The Market Minute - October 2022
October saw a continuation of all the trends that have come to dominate the current Northern Colorado housing market in the second half of 2022, while offering little in terms of relief. Across the board, every metric continues to move in a direction which indicates that the housing correction is not only occurring in earnest at this point, but that it may be here to stay for the foreseeable future.
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. As the Pandemic Housing Boom fizzled out this summer, inventory went through the roof. In Weld County, inventory jumped 206% between February and August while closed sales tanked buy nearly 40% on a year-over-year basis. Fast forward to October and inventory, despite being up nearly 78% YoY, continues to fall at a steady rate each month as the decline in the number of new listings accelerates.
To that end, October marks the fourth straight MoM decline in new listings, which after seven consecutive months of inventory increases between March and September, was finally enough to see our available inventory post a 6% decline. Nonetheless, the backlog of available homes still sits near two-decade highs, and the number of homes actually selling continues to rapidly decelerate.
Outside of the the small 9.5% MoM bump in closed sales that we saw in August as Buyers frantically tried to lock in lower interest rates, Weld County continues to see this metric fall, with October posting a nearly 15% MoM decline from September and a nearly 26% decline YoY.
For all the consternation we find in these October housing stats, the real story lies in what’s been happening with interest rates and median sales prices.
Interest Rates
October 2022 saw incredible volatility in the Mortgage Backed Securities Market, which among other things, saw the month 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.
As mortgage rates continue their upward trajectory, the “rate lock-in effect” is becoming more of a factor with each passing day. The fact is, a vast majority of outstanding mortgages have rates below 5% - with many below 3%. Selling now means giving up a historically low mortgage rate, and the ensuing payment jump is simply too unappealing for move-up Buyers. This will continue to be a major factor driving the number of new listings down.
What’s more, the pressurized affordability that these higher rates create can be directly correlated to the sharp declines we continue to see in the number of closed sales. All of which leads us to the next topic, median sales prices.
Median Sales Prices
Weld County posted a median sales price of $487,000 in October, which was enough to post a 0.4% MoM increase and break a streak of four consecutive months of price declines, bringing YoY appreciation for Weld County to 3.6%, but still 3.75% from the peak of $506,000 in May 2022.
Unfortunately, Larimer and Boulder County have seen their price declines begin to accelerate, with Larimer County’s median sales price falling to $566,250 in October, 7.89% from the April 2022 peak of $614,783. In Boulder County, median sales price has fallen 17.78% since the April 2022 peak from $970,000 to just $797,500.
Zooming in to look at several of the individual cities and towns in the region, the declines from the peak vary from a 2.18% decline in Severance all the the way up to a 13.22% decline in Loveland. Interestingly, Windsor set a new high for median sales price in October after posting five consecutive months of declines since the previous peak of $635,000 set in April 2022. Unfortunately, a closer look at the data shows this 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 predict that unless Windsor can manage to pull off similar sales volume at similar price points in November, the median sales price decline in November will be substantial.
Looking Ahead
As the Fed continues in earnest with its plan to reset the housing market, issuing another 75 basis point hike yesterday to bring the Fed Funds Rate to 4.75-5%, there may be little in terms of relief in the near future. Mortgage rate volatility will continue to play a role in driving uncertainty for Buyers, with average rates quickly rising back towards the previous two-decade high set in October, closing out the day at 7.30% yesterday. Unfortunately, Jerome Powell did little to assuage the market’s concerns after what appeared to be a somewhat softer statement released by the committee prior to his press conference.
“Chairman Powell made it clear that his bias is to err on the side of over-tightening rather than under-tightening in order to avoid the risk of inflation becoming entrenched,” said Yung-Yu Ma, chief investment strategist, BMO Wealth Management. “At the end of the day, it’s going to come down to inflation and labor market data in the coming months and quarters. The Fed’s outlook may be less one-sided, but reaffirming its bias to fight hard against inflation – and the 2% inflation target – is likely to remain a market headwind until inflation conditions improve.”
In light of this, prospective buyers should also be keenly aware of the possibility that rates are projected to climb throughout the remainder of 2022 and into 2023, with some analysts now warning that we may even see double-digit mortgage rates by early next year. And while the possibility of rates surpassing 10% is currently somewhat low, it is by no means impossible. Remember that as recently as March of this year, virtually no one predicted that rates would surpass 4.5% in 2022 and the Fed still has one additional rate hike planned before the end of this year.
30-Year Fixed Rate Mortgage Average in the United States. Source: Freddie Mac
Remember also that the U.S. is currently battling 40-year high inflation that has stubbornly refused to abate. The last time the Fed was faced with such a challenge, Buyers were faced with 12 years of mortgage rates above 10% (1979-1990) which peaked at 16.63% in 1981. What’s more, the average interest rate since 1971 has been 7.76%. That is to say that even today with rates at 7.29%, we are still enjoying rates below the most recent 50-year average.
As we enter into the winter months, there is a growing consensus that winter will be brutal for the housing market. 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 what may very well become 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.