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There are a lot of interesting things going on in the world of real estate and mortgages these days. Still, the scenario the experts got wrong is the one that’s blessing us all. Inventory has not spiked, and prices have not dropped. I found a graph showing how the highest interest rates in 23 years have affected those who can afford it the least.
The best news of the day is the relative stability of the overall market today. Interest rates aren’t rising anymore. They’ve steadied and are predicted to start declining soon (more on that near the end of the report). Evidence of stability is in prices, which are neither climbing nor dropping; days on market (DOM) have fallen into a very tight range (between 45 and 51 DOM); and inventory is neither dropping nor climbing any longer. All these conditions show stability. Markets love stability because it breeds predictability. Buyers and sellers can plan around predictability. Optimism comes from reliability. Fear, anxiety, worry, and concern come from instability.
Stable market conditions don’t exist only in the Longmont area. They extend to the Boulder area report as well as throughout the Northern Colorado region. The only slight difference is the DOM stretches up into the low 60s in a few areas. Some market areas are experiencing slight increases in Sold % of Asking Price, indicative of a strengthening market.
Longmont Area Real Estate Stats August 2023
Boulder Area Real Estate Stats August 2023
Northern Colorado Real Estate August 2023
I had to look hard to find something out of the ordinary to comment on in this month’s local data. Days on Market in Louisville seem weirdly low. But as we’ve seen often, a small dataset can create a wide variety of outcomes. This is no exception. This year there was only one sale over a million dollars, last year there were five. This will easily swing an average or a median. DOM in Superior also dropped similarly, for the same reason, few sales for lower prices. There was a frenzy to buy homes in both areas a year ago as inventory plummeted after the Marshall Fire.
This paragraph is for newer and some veteran readers of this report. I get questions that I want to address. I have been doing this report since 2007. I have sales and listing data for the Longmont area that goes back to 2004. The Boulder and Northern Colorado reports are less than two years old. Both of those newer reports don’t include active listing data that is in the Longmont report. Instead, they have Sold % of Asking Price. I haven’t collected the listing data for these new reports, and it’d take a year to collect today’s data before changing the report to reflect listings. Instead of changing the data readers have gotten used to, I decided to keep the Sold % data going forward. So, for the Longmont report, in the guest section (Ft Collins this month), you will always see Sold % instead of Active Listings. Lastly, Active Listings are defined as Active, Active/Backup, First Right, and Pending… because they don’t fit in the other box… of SOLD.
A year ago, a predicted outcome of rising interest rates was that they would adversely affect the people who can afford it least. The less wealthy would be prevented from buying a house because the rise in interest rates would increase their payment to the point where they can’t afford a house. Intuitively this makes perfect sense. The graph I found this month is courtesy of the New York Fed Consumer Credit Panel/Equifax. It is from their Quarterly Report on Household Debt and Credit. Click on the link if you’d like to download their dataset.
Since it’s such a small number, I did the extra research for you. Q1 of 2023 saw the second lowest mortgage applications by people having the lowest credit score (under 620), the 6th lowest number of applications for the 2nd lowest credit score group (620-659), and the 4th lowest total of mortgage applications overall. That was from the 1st quarter of this year. The 2nd quarter wasn’t much better scoring a top (bottom is more like it)-10 in each of those categories mentioned. Fewer applications by this demographic result in fewer homes being purchased by them.
Where does this market go from here? I have my suspicions, but before I read another crystal ball, legendary Northern Colorado mortgage guy and VP/Regional Market Manager, Lonnie Jenkins of Cornerstone Home Lending, has been sharing this with partners recently and he allowed me to share it here.
“Let’s start with some information we think is for the most part behind us:
Tailwinds:
- Per NAHB, builder confidence hit 10-year lows from Oct. 22 to Jan. 23 at an average of 34 but has since recovered in June and July to 55 and 56. This is exceeding 50 for the first time in 11 months.
- New home sales historically comprise 8-12% of overall sales but are now accounting for 30-35% of sales in many markets.
- Of homeowners who have mortgages, 85% have rates below 5.0%, which implies that homebuilders will continue to be the primary driver of the housing inventory.
- Cornerstone’s builder JVs have reported strong profits across 2022 and 2023, whereas the mortgage industry as a whole has averaged five consecutive quarters of losses.
- The current demographics of first-time homebuyers ages 28-38 indicate that new home sales should stay strong for the near future.
- Per Zonda, 44% of builders have raised prices this year, and 38% have reported building smaller houses to improve margins.
We still have some significant headwinds ahead of us. Here are a few things we should be aware of as we move into the fourth quarter:
Headwinds:
- The Fed continues to push the Fed fund rates higher for longer, which may delay our interest rate recovery into the middle of next year.
- Multiple studies have shown first-time homebuyers need rates in the low-to-mid 5% range to qualify at the current sales prices, further validating the significance of builder forward commitments or rate buydowns to get the rates down.
- Competitors in desperation mode have created significant margin pressure pricing interest rates since late 2022. Even though we have seen many mortgage industry originators and other employees leave the industry, it may take longer than expected to get the industry attrition needed for pricing to normalize.
- If unemployment rates begin to rise, consumer confidence could become a concern with savings rates already dropping dramatically, credit card debt soaring, car payments at an all-time high, and student loan payments starting up again in October.
So, what does this really mean and when will we likely see improvement in the rates? Nothing is absolute or certain, but we can look back in time and see how the market has responded over the last 50 years. In the last seven cycles of the Fed raising rates, on average they’ve started cutting rates 10 months after the last increase, with the earliest being five months and the longest 18 months. If July 26th was in fact their last rate increase in this cycle, this trend would mean we should see their first cut in May of 2024. The good news is by the time the Fed makes their first cut, our interest rates on average have already dropped by 20%, which would translate into rates in the high 5%’s. Depending on what the Fed decides to do here in the third and possibly early fourth quarter, we may see rates begin to normalize and improve May or June of 2024.”
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