Spring Predictions
January 2025
The Skim:
-
Hey Fed, How Low Can You Go?
-
Demand: Unseasonably Strong
-
Supply: Leveling Off
Hey Fed, How Low Can You Go?
If you’ve been holding out hope for rapid interest rate cuts in 2025, the Federal Reserve’s December meeting delivered a reality check. While the Fed reduced its target range for the federal funds rate by 25 basis points to 4.25%-4.50%, their commentary made it clear: the path to lower rates will be slower and more deliberate than markets had previously anticipated. Why? Inflation, while improving, remains sticky, and uncertainty about global and domestic policy changes adds complexity to the outlook.
The Fed’s decision to cut rates reflects notable progress on inflation, with key measures like the core personal consumption expenditures (PCE) index falling to 2.8% in November—down significantly from its highs but still above the Fed’s 2% target. This progress, however, has slowed, and some participants in the meeting expressed concern that disinflation could stall in the face of persistent price pressures. Upside risks, including potential trade policy shifts and geopolitical tensions, loom large on the horizon.
On the labor front, conditions have softened slightly but remain resilient. Unemployment rose to 4.2%, and wage growth slowed to 4% year-over-year in November. While these trends suggest a gradual easing in the labor market, they are unlikely to prompt the Fed to pursue aggressive rate cuts—especially given the strong jobs report released last week, which adds to concerns about potential inflationary pressures ahead. Instead, the Fed remains focused on ensuring inflation continues its steady decline without reigniting economic imbalances.
What does this mean for mortgage rates? Unfortunately for buyers and refinancers, a slower pace of Fed action could keep borrowing costs elevated longer than expected. While long-term Treasury yields have come down from their 2023 peaks, they remain higher than many had hoped entering 2025. For now, expectations of rapid rate relief have given way to a more measured outlook, one that sees the Fed maintaining a cautious approach as it monitors evolving economic conditions.
Demand: Unseasonably Strong
Supply: Leveling Off
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 January 10, 2025.
Active Listings Trending Down
The surplus of active listings continued its downward trend from the spring, with detached homes showing 1,436 active listings and attached properties at 1,400 by year-end. In aggregate, the year-over-year surplus now stands at 27%. This surplus represents the lowest level since early 2024. Given that it has been one year since the supply buildup began and that both new supply and pending activity were up approximately 5% in December, we expect year-over-year comparisons to continue trending downward over the next few months.
Unexpected December Activity
December saw a surprising increase in market activity, despite mortgage rates being near their highest levels of the year. Detached properties recorded 598 pending sales, while attached properties had 329, representing a year-over-year increase of 21%. This activity suggests that buyers were capitalizing on motivated sellers and lower year-over-year list prices. Detached homes had an average list price of $743,000, while attached properties averaged $430,000, marking the third consecutive month of average unit price declines. Many buyers likely believed the market had hit a near-term bottom and were willing to navigate higher-than-expected borrowing costs to secure deals.
Days on Market Stabilizing
Median days on market (CDOM) crept up in December, reaching 30 days for detached properties and 45 days for attached properties—a clear sign of a slower but stabilizing market. Compared to the ultra-competitive conditions of past years, where DOM often fell below a week, the current pace allows buyers more time to evaluate their options. We expect median days on market to decline into the teens during the spring months but remain unlikely to reach the frenzied lows of previous years, especially if mortgage rates continue to rise.
Spring Market Outlook
The current environment sets up well for the typical spring surge in activity—even with the potential for increased mortgage rates. Historically, prices accelerate up to 14% in the spring and peak in the summer, driven by families looking to move without disrupting school schedules. While a 1.0% increase in mortgage rates typically reduces affordability by 8-10%, we are encouraged by the exceptional jobs report that came out last week. With the stabilization of supply in our market, typical seasonal demand trends, and a strong labor market, we believe prices will rise, and market activity will be constructive this spring.