The Market Minute - January 2023
Key Points
January brought a striking return to normalcy in many regards, with the market behaving similar to many other pre-pandemic January markets.
Despite this fact, several leading indicators continue to flash strong caution signals, indicating that there remains considerable uncertainty ahead.
In Weld County, median sales price has declined 2.3% YoY, with prices now nearly 8% below their May 2022 peak. Nationally, home values have dropped 3.6% from their peak according to the Case-Schiller Index.
Months supply of new construction homes remains at the highest levels since the 2008 GFC.
In spite of the uncertainty, a strong case can be made that many buyers and sellers alike could still stand to benefit from making a move today versus waiting to see what the market does next.
Twenty twenty-two was a tumultuous year for the real estate market. After two-plus years of meteoric price increases, bidding wars and painfully low inventory, the Fed finally managed to slam the brakes on the insanity with a plan to reset the housing market that would, among other things, drive interest rates from all-time lows in 2021 to two-decade highs in the later summer of 2022. The rapid rise in interest rates took an already expensive housing market to new levels of unaffordability, with the average cost of home ownership nationwide jumping over 80% from pre-pandemic levels.
To give you an idea of just how detached the housing market had gotten from the fundamentals by Q4 2022, consider the monthly payment between a median priced single family home in Weld County pre- and post-pandemic:
February 2020: $365,000 @ 3.45% = $1,303/month
October 2022: $485,000 @ 7.24% = $2,644/month
Assumptions: 30-yr fixed rate with 20% down payment, before taxes or insurance
Forgoing the eye-watering 32% appreciation in home value, the monthly payment on the same home had increased by over 102% by October 2022, when interest rates peaked at 7.24%.
Needless to say, something had to give, and what began as a slowdown in May 2022 ultimately grew into what can only be described as a total collapse in housing activity by year’s end, with December 2022 posting some of the most abysmal metrics on record for New Listings and Closed Sales as the few buyers that remained completely evaporated.
As we entered the new year, there was renewed hope that the housing market might be finding its bottom as the Fed announced another - albeit smaller - rate hike at just 25 basis points. What’s more, interest rates, which had been trending slowly down through Q4 2022 remained steady, and even continued to dip further into January 2023, ending the month at a not-terrible-considering-the-year-we-just-had 6.17% average rate on a 30-Yr fixed rate mortgage. Better still, January saw a 46.6% MoM increase in single family homes put under contract, which marked the first time since September 2022 that this metric saw MoM gains.
Still, it would be misnomer to call January 2023 a “solid win” because - in spite of a smattering of not-terrible metrics - there are several important metrics that indicate that we have not found the bottom of the housing market yet. So, while January was more or less a continuation of Q4 2022 in that not a lot changed, that fact alone should not necessarily be interpreted at an indication of whether things will get better or worse as we move into February.
wait, is this 2019?
All told, the market in January 2023 looked much like the market in January 2019 in that the metrics are nearly all following the expected cyclic trends that the housing market tends to follow on an annual basis. This may indicate that the housing market is making strides towards a return to pre-pandemic behavior. I would be inclined to agree with this assessment, but it’s important to understand that there are a number of additional considerations that need to be taken in to account in attempting to forecast future outcomes.
At the national level, new and existing home sales volume declined for an eleventh straight month in December and has 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 December 2022. Similarly, Weld County saw only 359 Closed Sales in January, a nearly 30% MoM and nearly 37% YoY reduction. This comes on the heels of December 2022, which posted the single largest YoY decline in closed sales ever recorded.
In line with my predictions this past summer, inventory continues its 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, January posted 414 New Listings for single family homes, a 61.7% MoM increase but a nearly 18% YoY decrease. Again, this follows a prior month in which new listings posted their largest YoY decrease ever recorded.
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. In January 2023 the 651 single family homes for sale at month’s close marks a 94% YoY increase, and the largest available inventory in the month of January since January 2020, when 851 single family homes were in inventory. This is welcome news to a market that has been plagued with constrained inventory for years now. Better still, January saw 434 homes Under Contract, a whopping 46.6% MoM increase. This should translate into a respectable uptick in the number of closed sales for February 2023 assuming cancellation rates do not increase beyond historical norms.
All of this is reflected in the months of supply metric, which declined slightly to 1.3 Months of Supply for January. While still painfully low for would-be buyers, this metric has been steadily increasing over the past year after hitting bottom in February 2022 when the metric stood at just 0.5 months supply. This metric would seem to indicate that we remain in a strong Seller’s Market, but remember, this metric only reflects months supply of existing homes. The months supply of new construction is the more reliable leading indicator and, as discussed below, this metric remains firmly within the realms of a strong Buyer’s Market.
Days on market continues to climb. After posting an all time low of just 20 days in April 2022, with the following month posting the all time high for single family median sales price in Weld County. This metric has been steadily climbing, with January 2023 posting 63 Days on Market, marking a 31.2% MoM increase and 103% YoY increase.
Transaction volume remained depressed in January, with single family homes accounting for just under $132M in Transaction Volume. This marks a nearly 30% MoM decrease and nearly 36% YoY decrease, and follows a month which saw transaction volume absolutely collapse to post the largest YoY decline in transaction volume ever recorded.
MEDIAN SALES PRICES
Weld County saw the median sales price of single family homes decline for an eighth consecutive month in January, falling to $466,125. This represents a 2.3% YoY decline in home values for the region, and the first YoY decline in home values since December 2011, when home values decreased 1.0% YoY. This decline brings Weld County to a nearly 8% drop from the all time high median sales price which was achieved in May 2022, when the median sales price hit $506,518.
In Larimer County, median sales price recovered slightly from December, increasing to $569,000. This represents a 6.6% YoY increase in home values, but still a 7.45% decline from the April 2022 peak of $614,783.
In Boulder County, median sales price decreased MoM to $775,000 in January, representing a 4.3% YoY increase in values. Despite this increase, Boulder now posts a 20.1% decline from its all time high median sales price, which peaked at $970,00 in April 2022.
Zooming in to look at several of the individual cities and towns in the region, the declines from the peak continue as well, with every city and town in the region now posting at least a 6% decline in values since the Spring 2022 peak.
The obvious question is, “Where do prices go from here?” In many ways, the market is behaving as it did pre-pandemic. This is a welcome sign in that it decompresses the prospect of buying or selling a home just a little. But make no mistake, this is not 2019. Many things have changed in the last 3 years and there is a real possibility that we have yet to find the bottom of the housing market. Barring some yet unseen variable that would sustain current home values, there is little - if any - upward support for home values at the moment. The canary in the coal mine is still singing, but as you will see below, his survival is not yet guaranteed.
The Canary in the Coal Mine
As I have discussed at length before, new construction activity offers the most historically reliable leading indicator regarding future price appreciation. For this reason, I continue to advocate for the need to evaluate the market through this lens. Just as it was in previous downturns, new construction is the canary in the coal mine.
Let us consider the months supply of both existing homes and new 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. When inventory remains constrained, sellers tend to gain the upper hand in negotiations, which in turn serves to support home values. It’s little more than a simple supply and demand scenario, whereby home prices are sustained or driven higher by the number of buyers exceeding the number of homes for sale. 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.
The month supply indicator for existing homes remains at levels which would support the argument that we remain in a strong Seller’s Market. That is, many are inclined to look at the current months supply – which stood at 1.3 months for Weld County single family homes in January – and assume that the number of buyers (the demand) far exceeds the number of homes for sale (the supply) and as such, the law of supply and demand would predict the price of homes to remain steady or increase.
However, this assumption is a red herring because it is employs an oversimplification of the supply and demand cycle while failing to consider the inventory of new construction homes, which is the better predictor of future home price growth.
Nationally, the months supply of new construction is currently at 9.0 months as of December 2022. According to Zonda, in Northern Colorado, months supply of new construction at the end of January was 8.2 months in Weld County and 9.3 months in Larimer County. Given these figures, you can see 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.
Chart: FRED
Source: U.S. Census Bureau, HUD
Zonda, in their February Market Report for Weld and Larimer Counties, states,
“Demand for homes continued to languish as relatively high mortgage rates exacerbate declines in affordability with record-high home prices … Homeowners and builders are recalibrating expectations … monthly new home sales have fallen below 2019 levels, the barometer year before the pandemic juiced housing.”
What’s more, Zonda reports that YoY new homes sales have decreased 40.6% and 60.6% for Weld and Larimer Counties, respectively. As such, builders have been quick to offer incentives and price reductions to combat the growing inventory. Taken in whole, this data presents a strong case for potential declines in existing home values in the future. What remains to be seen is how large of a decline we will see, with many data analytics firms still predicting at least a 5-10% peak to trough decline in home values over the next 12-24 months, with some firms predicting regional declines as high at 25% or more.
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 months supply of new construction leading indicator and thus, confirm our assertion that it is the more reliable leading indicator of future home price growth:
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.
Fast forward to today and 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 and that right now, this leading indicator is strongly signaling a potential for home price declines in the months ahead.
the case-schiller home price index
The latest release of the Case-Schiller U.S. Home Price Index shows that home prices have declined for five consecutive months at the national level, with home prices now 3.6% below their peak. While this drop may seem insignificant given the massive 43% price increase from March 2020 to June 2022 that the Case-Schiller reported, it’s worthwhile to note that a drop of 3% or more in Case-Schiller has only ever occurred twice before: the first was in 1990, when the index dropped 3.05% before recovering, and the second was in 2008.
Additionally, the last time prices peaked (July 2006), the Case-Schiller had declined by just 1.95% a year later. This is worth noting given that in the current market, prices have declined 3.6% in just five months. In fact, the current retraction in home prices is occurring faster than at any other point in history.
Notice also that the last crash did not occur overnight. In fact, it took 5 years and 7 months for the market to find its bottom. As such, if we are entering another period of price declines, expect it to take some time.
Chart: FRED
Source: S&P Dow Jones Indices LLC
looking ahead
February will be an important month for the housing market as we enter the traditional spring buying season. If the market continues to trend back towards pre-pandemic behavior, look for available inventory to steadily increase through out the month with days on market declining. The lynchpin here will be whether we see median home prices fall further or begin to stabilize.
If you are thinking of selling your home in the next 1-6 months: You would be wise to get it listed as soon as possible. Waiting will do nothing but ensure you are competing against a larger supply pool and you may very well be doing so in the face of higher interest rates and lower home values. What’s more, builders will continue to increase incentives as the spring approaches, which will further hamper your ability to compete against new construction homes.
If nothing else, consider wether you want to spend the next 10 years in your current home or the home you’d rather have now. If the market crashes, you’re not going to be able to sell your current home anyway without losing your shirt, so you’ll be stuck in a house you don’t care for just trying to get back to even. If you sell now, at least you get close top dollar. The value of your new home will decline too, but at least it will be a home that you like more than your current one while you wait for the market to recover. The point is, if the market is going to nosedive and your equity is going to evaporate, you might as well ride out the storm in the house you want, rather than the one you don’t.
If you are thinking of buying a home this year: Don’t wait for the crash. For one thing, the crash may never come. Secondly, if and when the crash comes, it will take months - if not years - to play out. Remember, it took five years and seven months for prices to hit bottom the last time around and the only people that maximally benefited were the few that just so happened to buy at the bottom due to luck or circumstance. No one knew we were at the bottom of the market in 2012. It wasn’t until they had the benefit of hindsight that they realized how great of a deal they had gotten. Do you really want to live where you are now for another 5+ years waiting for the bottom of the market? Third, even if prices fall 15% from today’s prices, your monthly payment could still end up being more than it would be at current prices if interest rates continue to climb. Despite rates at 6%, we are still below the average rate for the last 50 years and what’s more, the last time the Fed was dealing with inflation like we are seeing today, mortgage interest rates eventually hit 18.63%. Just to give you an idea of what that would feel like, let’s assume the median home price falls a full 30% from where it is today. So now your $466,000 home only costs $326,000. That would be a steal, right? The problem is, at 18.63% interest on a 30yr mortgage with 20% down, your monthly payment would be $4063 before taxes and insurance. At today’s rate and price, your monthly payment would be $2336 per month.
Also, consider the same advice I have for sellers. If you buy now - even if you're a first time home buyer - and the market tanks, at least you’ll be riding out the storm in a home that you own, rather than paying off your landlord’s mortgage. Plus, the upside of a down market will be an opportunity to refinance at a much lower interest rate. This could quite easily translate into a lower monthly payment on a home purchased at today’s prices versus a lower priced home at the bottom on the cycle.
No matter who you are: Finally, do yourself a favor and go read my last article, It Matters Who You Work With. As the market continues to evolve, it’s more important than ever before to make sure you’re working with an agent that is actually competent. This isn’t 2021, so hiring your hairdresser to sell your house isn’t going to cut it anymore. And if you’re a buyer, you should probably make sure that the agent you hire isn’t going to let you buy a lemon because even though they like you, they’d like a paycheck more.
In the meantime, stay warm!
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.