The Market Minute - September 2022
With September behind us, we can now begin to see a trend emerging in the Northern Colorado market, and as predicted, home prices are beginning to slide. Having posted a fourth consecutive month of price declines for residential detached homes, year-over-year (YoY) median sales price has dropped to just 5.5%. This marks the first time since October 2020 that the YoY median sales price did not post double digit percent increases, save for a 9.6% YoY increase in March 2021.
The median sales price in September was $485,000, with a month-over-month (MoM) price decline of 2.0% and the fourth consecutive and largest MoM decline since October 2020, when prices slid 2.3%.
This brings us to a 4.2% decline from the all-time-high peak of $506,000 posted in May 2022.
As I predicted, the rate lock effect that I discussed last week is starting to take its toll on new listings, with just 622 homes listed for sale in September, a MoM decline of 8.8% and the third consecutive month of declining listings for Weld County. As we enter Q4, I would expect that we continue to see this scenario play out as Sellers choose to sit tight rather than take less for their homes.
Interest rates continue to exacerbate the pressurized affordability dilemma faced by would-be Buyers, with interest rates breaking 7% for the first time in two decades last week before retreating to 6.82% for a 30-yr fixed rate loan to close out the month. Interest rates continue to create extreme downward pressure on closed sales, with September posting another monumental YoY decline of 30.3% with only 457 closed sales.
Likewise, inventory continues to climb. After posting a staggering 96.2% YoY inventory increase in August, September posted a 73.8% YoY increase, with inventory rising to 987 homes. This on top of a 63.3%, 72.3% and 46.0% YoY increase in inventory for July, June and May, respectively.
It’s no surprise then that in light of all this, Months Supply of Inventory has climbed from it’s low of just 0.5 months in February to 1.8 months for September, the seventh consecutive month of increases for this metric. Similarly, Days on Market (DOM) continues to climb, with September averaging 41 DOM, a 36.7% YoY increase and the largest increase in over a decade.
Lastly, as Sellers begin to adapt to the shifting market and price reductions become more the norm, it’s not at all unexpected to see that September saw the first month since February 2020 that median sales price dipped below median list price. At just 98.4% for September, this marks both the largest MoM and YoY decline since 2012 at 1.6% and 2.7%, respectively.
What to Expect Going Forward
When some us first predicted that the market was ripe for a correction six months ago, most people chuckled and then politely told us that we were crazy. A strong labor market and tight inventory simply would not allow such a scenario to play out, they would tell me. Even still, everyone seemed to agree that whatever the outcome might be, the trajectory was not sustainable. The problem was, because most people could not envision a scenario where tight inventory could be trumped by any other factor, it became impossible to envision a scenario where prices might decline despite continued low inventory.
The problem with the “supply-and-demand” approach here is that it fails to account for other external factors. Namely two-decade high interest rates and home values which have far-outpaced what local incomes can support.
Fast forward to today and almost across the board, most players in the real estate market are calling for a correction in home prices with estimates in declines ranging from 10-25%. Morgan Stanley is now expecting home prices to drop by up to 7% in the next year.
Morgan Stanley’s James Egan wrote this week,
“Affordability is deteriorating faster than at any point in our data history. If we assume a 7% mortgage rate, affordability looks materially worse than today. And the pace of its deceleration has already more than doubled compared to almost any time in history.”
Likewise, last week, Zillow co-founder and former CEO, Spencer Rascoff, said,
“Unfortunately I think the housing market is little bit worse than most people realize because when you look at data like Case-Shiller, that tends to be a paired-sale methodology, which means that Case-Shiller looks at homes that sold in the period - let’s say last month and then it looks back at when the last time those homes sold, 3, 5, 10 years ago- and then it calculates the delta. But if you look at the median value of all homes in a geography, that’s actually declining in many parts of the country. So, housing is very weak. Thats to be expected. The Fed wants this.”
You can can watch the full interview with Spencer Rascoff on CNBC here.
As we enter Q4, markets which are significantly overvalued have been the first to see home prices fall from their pandemic highs, with some markets already posting double digit declines through the end of Q3.
Nationally, the decline in home values has occurred sharply enough as to wipe out all realized appreciation gains for the first six months of 2022. This is clearly demonstrated in the most recent Case-Shiller National Home Price Index figures, which shows a reading 0.24% below the June reading. Although the June to July decline is small, the story it tells is actually much larger because the Case-Shiller Index is a three-month lagged average. This means that the drop in July was large enough to wipe out all of the gains in May and June.
Everything that is happening now falls in line with what the Federal Reserve has planned for the housing market. Fed Chairman Jerome Powell has made clear that the Fed is willing to sacrifice the housing market if doing so allow them to fulfill their mandate of reining in inflation.
To that end, the Fed has already indicated that they envision two additional rate increases in 2022. So long as the monetary tightening trend continues, interest rates will remain elevated and in turn, downward pressure will continue to be applied to the housing market.