The Waiting Game

October 2024

While the world waits for November 5th, the economy and real estate market seem to be chugging along just fine. Two years ago, it seemed highly unlikely that the Fed would manage to quash inflation without hitting the brakes too hard, yet recent data suggests they may have pulled off a “Goldilocks” scenario. Inflation in the U.S. (and Europe) is falling, overnight interest rates are dropping, average hourly earnings are up, and private payrolls knocked the cover off the ball recently. Similarly, Denver’s real estate market went through a mini-revival in September, hitting that 'just right' balance of renewed strength after a period of stagnation. Let’s dive into what’s driving this Goldilocks momentum and explore what it could mean as we head into spring.

The Skim:

1. Forecast: No Election Chatter Here

2. Demand: Unexpectedly Strong

3. Supply: Drip, Drip Driip

Forecast: No Election Chatter Here

As the great Mr. Miyagi once said, “Focus. Your focus needs more focus.” He just forgot to add “…on the economy” at the end. Amid pre-meeting excitement about the Fed ushering in a new era of lower interest rates, quite the opposite happened. While the Fed lowered overnight rates affecting bank deposits and short-term lending, the rest of the interest rate complex, including mortgage rates, has risen—substantially—since the meeting.

What happened? Inflation had indeed been trending lower, now under the Fed’s 2% “target,” making the 0.25%-0.5% increase in mortgage rates since the Fed’s cut puzzling. This behavior is largely due to market dynamics and some unexpectedly strong economic data.

For one, there wasn’t an immediate rate shift lower because the Fed’s cut was one of the most widely anticipated moves in recent financial history. Longer-term rates, like mortgage rates, respond more to free market supply and demand than to direct Fed action. With months of strong hints about the coming cuts, many traders had already bought bonds expecting this “easy money.” When the cut came, those positions needed to be sold, and with few buyers left, the market saw a sell-off. The 10-year yield had been pushed below 3.6%, leaving little upside for new buyers and creating a delicate market situation.

Then, on October 4th, Non-Farm Payrolls—the key jobs market indicator—surged unexpectedly, doubling some forecasts. Wages also ticked up, signaling potential upward pressure on medium-term inflation. This spooked the bond market, and without a pool of ready buyers, bonds sold off, pushing rates up further.

Now, we’re 40-50 basis points higher across the 2-year to 10-year rate spectrum. This means homebuyers and homeowners hoping for lower rates may miss the lowest rates of recent months (though rates are still fairly good). Interestingly, bonds didn’t rally much after the payrolls surprise, likely due to October 10th data showing core inflation had ticked up over the past month. Let’s hope this jobs and wage growth resurgence doesn’t trickle too far into inflation data… Colorado homeowners have a big spring ahead! (Read below for more.)

Demand: Unexpectedly Strong

Supply: Drip, Drip Driip

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 October 10, 2024.

If you’re looking at the graph and noticing an unusual spike in last month’s pending data amid a sea of lackluster stats, you’re right; there was a significant increase in the number of listings put under contract in September 2024 compared to a year earlier. The total number of units taken off the market rose by 14%, offering an intriguing summary of trends in the Denver metro housing market. This increase was largely driven by a remarkable 28% rise in demand for single-family homes, even as demand for attached homes (duplexes, condos, townhouses, etc.) declined by 9%. For several months now, we’ve seen a growing divergence in demand between different types of properties around Denver, and last month’s gap was even more pronounced than usual.

So, what triggered this sudden surge in activity? Likely a combination of factors. First, September is the last full month for buyers to get an offer accepted and move in before Thanksgiving, making them relatively motivated. Second, recent news about the Fed’s rate cut led many buyers to hold off until the situation became clearer or the cut took effect. Lastly, it appears that many sellers reduced prices to finalize sales before the holidays. In this standoff between sellers and buyers, sellers seem to have yielded first, leading many buyers to believe they could snag good deals.

The difference in performance between sold and list prices further supports the idea that sellers had to adjust their expectations significantly. The current average listing price is 2.5% higher year-over-year, while the average sold price dropped by 5.0%. While this doesn’t necessarily indicate a major decrease in home prices, it does suggest that affordability remains a challenge for many potential buyers.

Affordability issues could become even more interesting next spring if current supply trends persist. With new listings appearing only slightly more frequently than last year, the market is gradually eating into the supply glut seen over the summer. If this trend continues, we could be in a much better supply position for a spring “pop,” which would align well with rising wage data if it holds up. On the other hand, if the job market picks up momentum again, mortgage rates are likely to rise, which could dampen the enthusiasm we’re all hoping for next year.