Divergence

We are officially in the summer buying season along the Front Range of Colorado! The period from the beginning of April until mid-June is when most buyers in Colorado prefer to move, so now is the time when things start to get busy, and new listings hit the market more frequently. The data also show signs of the real estate market accelerating, even against a macro backdrop in which optimism regarding future rate cuts is fading quickly: new listings are up, active listings are trending lower, and pending activity is higher, all in the last month.

The Skim:

1. Rates: Higher for Longer

2. Demand – Picking Up

3. Supply –  Absorbed

Higher for Longer

Last month, we focused the macro discussion on the interest rate levels of the 10-year US government bond, and we noted how the reaction over the next several trading sessions would set the tone for future movements over the summer. Initially, it seems that the prediction was correct. The 10-year rate consolidated at the bottom of its range and proceeded to blow through the upper level of its most recent trading range a couple of weeks ago (around 4.35%). Since breaking that upper level in early April, rates consolidated around 4.35%-4.4%, and portfolio managers are trying to determine whether longer-term rates will stay here or start another move toward the higher rate levels we saw in October & November of 2023. The initial reaction to CPI data released on April 10th shows that many investors were expecting inflation pressures to have eased much more by now. 

On one hand, the Fed Chairman has been consistent in his guidance over the last several months about their plan to lower short-term rates multiple times in the second half of 2024. On the other hand, things seem a little fishy (and even more so after the CPI data). The first crack in the armor of the rate-cut argument was at that same meeting in late March when the Fed increased its GDP projections. (GDP, or Gross Domestic Product, is a common measure by which economists measure the strength of an economy. When GDP is accelerating faster than the Federal Reserve predicts, it's typically a sign that things are going surprisingly well.) It's pretty odd for the Federal Reserve to talk about rate cuts when the economy is growing faster than expected. Then came the blowout jobs number this past Friday. Non-Farm Payrolls (NFP), a volatile and important measurement of the health of the job market, surpassed expectations materially and even beat the huge number recorded in early March (and the NFP number was further backed up by employment data released by ADP last week). Lastly, CPI was released and core inflation is still running north of 4.5% which is significantly higher than the Fed’s 2.0% inflation target.

This is weird, right? The job market and economy are ripping, inflation isn’t going away, and the Fed is talking about rate cuts...? (As Jim Mora would say, "Ah, RATE CUTS? Don't talk about rate cuts! You kidding me??")

We have a conspiracy theory: it's an election year. One of the best leading indicators of an incumbent President's ability to win the next election is the strength of the economy. Heading into the home stretch before the election this fall, the Biden administration is incentivized to do everything in its power to keep the job market strong, wages increasing, and the economy humming. They also know how scary the world felt last fall when longer-term rates were creeping closer to 5.0% and business & commercial real estate owners were sounding the alarm bells about the cost of financing. The Biden administration wants lower interest rates for the next six months. So, if you were Joe Biden, why not give your friend Jerome Powell a quick little call and chat about the economy? In my mind, it probably went something like this:

Biden: "Howdy, is this Jerome?"

Powell: "Yes, sir! What's up? How are you?"

Biden: "I'm good, man. 100. Seems like the market likes the idea of rate cuts this year, huh?"

Powell: "Yes, sir. But, I don't know... the job market is pretty strong and inflation hasn't gone away."

Biden: "So what are you thinking?"

Powell: "Well, sir, we're probably going to have to keep things where they are for a bit longer."

Biden: "Jerome, Jerome... buddy... The market really likes this talk about rate cuts..."

Powell: "I hear ya, sir. How about we keep telling them we're going to cut and then we can figure it out after you win in November?"

Biden: "Sounds great. See you on Saturday for our tee time with Schumer."

Given the Fed's history of "independence," it would be truly inappropriate for the President to interfere in Fed policy, even though the Fed's unwritten guidance can likely be influenced a bit. It makes sense that Powell is trying to talk down the longer end of the curve to keep borrowing costs where they are right now without the Fed having to act. Keep an eye on the data coming out this summer, and the movement of the longer-dated bonds will tell you everything you need to know about the potential for rate cuts this year.

Demand – Picking Up

Supply – Absorbed

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

Data taken from REColorado on Apr. 9, 2024. The area covers the circle with a 10-mile radius surrounding Union Station in downtown Denver, CO.

Toward the end of last month, we were focused on the "active supply" that appeared to be building and also the total number of new listings hitting the market. It seemed that some sellers wanted to take advantage of lower supply levels and get their homes on the market earlier in the season. Last month was still a little early relative to when we'd expect the market to wake up, so it was hard to draw many useful conclusions on the path of the market for the spring buying season at that time.

Now, we've had a few more weeks of market evolution, and it's quite clear that buyers are starting to come out for the buying season (as long as mortgage rates don't destroy everything). Active supply dropped by 23% relative to historical trends, with only a 5% reduction in new listings, which implies that homes are going under contract more quickly. Indeed, we saw pending activity up over 5% last month, and we expect that to continue through June.

The title of this note is "Divergence," and we want to highlight that differences are starting to emerge between the detached and attached markets. This isn't something we've seen materially since pre-COVID, so it's something to start watching again. Days on Market (DOM) for detached homes dropped from 32 days in January '24 to six right now; on the attached side, it's gone from 39 to 15 days. The difference between six days and fifteen on the market is material. In a market with a median DOM of less than 10, you would expect many multiple-offer scenarios and even some bidding wars; when homes are on the market for more than two weeks, buyers do not need to act with as much urgency, so a lot of the craziness goes away. First-time and more rate-sensitive home buyers tend to be in the attached market because prices are typically lower, so the lack of strength in this market is also likely a reflection of the more expensive interest rate environment.

Continued divergence between the pace of the detached and attached markets is something we are going to keep our eyes on for the next few months. Given the interest rate move this week, it's more likely that attached products will continue to transact at a slower pace, so that might be where some of the opportunity will be for buyers looking to get a deal.

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