“Waking Up” — February 2023
Blue Pebble Market Insights
The Skim:
What Landing?
Demand Slowly Coming Back
Sellers: Anticipating Spring Season
You don’t hear me say this very often: I was wrong. A few months ago, when I wrote our note declaring the end of the residential market, it was with the expectation that US interest rates would continue to rise thus forcing mortgage rates higher and destroying affordability. While there are some grumblings across the country that residential real estate markets are slowing down significantly, it seems Colorado (and especially the Denver metro) didn’t get the memo. Lower mortgage rates in January translated to a reversal in pending activity and sellers are taking the lack of destruction as a sign that a spring pop is imminent. Average list prices are up 14% month-over-month, so it seems like the window to “get a deal” is closed for now.
What Landing?
This is a fascinating time to watch the capital markets. January started off with a huge rally in bonds when participants started to handicap the Federal Reserve “pivot” resulting from disinflationary pressures and a slowing economy. In the last two weeks, however, a string of economic data was released that (in my opinion) ends the debate about whether or not a pivot is imminent. Instead, market participants are now forced to determine if the economy is even headed into a recession.
January non-farm payrolls blew expectations out of the water when the US economy added 517k jobs against an estimate of 190k. Most surprisingly, private payrolls drove the biggest gain as 443k jobs were added against an estimate of 269k. Even though companies are starting to warn about performance, the job market is not suggesting any economic slowdown, and the unemployment rate actually ticked lower by 0.1% (to 3.4%).
The strong employment picture is presenting a quandary for the Federal Reserve. CPI data released on Feb 14th showed inflation is still elevated at over 6% on a headline number while the trend in month-over-month results shifted back higher. Most concerning is that services less energy was sticky at 0.5% month-over-month and driven by demand for labor. Additionally, retail sales were just released on Feb 15th which was up 3% vs. an estimate of 1.2% — the consumer is still alive and well. This consumer trend currently playing out in Colorado’s residential real estate market as well.
The macroeconomic data is playing into Blue Pebble’s narrative that the US and the world are going through a structural shift in how economies function. So long as baby boomers continue to spend their money, demand will not come down, and there will be pressure on wages and inflation. The bond market is starting to wake up to this fact, and interest rates rose significantly in the last two weeks – this should start the tap the brakes a bit on the housing market, maybe.
Demand Slowly Coming Back
Let’s check on our trusty table summarizing the behavior of the housing market within a 10-mile radius of Union Station in Denver:
All data taken from REColorado from Feb 1-15, 2023.
The demand side of our market is showing strength with the decrease in mortgage rates last month. Depending on a buyer’s credit, rates came down between 50-100 bps (0.5-1.0%) which translates to an increase of approximately 7% in overall affordability. Even though pending units were still 18% below the levels we saw last year, the data picked up from the recent trend of 30% below 2021 levels.
Intra-month data is difficult for us to gather given the lack of sensitivity of our data systems, and it will be interesting to see what happens through the rest of this month. Interest rates have reversed most of the move that happened since the start of the year, and this will translate to higher mortgage rates as we get into the spring season. It also seems like macroeconomic data is not pointing to lower rates any time soon. Now that list prices jumped 14% from the end of December to the end of January, something will have to give. Either buyers will have to find more income to qualify for loans or sellers will have to move expectations lower.
Sellers: Anticipating Spring Season
A month-over-month price jump of over 10% is relatively rare; this happened in January 2022 and then you have to go back to the spring season of 2019 to find the previous time. In both instances, each gain was in January of that year, but the market was much, much more supportive of buyers during those times. Interest rates were below 4% then and have shifted dramatically to over 6.5% now. Additionally, there is more than double the supply on the market now than at the same time last year which was not an issue during those previous times. We know there is typically a pop of 16% in Denver home prices from January through June which is the result of good weather and families wanting to move when kids aren’t in school. Currently, list prices are suggesting that the spring buying season has already started while other indicators like Days on Market (DOM) have not adjusted to match. The market may be getting a bit ahead of itself.
The local real estate market is handicapping the relative strength of our job market in conjunction with pent-up demand from Gen Z & Millennial buyers who moved to CO in the last three years. We still expect demand to outstrip supply in the long run and thought there would be a tough quarter or two to start the year; we also thought the job market would be a lot weaker than has been shown. Based on these dynamics, it wouldn’t be surprising if you start seeing a bigger bid-offer spread between where sellers are willing to sell and buyers are able to afford. When this happens, DOM will start to go higher as well. On the whole, we believe resale transactions will primarily be Baby Boomers downsizing (selling) to younger buyers who are getting into the market or trading up. The Baby Boomer sellers will need to maximize their proceeds given retirement and the prospect of living on a fixed income in the face of inflation pressure, so their price requirements will be sticky.
