The Market Minute - December 2022
Key Points
Residential single family home values continue to slide, with December 2022 marking the first time since the depths of the 2008 Housing Crash that Weld County saw 0% year-over-year home price appreciation.
Median Sales Prices for single family homes have now retracted over 6% from their May 2022 peak in Weld County, with Larimer and Boulder County posting declines of over 10% and nearly 15% respectively
The volume of existing home sales has completely collapsed, with New Listings, Properties Under Contract and Closed Sales declining to near all time lows in December 2022, shattering previous records for the largest month-over-month and year-over-year percent declines ever recorded for several metrics.
Cancellations on new home sales continue to increase, with the gap between gross and net sales continuing to widen as the Months Supply of Inventory of new construction homes continues to climb.
The False Supply Narrative - which has been widely adopted to support the claim that low inventory prevents home prices from falling - has shown itself to be an erroneous methodology for predicting future home price appreciation
December 2022 rounded out a less than ideal year for the Northern Colorado housing market. In spite of all the positive social media posts by countless starving agents telling us that the market was only normalizing, that prices would keep climbing, and that it was still a great time to buy or sell a home despite rising interest rates and 40-year high inflation, the proof is in the pudding. And folks, the pudding is not good.
While November ushered in a world where it was finally becoming socially acceptable to use the term, “Housing Bubble,” albeit with a multitude of qualifiers for most, it turns out that it was all just a preview of what December had in store for us. At both the local and national level, December 2022 saw what can only be described as a near total collapse of housing market activity to levels not seen since the depths of the 2008 Housing Crash and in some instances, to levels never seen before at any point in time.
Records Are Meant To Be Broken
At the national level, new and existing home sales volume declined for a tenth straight month in December, and have now declined over 40% from its peak in late 2020, from an annualized pace of 7 million single family homes to just north of 4 million as of November 2022. Similarly, Weld County saw only 128 Closed Sales in December, a nearly 65% month-over-month (MoM) and 80% year-over-year (YoY) reduction, marking the single largest MoM and YoY decline ever recorded as well as the fewest number of single family homes sold in one month since January 2012, when 160 homes sold.
In line with my predictions this past summer, Inventory continues it’s steady decline as Sellers continue to forgo listing their home for sale rather than taking less for it while also being hampered by the rate-lock affect and pressurized affordability created by sustained increases to the cost of borrowing. Simply put, few Sellers are willing to take less for their home only to be faced with the prospect of then purchasing another home that may decline in value at an interest rate that may well be over double what they are paying on their current mortgage. To that end, December posted just 178 New Listings for single family homes, marking the largest MoM and YoY decline ever recorded, at over 52% and 64%, respectively.
As the Pandemic Housing Boom fizzled out this summer, inventory went through the roof. In Weld County, inventory jumped 206% between February 2022 and August 2022, while Closed Sales tanked buy nearly 40% on a YoY basis. Fast forward to December and Inventory, despite being up over 128% YoY, continues to fall at a steady rate each month as the decline in the number of new listings accelerates, with December posting a third consecutive MoM drop in available inventory, ending the month with 839 single family homes for sale. Likewise, the number of properties that were put Under Contract absolutely collapsed in December to just 183 homes Under Contract, representing an over 48% MoM decline and over 63% YoY decline. This again marks the largest MoM and YoY decline ever recorded as well as the fewest number of homes to go Under Contract in one month since January 2013, when 222 homes were contracted for purchase.
To put the incredible decline of these metrics even further into perspective, consider that in April 2020 - while we were all locked in our homes - in Weld County there were 1062 single family homes available for sale, 622 new listings, 390 homes went under contract and 442 homes sold.
Median Sales Prices
In November, Weld County posted a median sales price of $475,000. At the time, I pointed out that this was significant for three reasons:
This was a reversal of October’s metric, which broke our four-month streak of MoM declines from June 2022 - September 2022 with a 0.4% MoM increase;
This represented a 2.5% MoM decline, the largest MoM decline in median sales price yet since the decline from the peak began in June 2022;
This decline brought YoY price appreciation for Weld County to 0.0%. The median sales price in December 2021 was also $475,000, meaning that any decline in YoY median sales price in December 2022 would push Weld County into negative YoY price appreciation for the first time since December 2011, during the later part of the 2008 Housing Crash.
Regrettably, December saw our median sales price erode to $470,249 for single family homes. This -1.0% YoY decline marks the first time that Weld County has posted negative YoY price appreciation since December 2011. Weld County now sits 7.07% below the peak median sales price of $506,000 which was achieved in May 2022.
Likewise, Larimer County has seen their median sales price decline continue to accelerate, with Larimer County’s median sales price falling to $547500 in December, or 10.94% from the April 2022 peak of $614,783. Unlike Weld County however, Larimer County ends the year with a 2.2% YoY increase in median sales price for single family homes.
In Boulder County, median sales price increased to $824,000 in December, snapping a three month streak in declining values to end the year with a 5.0% YoY increase in median sales price for single family homes. Despite this, Boulder Country still sits 15.05% below its April 2022 peak of $970,000.
Zooming in to look at several of the individual cities and towns in the region, the declines from the peak continue as well. Concerningly, several areas are seeing a rapid acceleration in these declines, with Evans overtaking Windsor to become the only city or town to begin the new year with a median sales price higher than than it’s Spring 2022 peak. Elsewhere, the declines from the peak have generally further increased and in some cases, stabilized to some degree, with Greeley posting a 8.6% decline to Windsor, which now posts a staggering 35.6% decline after four consecutive months of setting new all time highs for median sales price.
For a third month in a row, I am compelled to call special attention to Windsor.
In November, I noted:
Interestingly again, Windsor set yet another a new high for median sales price in November after posting five consecutive months of declines since the previous peak of $635,000 set in April 2022, followed by an unexpected increase in October. A closer look at the October data showed last month's new high to be little more than anomaly, with 7 of the 47 total homes sold accounting for $9,059,000 of the $34,341,710 total sales volume for the month, or 26.3%. These 7 properties had an average sales price of over $1.29M, well above the median or average price for the area. I predicted last month that unless Windsor could manage to pull off similar sales volume at similar price points in November, the median sales price decline in November would be substantial. However, the opposite occurred, and by significant margins to boot, with Windsor posting a median sales price of $737,500 for November, an incredible 13.4% MoM increase and 29.32% YoY Increase.
In Windsor, November saw a similar composition of home sales as October did, with 8 of 39 total homes sold accounting for $9,587,719 of the $28,374,943 total sales volume in November, or 33.8%. These 8 properties had an average sales price of over $1.19M, well above the average or median price for the area. I am compelled once again then, to predict that we will see a decline in median sales price for Windsor in the future. My rationale in making this prediction simple: excluding home sales above the current median sales price of $737,500, Windsor’s peak price hit $600,000 in April 2022 and has since dropped 12.5% from the peak to $525,000 since then. In other words, unless homes which are 50-150% above the current median sales price continue to sell in a quantity well above the expected average for the area, regression to the true mean will occur in due time.
Here we begin to see the fundamental flaw in dealing with small numbers at certain times and why it becomes so important to not just regurgitate the data (i.e., “Home prices will rise!”) but also to analyze and compare it to other data with a history of reliability regarding future predictions. Case in point, there were just 12 single family homes sold in Windsor in December 2022. This represents an almost 90% decline from the 111 homes sold in December 2021 and a nearly 73% decline from the homes sold in November 2022. Given that the median is the literal middle of the data set (meaning of the 11 homes sold, 5 were above the median sales price of $475,000 and 5 were above), and a sample size so small relative to what it has been in the past, it’s best to consider the current metric in unison with another reliable metric before deciding that the end has arrived and we should just stop making the mortgage payment. For example, Windsor takes the distinction of ending 2022 with the highest YoY appreciation of any town or city in the area at 10.8%. Compare this to the second highest, Loveland, at 6.5% YoY or the third, Fort Collins, at just 1.6% and the need to recognize when data should be taken with a grain of salt becomes even more apparent.
I think we should plan on needing to keep an eye on Windsor in the months ahead and see where this data takes us, so stay tuned.
Interest Rates
After a fall filled with drama in the mortgage market, December saw some stability return. The month began with rates on a 30YR Fixed Rate Conv mortgage at 6.29%, which was the lowest rates we’d been able to enjoy since mid-September. From there, it was a rather uneventful month. Even the Federal Reserve couldn’t manage to stir the market much, with their 50 basis point rate hike doing little to rock the boat. Then, just as we all prepared to take a collective sigh of relief as 2022 finally drew to a close, rates jumped overnight on 12/27 to 6.5% to end the year at 6.54%.
The general consensus is that interest rates should remain somewhat stable over the next 30-60 days. But if 2022 has taught us anything, it’s that there are absolutely no guarantees in the mortgage backed securities market.
Average Daily Mortgage Rates, December 2022
Source: Mortgage News Daily
The false Supply narrative
As we enter the new year, it’s worth taking a moment to talk about a phenomena that continues to show up in the conversation relating to future home price growth: The False Supply Narrative. This has been - and continues to be - the longstanding argument presented by most within the real estate world that low inventory will prevent home prices from falling. To that end, it has been almost universally espoused in the past year that no matter what challenges might lie ahead for the real estate market, declining home prices would not be one of them.
I have long claimed that this assumption is a red herring because it is employs an oversimplification of the supply and demand cycle while distracting from other important, relevant information which can be used to make a more informed prediction about future home price growth.
As we begin to look back on the 2022 housing data metrics in their entirety, the shortcomings of the erroneous methodology for predicting future home price growth which results from employing the False Supply Narrative becomes clear. Even with still historically low available inventory, we are witnessing one of the most monumental collapses in transaction volume in a generation which in turn, is leading to an accelerating decline in home values for the great majority of our market.
I’ve discussed leading indicators before, but one of the most reliable leading indicators to use for the purposes of establishing market direction is to compare real home price growth to the Months Supply of New Construction Homes. Months supply is a measure that tells us how long it will take to clear the existing stock of inventory at the current pace of sales. A higher months supply figure means that there's a growing imbalance between inventory and sales.
After six months of the so called “local market experts” clamoring to convince us that supply constraints would make price declines fundamentally impossible, one has to wonder, How were they so wrong?
The answer is simple: they are looking at the wrong data. Specifically, they are looking at the Months Supply of Existing Homes data, and not the Months Supply of New Construction Homes data. This is important for two reasons:
If you plot the Months Supply of Existing Homes data and the Months Supply of New Construction Homes data, you will find that the latter has a stronger historical correlation to future home price growth than the latter, as shown below: and
New Home Builders tend to be price setters, whereas Existing Home Sellers tend to be price followers.
Chart: EPB Research
Source: BLS, BEA, Census Bureau, Federal Reserve, Case-Shiller
In the chart below, the current Months Supply of Existing Homes is 3.3 months nationally, whereas the current Months Supply of New Construction Homes is 8.6 months nationally. In aggregate, the Months Supply of All Homes is 4.1. The market is generally considered balanced when the Months Supply is 5.0, with less than 5.0 months supply favoring Sellers and greater than 5.0 months supply favoring Buyers. Given that fact, you can see in the chart below that the Months Supply of New Home data, which is a highly reliable leading indicator for predicting future home price growth, is flashing red. What’s more, the spread between the Months Supply of New Homes and Existing Homes is rapidly diverging, something that has never happened before and is further confounding those who fail to consider this nuance.
Chart: EPB Research
Source: Census Bureau, NAR
And on top of all that, it is important to note that the figure of 8.6 months is in all likelihood higher than what is being reported because it does not factor in contract cancellations, which are not captured in the Census Bureau and other government data. These cancellations have been accelerating in recent months and topped 11,000 in November out of 46,000 new contracts for purchase, roughly 25% of the total, as you can see in the cart below:
Chart: EPB Research
Source: John Burns Real Estate Consulting
Failure to consider these historically accurate indicators all add up to create the False Supply Narrative: the tendency of most people to look only at Months Supply of Existing Home data in establishing a prediction about future home price growth, while failing to consider the more historically reliable leading indicator of Months Supply of New Homes.
Simply put, the reason homes prices are falling is because the Months Supply of New Homes - the better predictor of future home price growth - is at it’s highest level since 2008 and with transaction volume collapsing, their is no reason to believe that this ratio will fall in the next several months.
On a national level, we see that home prices have officially peaked when looking at the Case-Shiller U.S. National Home Price Index. It is important to keep in mind that while this drop may appear small relative to the proceeding period of growth, Case-Shiller is a three-month lagged average.
Chart: FRED
Source: S&P Dow Jones Indices LLC
Finally, looking at Real Home Price Growth, which is an inflation-adjusted measure of the rate which home prices are changing annually, in relation to Months Supply of New Homes allows us to confirm the validity and past performance of this leading indicator and thus confirm our claim that it is superior to the indicators provided by the False Supply Narrative. Both of these data sets are shown below:
Chart: FRED
Source: U.S. Census Bureau, HUD
Chart: FRED
Source: Bank for International Settlement
You can see that the Month Supply of New Homes indicator increased in advance of the 2007 home price decline as well as in advance of the 2013-2014 downturn in real home price growth.
Likewise, it led the rise in real home price growth in 2019. Interestingly, this metric also gives us some indications as to why real home prices did not decline in the 2000s recession: the months supply metric wasn’t showing any indication of a downturn or imbalance between inventory and new home sales.
In the current market period, we see that the months supply indicator started to show clear signs of a peak in real home prices at the end of 2020, leading the actual peak in real home prices by about a year - just as it has in the past - and since that time has revealed a staggering imbalance in the months supply of new homes.
With all this, we can definitively confirm that this is a very historically reliable indicator of a coming declines in real home prices.
Looking Ahead
As we enter into the new year, the consensus that winter will be brutal for the housing market has come to fruition. The Pandemic Housing Boom saw home prices skyrocket 43% nationally in just two years. As recently as May of this year, firms like Moody’s Analytics, Goldman Sachs, and Zillow were predicting double-digit home price appreciation through 2022 and into 2023. Fast forward to today, and not only has every major outlet in the country revised their home prices downward, nearly all are now forecasting home price declines ranging from 7% all the way up to 30% in some parts of the country over the next 12 to 24 months. Within the span of just 4 months this year, the Pandemic Housing Boom turned into the Pandemic Housing Bubble, only to rapidly manifest into one of the most monumental collapses in transaction volume on record. Given the established correlation between rising supply of new homes and price declines, it is hard to foresee a scenario where the collapse in transaction volume will not continue to contribute to already falling home values in the Northern Colorado market. This reality becomes even more glaring when you factor in the hard truth that the Northern Colorado market has been significantly overvalued in the past two years, with analysts like Moody’s estimating that home values in the region are 36-42% higher than what wages and salaries per capita and construction costs can historically support.
All told, there are a multitude of reasons to believe based upon the available data and leading indicators, that we should see a continuation of what we saw in the second half of 2022 in the first half of 2023.
Despite all this, there will be opportunities ahead. Buyers looking to take advantage of these opportunities need to be taking certain steps in order to make sure that they are in the best position possible when the time arrives. This includes:
Connecting with a local lender as soon as possible who can keep you updated on where rates are headed, when you should consider locking rates, and available loan products
Hiring a highly competent buyer agent with access to a broad network of professionals and with a highly developed ability to negotiate. Only buyers who are working with the best buyer agents will strike gold here, so this is not the time to give your cousin’s friend who did two deals five towns over last year a chance to make some money.
Increasing savings and reducing debt to the greatest extent possible to ensure you have ready access to funds and the lowest debt-to-income ratio possible.
Sellers too, should be making their own preparations. This includes:
Hiring a highly competent listing agent with a deep understanding of market trends and ability to price homes effectively.
Completing any and all outstanding maintenance items to minimize roadblocks and delays when the time comes to list your property for sale.
In meantime, stay warm and Happy New Year!
Not all agents are the same and interviewing an agent is not something you should take lightly. Your home is one of the biggest financial transactions that you will ever make. You owe it to yourself to hire someone that will treat it that way.