The Roaring 20's

December 2024

The Skim:

1. Let's Party Like It's 1925

2. Demand: Twice is a Fluke, Three Times is a Pattern

3. Supply: Could Be Tight By April

Let's Party Like It's 1925

The current economic landscape feels reminiscent of 1925—a time when markets were heating up, valuations were at peaks, and the broader economy seemed unstoppable. Although hindsight casts the years following as a lead-up to the crash of 1929, 1925 itself was marked by growth, confidence, and consolidation, leaving plenty of room for further expansion. Similarly, today’s economy presents opportunities for continued growth, but the Federal Reserve’s balancing act could become increasingly difficult next year.

In 2024, inflation eased, and the Federal Reserve responded with measured rate cuts, giving the economy a much-needed breather. However, several structural forces suggest that the risks to inflation remain unbalanced, particularly under the incoming administration’s policies. While avoiding direct commentary on policy specifics, it’s important to note that the current mix of proposals around tax adjustments, regulatory changes, and immigration restrictions could exacerbate labor shortages and boost consumer spending. Combined with demographic trends—baby boomers spending down their savings and millennials driving demand for goods and housing—the conditions are ripe for a rebound in inflationary pressures. Indeed, this could explain why the 10-year Treasury yield remains closer to its highs even as the Fed lowers short-term rates.

Wage growth continues to show resilience, supported by tight labor markets and declining workforce participation as the population ages. According to recent data, average hourly earnings are up approximately 4.5% year-over-year as of Q3 2024, while the unemployment rate hovers near a historic low of 3.6%. Even with broader economic uncertainty, the job market has remained surprisingly strong, pushing wages higher and giving consumers the confidence to spend. While this is good news in the short term, it underscores the Federal Reserve’s ongoing challenge of balancing growth and inflation. A moderate uptick in inflation next year could compel the Fed to pivot back toward tightening monetary policy, particularly if the new administration’s fiscal policies add further fuel to the economy.

For the housing market, this dynamic represents a mixed bag. On the one hand, higher wages and a cooling inventory build-up create opportunities for more buyers to enter the market and drive prices higher. On the other hand, the prospect of rising interest rates looms as a potential headwind. Historically, inflationary double-dips—where inflation cools only to resurge—have proven destabilizing for markets. Should inflation pick back up and the Fed be forced to react aggressively, the runway for growth could narrow quickly.

That being said, we think these problems are further off in the distance. It appears that massive amounts of capital are poised for deployment as the new administration takes over. This anticipated investment could spur growth nationwide, with early indications pointing to a renewed focus on infrastructure spending and technology. For instance, recent surveys show an uptick in corporate investment plans, with nonresidential fixed investment increasing by 3.2% in Q3 2024, reflecting optimism for the coming year. Similarly, state and local government spending on infrastructure has been rising steadily, with construction spending up 5.8% year-over-year through October.

As we approach 2025, the Denver real estate market is poised to perform well under a moderate economic scenario. If rates rise gradually and buyers acclimate to these higher levels, the market could experience steady growth. However, any significant policy shocks or rapid changes in monetary policy could alter this trajectory, reminding us that optimism should always be tempered with caution. Let’s take a closer look in the next section.

Demand: Twice is a Fluke, Three Times is a Pattern

Supply: Could Be Tight By April

Let’s check in on our trusty table summarizing the Denver metro housing market within a 10-mile radius of downtown Denver:

All Data taken from REColorado on December 15, 2024.

Building on the broader economic trends we’ve just discussed, Denver’s real estate market is well-positioned for steady growth in the year ahead—provided interest rates remain manageable. While the market is undeniably slower than the frenzied activity of a few years ago, several indicators point to a healthy rebalancing rather than a downturn.

Throughout 2024, we’ve observed a steady build-up of inventory, with active listings peaking mid-year. However, this trend is now reversing as the oversupply begins to normalize. As of November 2024, active listings were down nearly 20% from their September highs, reflecting a more balanced dynamic between buyers and sellers. This contraction suggests that the Denver market has absorbed much of the excess inventory from earlier in the year.

Pending Sales Highlight a Late-Season Surge

A key driver of this stabilization has been a notable increase in pending sales during the fall. September, October, and November saw a significant uptick in activity, coinciding with the Federal Reserve’s September rate cut. This late-season demand can likely be attributed to buyers who were previously on the sidelines, motivated by the slight reduction in borrowing costs. Interestingly, long-term mortgage rates have remained relatively high despite the Fed’s actions, suggesting that buyers are acclimating to the new rate environment rather than waiting for significant drops.

A Slower Market, But Still Healthy

While the pace of the market has slowed, it remains in a healthy range that allows buyers time to shop without eroding price growth. Detached homes are spending an average of 21 days on the market, while attached units average 34 days. This is a far cry from the hyper-competitive days of 2021 but still reflects balanced conditions that allow for constructive price appreciation. Importantly, this moderation also provides a cushion for the market to absorb potential future rate increases without significant disruption.

Wage Gains Could Fuel Buyer Activity

As noted earlier, wage growth has been resilient, helping to close the gap between rising home prices and buyer affordability. With buyers more accustomed to today’s interest rate levels, we expect wage gains to play a crucial role in driving activity next year. If incomes continue to rise and days on market remain steady or increase slightly, Denver could see a pickup in buyer interest without the risk of overheating.

Looking Ahead to the 2025 Denver Housing Market

Our outlook for Denver real estate in 2025 is optimistic, particularly as we move into the spring. With stabilizing inventory levels and signs of growing buyer activity, the foundation is set for a healthy market rebound. Wage gains are helping to close the affordability gap, and as buyers grow more comfortable with current interest rate levels, we anticipate a meaningful pickup in activity in the first half of the year.

The stabilization in days on market, combined with steadier price growth, creates a favorable environment for both buyers and sellers. For buyers, the market offers the time and space to shop without the frenetic pace of recent years. For sellers, constructive price gains and renewed buyer interest mean that well-priced homes are still moving quickly.

Denver’s resilience stands out on the national stage, with local demand supported by the region’s strong job market, steady population growth, and a reputation for quality of life. We expect this momentum to build as we head into the spring, positioning Denver as one of the more attractive real estate markets in 2025.