The Shoulder
Welcome to Shoulder Season
Is demand going away…?
Can we have one month with more supply? Please!?
Moving is rarely something people want to do, and I’ve heard that moving with young children during the school year is even more difficult. That explains the substantial seasonal effects of back-to-school season. A material amount of demand leaves the market, and September and October tend to be awkward months when late-season sellers have to readjust their expectations while buyers put their plans on hold until next year. Sellers are caught off-guard by the speed with which the housing market goes from "hot" to "cold" every year, and this is why you'll see many properties endure a series of price reductions heading into January. To make matters more difficult, interest rates continued to climb higher last month (thus making affordability an even bigger problem), and many buyers are seriously considering "waiting for rates to come down."
Welcome to Shoulder Season
Last month, we highlighted how the capital markets were setting up for a negative surprise, and it's always cool when our predictions come true (note: a broken clock is always right twice a day). 10-year US gov't bonds were trading at implied interest rates of around 4.3%, and it appeared that demand for bonds at those prices was slowly drying up. Here's what happened over the last month:
Yields on the 10-year US treasury bonds from Spring 2023 through present as of Oct. 19, 2023 (taking from TradingView).
As you can see, the increase in rates accelerated once the level broke 4.35%, and 10-year interest rates are up over 0.5% over the last month! When interest (and mortgage) rates go up, affordability goes down. Borrowers only have a certain amount of purchasing power which depends on their assets and income. When rates go up, a higher proportion of that purchasing power needs to be spent on interest payments vs. principal payments, and that means that the value a borrower can afford goes down. With the 0.5% increase in rates, affordability took a 4.2% hit; that means that a home a buyer has to lower their max price for a target home by 4.2% from where they were looking only LAST MONTH.
The recent move in rates will undoubtedly cause some concern for upcoming real estate refinancings and also the general ability of corporate America to generate huge profits. The market will continue to digest the higher rate regime over the next few weeks, and we think this will continue to put pressure on the real estate market to slow down a bit more in the coming months.
Unlike many of the talking heads, we don't think the bond market is going to snap back, and that means we are preparing for interest rates to stay at these levels for a prolonged period of time. In order to help our clients get into the homes they want, we are going to announce a big shift to our rebate program in the next month or two. Click here or "Contact Us" to sign up and receive the update that will save you thousands when you purchase or list your home.
Is Demand Going Away?
Can we have one month with more supply? Please!?
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 October 15, 2023 (REColorado).
It’s fascinating that we continue to see negative numbers across the board — and that’s giving us conflicting signals. We shade the table green when "New Listings" and "Active Listings" are lower because that should lead to higher prices. These are the two supply metrics on our table, and lower supply typically leads to higher prices. There had been materially more listings on the market for most of 2023 vs. 2022 because buyer demand was slower and it took the pool several months to adjust to the higher rate environment. You can now see how the "Active Listings" column recently switched from red to green and is more in line with the "New Listings" results. Either way, we haven't seen a flood of new supply come on the market, and this isn't likely to change until we get a bigger macroeconomic dislocation.
On the demand side, we chart "Pending" and "Sold" units every month. Slower "Pending" and "Sold" activity typically leads to prices coming down — if supply is equal to demand and then a bunch of demand leaves, prices will have to come down in order to clear the inventory. Denver’s housing market hasn't been "balanced" for at least 6 or 7 years, so we aren't seeing prices come down even though volume is grinding to a halt. Over 4,000 fewer units have been sold in our statistical market area in 2023 vs. 2022 but the average price of a sold unit is 7.0% higher... And that’s odd… what gives?
It’s even more odd that Days on Market hasn't gone up materially (yet). There have been 13,700 closed units in our market area during 2023 but a total of 17,200 have so far been listed. We've averaged ~2,500 units on the market at any given time, so we should be seeing a huge increase in the time a listing takes to sell if that many units are sitting unsold. But, they're not sitting unsold. The data suggests that sellers have very specific expectations for the cash they need to net from the sale of their home, and they are simply pulling the listing if they aren't getting it. And this is why volume is grinding down without prices coming down… Sellers are unwilling to adjust their expectations lower, and buyers simply can't afford the prices on the market.
