Marching Along

When the weather switches from 50 degrees and sunny to 30 degrees and snowing, and then back to 65 degrees after a hailstorm — all in the same day — you know you're nearing summer in Colorado. As the 10-day forecast warms up here, so does the real estate market! We're starting to see more homes get listed, which is typically a sign of even more movement in the following months, and macroeconomic headwinds that caused higher interest rates over the last month are taking a backseat this month. That means buyers will have a window to pursue a home this summer while mortgage rates aren't approaching all-time highs. We expect to be in a Goldilocks period for at least the next month or two as we keep a steady eye on the labor market and inflation data to be published over the next two weeks.

The Skim:

1. Rates: Finding a Range

2. Demand – Seasonally Average

3. Supply – Increasing Slightly

Rates: Finding a Range

Mortgage rates have been slightly lower over the last month due to the long-term treasury markets avoiding the worst-case, short-term scenario of the Non-Farm Payrolls (NFP) release on May 3rd. The image below is an annotated 10-year treasury chart highlighting the dip in interest rates with a yellow arrow.

The strength of the labor market is one of the most important leading indicators of the future path of inflation, and that makes data releases like NFP extremely important for portfolio managers who are allocating capital into the interest rate markets. As inflation expectations increase, interest rates on bonds also increase because buyers of those securities will need to be paid more interest to maintain their purchasing power until the maturity of their note. This is one of those weird relationships between economics and finance: it’s hard to rationalize a scenario in which interest rates go lower without seeing the job market weaken significantly.

That relationship between interest rates and the labor market is more pronounced in economies with lower savings rates. Savings act as capital buffers to maintain consumption when jobs are harder to find (and act as a drag when times are good), so there’s a more pronounced correlation between consumption and wages when consumers generally save less. This is the main reason interest rates continued to rise over the last few months, even though the Federal Reserve had been communicating its expectation to be cutting rates (until recently). The US had been adding over 200,000 jobs per month going back to December 2023, and the print of 175,000 additions in early May was a welcomed reprieve. That reprieve took longer-dated treasuries back from the edge and allowed mortgage rates to come down—just in time for the heat of the summer real estate market.

That begs the question: when do we get an even bigger break in mortgage rates? We think it still might be a bit. If the strength of the job market tells you the direction of inflation, then changes in average wages can hint at the magnitude of inflation pressure. (More money in consumers' pockets means more money is spent on goods, and demand for goods drives inflation higher.) The growth in average hourly earnings has been trending down over the last four months and recently hit its lowest level since 2021; at 3.9% growth, however, the Fed can't be super comfortable. The Federal Reserve's target inflation rate is 2.0%, and wage growth will still need to go lower (as a result of a weaker job market) to give them confidence everything is under control.

That likely puts us in a holding pattern for a few months. As always, we are going to keep an eye on inflation data, and we think the jobs and wage data will have bigger impacts on the capital markets (and your mortgage rates) this summer.

Demand – Seasonally Average

Supply – Increasing Slightly

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

The market has had more supply going back several months, and April was no different. Toward the end of the month, active supply was close to its highest levels relative to year-over-year (YoY) comparisons that we've seen recently, and that was a function of two factors.

The first is that April was the third month out of the last four in which the YoY change in new listings for that month increased. Almost 450 more new listings came on the market this past April than one year ago, and the year-to-date total is 944 more units have been listed in 2024 than through this time last year. The second factor impacting higher supply is higher mortgage rates. The recent peak in mortgage rates occurred in April, and there was a shift in pending activity from green in March (higher YoY) to red in April (lower YoY) as a result of those higher rates. As we mentioned earlier in this blog, mortgage rates are even a bit lower now, and we would expect the pending box to flip back to green when we release this same content next month.

How much is higher supply impacting other activity and/or housing prices? Not much, yet… 944 more new units on the market over the first four months of the year equals an average of 236 more units each month; over that same time, the market averaged 1,300 homes sold each month. That means one would expect the average home to stay on the market an average of seven days longer, and that's not too big of a difference when the average home is only on the market for five days right now.

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