below 3.5%, then we think rates will move higher and make homes harder to afford. 

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