The Market Minute - November 2022
Key Points
November housing data for Weld County and most of the Northern Colorado region indicates that the housing correction that began in June 2022 has accelerated to the level of housing bubble
Volume, New Listings and Closed Sales continue to rapidly decline as Days on Market and Months Supply continue to increase
Median Sales Prices have retracted over 6% from their May 2002 peak in Weld County, with Larimer and Boulder County posting declines of over 10% and nearly 25% respectively
In Weld County, year-over-year appreciation of single family residential homes has been reduced to zero, with the median sales price now equal to that of November 2021
Months Supply of New Construction is approaching levels not seen since the 2008 Housing Crash
In spite of elevated interest rates, opportunities abound for Buyers looking to leverage the market to their advantage, but only those working with the very best agents will succeed
For the last several months, many have been hesitant to use the term, “Housing Bubble.” It seemed unfathomable that we could go from what was arguably the greatest housing boom in history to a housing bubble so quickly. What’s more, many believed (and some still do) that even if all the elements of a housing bubble were present, historically low inventory and a strong labor market would virtually guarantee that home prices would not fall. As time when on, some began to concede that home prices might fall, but even if they did, the retraction would be minimal and prices would quickly return to all time highs.
While the ongoing housing correction will differ widely from region to region, with some areas seeing little, if any price declines, the performance of the Weld County market in November ushered in a number of important confirmations that, as I predicted as early as last July, the housing boom has indeed become the housing bubble. Across the board, every metric continues to move further in a direction which indicates this fact to be true. What’s more, the price declines are not limited only to Weld County, but rather encompass the entire Northern Colorado market.
As I predicted back in September, new listings continue to slide as Sellers continue the trend of simply not putting their homes on the market rather than taking less. At the same time, I further predicted that the rate-lock affect and pressurized affordability would also begin to impact transaction volume. These factors, combined with the downward pressure created by increasing interest rates, have been - and continue to be - a large part of the basis for all of my projections thus far.
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 year-over-year basis. Fast forward to November and inventory, despite being up over 95% YoY, continues to fall at a steady rate each month as the decline in the number of new listings accelerates, with this month posting a nearly 28% MoM decline in new listings, and setting a new two-decade record for the largest YoY decline in new listings at 24.1%.
To that end, November marks the fifth straight MoM decline in new listings, which after seven consecutive months of inventory increases between March and September, adds a further 8.8% Mom decline to the 6% decline posted in October. Unfortunately, the retraction in the backlog of inventory is not translating into closed sales, which for all intents and purposes is the most meaningful metric to be considered outside of median sales price.
November saw a nearly 14% MoM decline in closed sales, posting a staggering 41.5% YoY decline, the largest YoY decline in more than 20 years. And on top of all that, with the exception of May 2022’s 0.3% YoY increase in closed sales, Weld County has now posted a YoY decline in closed sales for 12 consecutive months.
All of this data combines to reveal an ever widening spread between the YoY change in new listings, properties under contract and closed sales versus inventory, which you can see quite clearly below.
Interest Rates
November was a bit of a roller coaster for interest rates. The month began on the heals of a moment of incredible volatility in the Mortgage Backed Securities Market, which among other things, saw October 2022 post the highest interest rates on 30-yr mortgages in over two decades, starting the month at 6.65% before topping out at 7.32% on October 20th and then finally settling in at 7.13% at month’s end. All told, this brought the average rate for October to 6.9%, literally double the average of 3.45% in January 2022 and 3.83% higher than last October, when rates averaged 3.07% for the month.
November began with interest rates looking like they would continue their steady march higher, with 30-yr rates rising to 7.3% by November 3rd and continuing to hold steady through November 10th. That all changed when the October CPI numbers were released that same day, and to nearly everyone’s surprise, they weren’t nearly as bad as had been anticipated. Make no mistake, they were not good, but given the mood recently that was enough to send the stock market, as well as the mortgage backed security market into a happy dance, with the 30YR UMBS 5.0 posting a 183 basis point increase within hours of the CPI news release.
The result that day was a near-instantaneous 55 basis point drop on the rate for a 30YR Fixed Rate Conv, all the way down to 6.67%. This drop marked the lowest rate we’d seen since October 4, 2022, and one of the largest one-day drops in months. Talking to most lenders that afternoon, it’s hard to explain to you the chaos that ensued as Buyers began reaching out wanting to float their rates down. Almost universally, it was agreed that immediate action was the prudent course given the volatility of mortgage rates in recent history. There was absolutely no guarantee that rates would not turn higher again within days, if not hours.
But then something strange happened: nothing. Not only did the rates remain relatively unchanged, but after the intial flurry of Buyers seeking to float down their rates, market activity remained essentially unchanged. There was no notable move in a positive direction of any of the metrics discussed above for the remainder of the month.
One final note worth mentioning on rates would be that - interestingly - after spending the last 2/3 of November essentially stagnant, rates dropped this morning (12/1/22), with the current rate for a 30-yr Conventional loan now sitting at 6.29%, the lowest the rate has been since September 13, 2022.
Median Sales Prices
Weld County posted a median sales price of $475,000 in November. This is significant for three reasons:
This is 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 represents 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 brings 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 will push Weld County into negative YoY price appreciation for the first time since December 2011, during the later part of the 2008 Housing Crash.
With this most recent data, Weld County now posts a 6.13% decline in residential detached home values from the peak median sales price of $506,000 which was achieved in May 2022.
Just as we saw last month, Larimer and Boulder County have seen their median sales price declines continue to accelerate, with Larimer County’s median sales price falling to $551,250 in November, or 10.33% from the April 2022 peak of $614,783. In Boulder County, median sales price has fallen a staggering 24.92% since the April 2022 peak, from $970,000 to just $728,280.
Zooming in to look at several of the individual cities and towns in the region, the declines from the peak continue as well , and vary from a 2.22% decline in Milliken all the the way up to an 18.63% decline in Loveland.
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.
Looking Ahead
It Sure Looks Like a Housing Bubble
I have discussed at length the Fed’s plan to reset the housing market and what it means for both our market and the national market. Our first insight into the Fed’s plan came from remarks made by Fed Chairman Jerome Powell in June:
“We saw [home] prices moving up very, very strongly for the last couple of years. So that changes now… I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together,” Powell said in June 2022
In June, Jerome Powell was hesitant to utter the words, “housing bubble” out loud. Throughout the summer and into early fall, he still resisted defining the current events as such. But on November 29, Powell was finally ready to tell us what some of us had known for months. Speaking at a Brookings Institute event, Fed Chair Jerome Powell told the audience that the run-up in home prices during the Pandemic Housing Boom qualifies a “housing bubble.”
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand,” Powell said.
With that in mind, it’s worth considering once again the three things I told you you needed to know about the Fed’s plan to reset the housing market:
We are in a housing correction, which by definition, is a period of home price decline
The housing correction should bring balance back to the market, but that is not a guarantee
The Fed wants the housing correction to spread to impact the whole economy, but their mandate isn’t affordable housing - a fact that you’d be wise to remember
It’s also worth noting that Powell isn’t the only one finally ready to openly talk about a housing bubble. On November 15th the Federal Reserve Bank of Dallas published an article titled “Skimming U.S. Housing Froth a Delicate, Daunting Task.” The article argued that policymakers should try to deflate the bubble rather than burst it.
“In the current environment, when housing demand is showing signs of softening, monetary policy needs to carefully thread the needle of bringing inflation down without setting off a downward house-price spiral—a significant housing sell-off—that could aggravate an economic downturn,” writes Martínez-García at the Dallas Fed. “A severe housing bust from the frothy pandemic run-up isn’t inevitable. Although the situation is challenging, there remains a window of opportunity to deflate the housing bubble while achieving the Fed’s preferred outcome of a soft landing.”
The Fed’s plan aside, let’s be honest here: It sure does look like a housing bubble, and as the saying goes, “If it walks like a duck…” Consider for example, data compiled by the Dallas Fed that finds that home prices in 2022 are actually more detached from the underlying fundamentals than they were in 2005 and 2008. In the chart below, compiled by Lance Lambert, we see that the Real House Price Index, which accounts for inflation, currently sits at 125.75 as of Q2 2022 versus 105.35 at the peak of the last crash in Q4 2006.
Chart: Lance Lambert • Source: Federal Reserve Bank of Dallas
What we are witnessing now is simply the Fed’s plan in action as it attempts to bring those detached fundamentals back into alignment over the coming year. This is why firms like Morgan Stanley, Zonda, KPMG, John Burns Real Estate Consulting, Moody's Analytics, Goldman Sachs, Wells Fargo, Fannie Mae, and Zelman & Associates are all now predicting that home prices still have further to fall in 2023 and into 2024.
New Construction Gives Guidance As Well
When we consider housing market data, it’s important to consider both leading indicators and lagging indicators. Simply put, leading indicators give us information about where the market might be heading, whereas lagging indicators tell us how the market is actually performing at present. Using both is the best, and only, way to make worthwhile predications about what might happen next, and more importantly, comparing past lagging indicators to current leading indicators allows us to gauge how accurate our past predictions were and what we can do to improve them in the future. Identifying and leveraging reliable leading indicators is the cornerstone of making sound predictions.
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. Real home price growth is an inflation-adjusted measure of the rate which home prices are changing annually. Both of these data sets are shown below:
Months Supply of New Houses in the U.S., 2000 - Present
Chart: FRED • Source: U.S. Census Bureau, HUD
Real Residential Property Prices for the United States, 2000 - Present
Chart: FRED • Source: Bank for International Settlement
You can see that this 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.
This is a very historically reliable indicator of a coming declines in real home prices.
final thoughts
As we enter into the winter months, 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 has turned into the Pandemic Housing Bubble.
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.
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.