Active Inventory is DOUBLE Last Year, But Still Less Than We Need

Inventory exceeded demand in June for the first time since June in 2020, spiking at 94% year-over-year and 66% month-over-month. According to Redfin, price reductions increased to 40% of homes in Denver’s market.  If the story ended there, it might concern me. Sellers flooding the market are giving homes away at discounted prices, but the story is much different from that. June ended the first half of a transitional 2022, and it did so with a bang. Cryptocurrency is down 60%. The stock market had its worst first half of a year since 1970, inflation hit a 41-year high, and housing is up 16.5%. 2022’s year-to-date median price growth is only 1% lower than we experienced during the first half of 2021.

With this inventory, buyers and sellers “feel” like it shifted to a buyers’ market.

Increased price reductions lead us to believe buyers have the upper hand; however, most statistics show us being in a strong sellers’ market. Median days on the MLS stayed at 4 in June, with the average only increasing 1 day to 10. The closed price-to-list dropped 2 percentage points but was still over 103%. Months of inventory remained low at 1.2, 1.3 months for detached and 0.9 months of inventory for attached. 

The increase in inventory has given some much-needed relief from an incredibly unhealthy market, where there was as little as 10 days of inventory with buyers having to pay an average of 107% close-to-list. As higher interest rates and a slowing economy cool off an overheated demand, inventory can return to healthy levels. June 2022 inventory might be almost double 2021 but is still 5% less than 2020, 36% less than 2019, and 80% less than what is needed for a balanced market.

It’s all about perspective.

Meanwhile, buyers are slowly adjusting and readjusting as mortgage rates have become increasingly volatile. News regarding Fed Chair Powell’s fight against inflation topped this month’s headlines. During an interview, Powell said, “We understand better how little we understand inflation”. In other words, we’re doing a lot to fight inflation right now, more than in past decades. Still, we’re not sure we understand inflation, so maybe we’ll soon see that we didn’t need to be doing quite so much, quite as fast. Maybe we’ll see we needed to do more. 

Powell stepped on the gas with a 0.75% increase to the Federal Funds Rate on June 15 and is expected to raise it another 0.75% on July 27 and then 3 more times to round off the year. His strong determination to do something big came days after the Consumer Price Index (CPI) surprised the market by not easing as expected. Instead, the CPI jumped 1% month-over-month, resulting in an annual 8.6% inflation rate. Inflation is the archenemy of bonds as it strips away the purchasing power of fixed-income securities. To no one’s surprise but everyone’s dismay, the 10-year treasury jumped 35 bps, pushing 30-year fixed mortgage rates from 5.55% to 6.28% in 3 days. 

After Powell’s grand gesture to control inflation, the bond markets reacted favorably over the next two weeks as mortgage rates settled back down to 5.875%. Then, the Personal Consumption Expenditures Index (PCE) came out on June 30 While the PCE measured the same month’s data as the CPI report, the PCE’s larger look at consumed goods and services by all households saw a slight drop in its core inflation, excluding food and energy. It also marked a slower consumer spending, half of what was expected, and less of a personal income increase to offset inflation.  While the PCE was not expected to move the market, it did just that and June ended where it began, with the 10-year treasury back down to 2.88% and the 30-year fixed mortgage at 5.5%.

The PCE did more than just move the market. It moved the Atlanta Fed to revise their second quarter GDP estimates from a 0% expected growth to a negative 1%. We all know the CliffsNotes definition of a recession is two consecutive quarters of negative GDP.  While the National Bureau of Economic Research, which officially calls the start and end of recessions, expanded its definition, it’s hard to ignore that this will make two consecutive quarters. I still believe that the first quarter’s loss in GDP was due to supply chain issues, not a slowing economy as consumer spending was up 3.1% and over 1.6 million jobs were added. We are, however, seeing the slowdown. This quarter, 800,000 jobs have been added and consumer spending has slowed for two months in a row. 

A recession is coming, but we’re not there yet.

There is a healthy fear of recessionary times, calling everyone to reduce unnecessary risk, protect assets, and evaluate their spending in light of job security. While real estate challenges affordability, it also continues to show strength as we head towards what seems an inevitable recession. 38% of all homes nationwide are owned free and clear. Of the Colorado homes with a mortgage, only 1.8% are delinquent, 0.1% are in foreclosure, and record levels of tappable equity today provide a multitude of options for anyone faced with challenges.

There was a much-needed uptick in new and active listings in June. Some of this is due to increased mortgage rates or seasonality. Some see this as a result of migration out of Colorado due to affordability. Although this increase has bumped us above one month of inventory, it is still far from balanced and will continue to be a challenge. 75% of all mortgaged homes have an interest rate at or below 4%, causing a rate lock which will result in longer periods of time for people to stay put in their existing home. A record number of reverse mortgages reflects that Baby Boomers are aging in place. Additionally, investor-market-share hit a record high of 20% in the first quarter of the U.S. homes purchased.  All these factors will slow down homes reentering the inventory pool.

Yet, we’ve seen a little more inventory is shifting the buyer psyche. More buyers are jumping back in, knowing competition is down. Mortgage purchase applications ending in June still were down year-over-year but up 17% from where the month began. Buyers have also become more discerning. Sellers are pressured to price their homes right to get their attention. Not for what their neighbors sold for last month, but for what homes were listed at last month before the overbidding began. When homes hit the market priced right, those same buyers were willing to pay more than list price to get it. 

A market in transition requires us to think more creatively, act more strategically and communicate more proactively. A recession will probably come in 2023. When it does, rates will more than likely go down, putting additional pressure on limited supply and causing home prices to go up further. This equates to equity for those who own and lost opportunity for those still renting. 

Until next time, that’s a wrap for this month’s Market Trends update. It’s my pleasure to keep you updated,

It’s my pleasure to keep you updated.

Nicole Rueth
Producing Branch Manager with The Rueth Team of Fairway Mortgage