Time to Sell...?

The seasonal shifts in Denver’s housing market have occurred like clockwork over the last decade. As buyers prepared for their summer moves, price appreciation would climb in the spring, peak in late May or early June, and then start to cool as we moved into the fall. However, something is different this year. The price appreciation trend has been flat for the last several months and even declined in May, while supply is starting to build early. We aren't finding as many exuberant summer buyers as we've seen in previous years, and we can’t as easily blame rates — mortgage costs are lower this month than last. Whether cash is tight and sellers are looking to quickly monetize large portions of their net worth, or enough time has passed and Baby Boomers are starting to prepare their real estate holdings for the next stage of life, supply is building early in Denver this year. Finally, buyers are getting the upper hand again and we think that will continue for the foreseeable future.

The Skim:

1. Macro -- Data On Both Sides

2. Demand – Tepid

3. Supply –  Comeback SZN

    

Rates: Finding a Range

Macro-land tends to get quiet in the summer as portfolio managers and traders take their vacation days, so we try not to read too much into capital market movements until the fall. (There’s a reason why September and October are historically weird for the markets…) That being said, technical damage to the “higher rates” case occurred last month, and there have been important data points that support both the economic bull and bear cases that need to be put in context.

First, the technical damage to the “higher rates” case over the last month was extremely surprising. We were expecting rates to go higher, but they’re now a little lower than they were last month. The blue line at 4.35% is a line in the sand that traders are watching to see when the trend will shift for the treasury curve, and that seems to have broken in the short term. Right after we published our last note, this line supported the market and led to a rally, which ultimately failed a couple of weeks ago. The lack of follow-through to the upside shows there might not be as much steam to push rates as high as we thought. After ISM and before the jobs number this past Friday (both of which will be discussed in the next few paragraphs), the market seemed to get comfortable below this line as well as the 200-day moving average, which had been additional trend support over the last year. Outside of the jobs number shock, there didn’t seem to be much appetite to sell bonds (move interest rates higher), and that suggests we’re in a consolidation period of sorts.

Two huge economic data points had significant impacts on the treasury curve in the last 30 days, and they came out on both sides of the fence — ISM is suggesting a slowdown, while Non-Farm Payrolls indicate it's game on right now… or is it?

Let’s chat about ISM first. The ISM Manufacturing PMI number is a gauge of manufacturing activity across the United States and is typically a concurrent indicator of economic activity. A reading above 50 suggests the manufacturing sector is increasing, and a reading below 50 suggests that manufacturing activity is contracting, which isn’t a normally a good sign for the economy. The most recent reading was released in the first week of June, and it was 48.7, which was below the consensus expectation of 49.6 and also lower than the previous month’s final reading of 49.2. It seems this month came out lower than expected as a result of lower demand, and that isn’t a great sign for the economy. Not only did the economy not recover from a contractionary period last month, but it was also weaker than analysts expected again this month. When economic activity isn’t great, it means the path of interest rates is likely lower than the Fed’s current projections, and that explains why the 10-year treasury curve was able to rally to lower interest rate levels last month.

But wait!! It’s never THAT simple… Last Friday was the release of Non-Farm Payrolls, which is one of the more important readings on the job market. When the economy is great, employers add a lot of people to the payroll, so this number tends to get bigger when times are good. This is why the print of 275k job additions against an estimate of 185k and a previous reading of 165k was so surprising. It was even more surprising that most of the job gains came from private employers who take more risks on the economy than the government, so something seems a little off when put in context ISM numbers… On one hand, manufacturing was weak and became weaker while the jobs market was strong and got stronger… What’s going on here?

Inflation is coming down, the housing market is slowing down a bit (keep reading!), and manufacturing is slowing down, so the economy can’t be as strong as it was a couple of years ago nor as strong as the headline NFP numbers would suggest. The key to the jobs data is not in the print of 275,000 job additions, but rather, in the tick-up in unemployment from 3.9% to 4.0%. If you were adding more than 200,000 jobs across the country and the labor pool stayed constant, you would not expect an increase in unemployment as that would be mathematically impossible. Therefore, the only way to mathematically reconcile the jobs data with the broader economic data is to infer that a ton of people came back into the labor pool last month looking for jobs and not everyone was able to find employment. As a result, you can have strong job gains while the economy is weakening, and this is supported by the increase in unemployment stats last month.

If it’s for the proper reasons, the return of labor to the market is something the Fed would definitely welcome but we’re concerned. As we’ve discussed in previous editions of this note, one of the biggest pressures on inflation is that wages keep growing at exceptionally high rates, and an increase in labor supply should dampen future wage gains. This would be a Goldilocks scenario for the Fed if we were at the start of an expansionary economic cycle, and we’re concerned because it’s the opposite time in the cycle right now. The personal savings rate, as reported by the St. Louis Fed, has been approximately half of what it was before COVID, which means that Americans are saving less while spending a lot more given all of the inflation we’ve experienced. If people are coming back to the labor market in droves, it likely means that cash is pretty tight, and that isn’t a great sign for corporate earnings going forward. It definitely feels like the economy is taking a bit of a breather and giving people an opportunity to reset for the next move, and the question is whether this will provide the base for further expansion, or if the pinch on the American consumer is going to lead to harder times ahead.

Demand – Tepid

Supply – Comeback SZN

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

Things are FINALLY shifting in the Denver metro housing market. Last month was the second out of the last five in which all of our primary market statistics flashed “red” or “bearish.” Additionally, you can see in the “Avg List YoY” (third from the right) that May was the third month in a row when the average price of a listed unit in our market area was lower than a year prior. Lower prices along with bearish data isn’t something we’re used to when evaluating the Denver housing market, and the shift appears to be occurring as the result of two factors: (1) homes are not being absorbed as quickly as they were last year, and (2) new listings are coming on the market at a faster pace than we’ve seen in a while. Let’s dive into these factors a bit more…

The two columns that show demand activity are the “Pending” and “Solds” columns. For the last several years, these columns weren’t that important because there was so little inventory on the market that demand just became a function of supply. When more homes hit the market, it appeared that demand was stronger, and when fewer homes were on the market, demand appeared weaker. This is one of the first periods of time going back at least five years when demand appears to be going down while new homes are increasingly hitting the market, and that could be an ominous sign for sellers right now. One reason for this behavior is that sellers haven’t adjusted their expectations to what buyers can afford right now. Homes priced properly are still selling pretty quickly (Median DOM is 5 and 14 for detached and attached units, respectively), suggesting buyers are getting a lot more discerning about the offers they are making. With more homes on the market and fewer buyers able to afford the different price brackets in a higher rate environment, fewer homes end up transacting, and many more sit around for a long time. Given this increase in supply, buyers are also less interested in getting into bidding wars or giving sellers everything they’ve wanted. As a result, some homes are just sitting longer as deals are being negotiated, leading to a slower pace of transactions across the market.

At the same time, supply is definitely increasing, and it’s hard to offer an exact reason for that behavior. Four out of the last five months have seen material increases in new listings but nothing that hadn’t been previously absorbed by the market. Days on Market (DOM) is up slightly but not enough to be the sole cause for the 70% increase in supply, and the demand slowdown isn’t enough to lead to materially higher supply by itself. Our best explanation for this increase in supply is that homes that don’t sell within the first week or two are not being responsive enough to the mini-slowdown we’re seeing and they’re just sitting on the market. Life happens whether we want it to move forward or not, so if Baby Boomers are typically the ones who own homes, then it’s only a matter of time until these homes start to hit the market. If we’re putting the housing market in the same context as the job market, perhaps these homes are being sold because cash is tight and home equity is a relatively liquid way of monetizing your net worth — sellers looking to monetize every penny of equity without consideration for the buyer pool would explain a lot of what we’re seeing right now. Or, perhaps it’s time for many of these Baby Boomers to start downsizing and getting ready for the next stage of life. Either way, the consistent stream of new listings has not been absorbed by the current buyer pool, and we don’t think this is going to change until rates go much, much lower.

We’re at the peak of our seasonal cycle in the housing market, so the early building of inventory isn’t a good sign for sellers who missed the spring window. If you need to sell a house, get it on the market as quickly as possible! If you’re looking to buy right now, there’s a very good chance you can start to negotiate and get terms that buyers wouldn’t have dreamed about only 12 months ago. And if you’re willing to take a bit of a gamble, I think this fall will be an AWESOME time to buy a home. As the market cools in late summer, it’s very likely that many of these listings will still be available and sellers will start to get more motivated. So, if you’re really looking for a good deal, let’s get you pre-approved and ready to shop this fall… it could be a lot of fun.

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