The Off-Season
The Honey Badger
Demand: Following Recent Trends
Supply: Wait, MORE Listings??
In this month’s edition of our Market Insights, the first thing we want to say is “thank you.” To all of our clients, readers, referral partners, friends, & family members who support us as we pursue our mission of making real estate more affordable for the American consumer, we are very grateful to have you in our lives. We sincerely hope you have a wonderful holiday season, a happy new year, and that you are ready for an exciting real estate market next year! The trend of fewer listings hitting the market slowly reversed over the year, and November was the first month in the last EIGHTEEN when more listings hit the market than did in the same month of the previous year. At the same time, our market is slowing down similarly to how it did last year. Composite Days on Market (DOM) is up to 19 from a low of 5 this spring, and list prices are coming down along last year’s trend as well. That leaves two major questions for the 2024 spring buying season: when will supply start to build and will mortgage rates allow for our usual spring pop?
The Honey Badger
The name of the game is still inflation. While the Fed can give itself an initial pat on the back for what seems to be a smoother landing than what most people were expecting (check your retirement balances and you’ll feel pretty good these days…), recent economic data seems to suggest there’s still work to do with interest rates. It’s central to Blue Pebble’s longer-term economic outlook that the jobs market needs to be in much worse shape before you’ll see an end to this interest rate cycle. So long as unemployment is below 5% and wages are growing over 4%, inflation is going to run hotter than the Fed’s goal of 2%. The typical American consumer spends all of the money he or she makes, so if they’re earning 5% more every year, then demand will grow accordingly. Inflation will continue to rise because sub-four-percent unemployment and 62.8% participation rates mean there’s still no slack in the labor market to accommodate the growth in demand; thus, wages go up, more money goes to consumers, and the cycle continues.
This view was reinforced by a few other data points last week including the beat on Non-Farm Payrolls (199k vs. Est: 150k) and the 4.8%-annualized increase in average hourly earnings last month (vs. an estimate under 4%). The historical chart of labor force participation (below) also demonstrates that most people who want to work are working right now.
Source: US Bureau of Labor Statistics (Dec. 11, 2023)
The Civilian Labor Force Participation Rate is a measurement of supply or “slack” in the US labor market excluding military personnel. It measures the total number of 18-64 year olds who are employed divided by the total number of 18-64 year olds in the country. At 62.8%, it’s nearing a point that represented a ceiling to the metric before the pandemic. The reason why it’s a ceiling is that we’re still picking up some Boomers who retired early, a phenomenon known to have accelerated during the Pandemic, and that causes the numbers to go lower. We’re likely to see a rise in this data in the future as Boomers who retired early age out of the study and those Gen X, Millennial, and Gen Z workers stay in the labor force longer. We’ve had significantly fewer opportunities to build savings & equity like the Boomers did when they were our age, so it seems reasonable that our labor pools will be more engaged for longer. It will be interesting to see what happens in 10-15 years as the greatest transfer of wealth in the history of the world starts and we will be the beneficiaries…
Anyway, back to “now,” there doesn’t seem to be much relief on the way concerning a slowdown in wage growth, and the expansionary ISM data across services, new orders, and manufacturing all suggest our economy is humming along. For all of you who remember that YouTube video, the US economy is like the honey badger: it DGAS. While that might be encouraging for us normal people who depend on a thriving economy, it doesn’t seem like the Fed and Chair Powell should be sleeping as easily as the US equity markets are suggesting. If the increases in short-term rates haven’t caused a slowdown in wage growth, then longer-term inflation pressures still persist, and that means interest rates will probably have to go up more at some point. Higher interest rates mean higher mortgage rates, corporate debt refinancing costs, and higher commercial RE cap rates… but anyway, it’s December and it’s the holidays, and no one wants to be “that guy” at the holiday party talking about upcoming economic doom & gloom (trust me, I know from personal experience).
What that means for our readers is that now is probably a (relatively) good time to buy a house. No joke. Mortgage rates have come down from the peak on the expectation that rates have peaked, and prices are down with seasonal effects. If you’re looking to get into a house before the spring rush and the potential longer-term inflation, buy now. You don’t need to be as concerned about a housing correction because of the tighter labor markets and the number of people who own their homes in cash now vs. 2007.
Demand: Following Recent Trends
Supply: Wait, MORE Listings??
Let’s check in on our trusty table summarizing real estate market activity within a 10-mile radius around Union Station in downtown Denver, CO:
One of the first things to note is the lower magnitude of changes versus the previous year that we saw again this month. It feels as if the market is getting to some sort of equilibrium in terms of available supply and demand, and that the majority of the shift from “low rate” to “high rate” market is over. We mentioned last month how comps are resetting, and it seems that this trend is continuing.
There are a couple of other encouraging signs for home buyers that aren’t necessarily concerning for sellers, yet. First, it seems as if this past month MORE NEW LISTINGS hit the market than did in November ‘22! That’s huge! It’s been 18 months since that last happened, and maybe (just maybe) is a sign that supply has bottomed out. While new listings are slowly starting to increase, it also seems as if the pending pace isn’t increasing substantially, which means the probability of any one listing going under contract is lower, and one should expect days on the market to increase. Indeed, while Days on Market (DOM) in Nov ‘23 decreased slightly vs. Nov ‘22, the metric increased from 12 to 19 month-over-month from October to November this year.
The good news for sellers is that even though it will take a week or two longer to sell your listing, we can still be confident that it’s going to sell quickly. Even with the slightly increased supply and time on the market, the far right of the table still shows that prices are increasing at a steady clip. We would expect this behavior to continue so long as DOM stays below 120, so there’s likely some room for the market to slow down before prices take a material hit. This is also backed by our macro perspective that the job market remains robust, so we expect moderate strength of the housing market in the near term.
