Appreciation is Dropping. Will Home Values Fall?
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Sixty-nine Records and Counting . . . When Will This Market End?
Does it feel like a market of extremes? It does. It has. For over a year now. An extreme abrupt stop to business, shut down, fear, anxiety, release, cautious engagement, then full-on party. While the economy roars back to life, real estate continues to be judged. Will it bust or continue to break records?
The Denver Metro Association of REALTORS® (DMAR) published its May Market Trends Report highlighting April’s data breaking another 16 records this month, making 69 records broken in 2021 alone. Active listings hit month lows bouncing up from March’s sub-2000 housing inventory, but still only half of their previous low. April 2021 ended with 2,594 attached and detached homes for sale. The previous low in 2015 was 5,025 active listings. With low actives, it’s no surprise records were broken in Months of Inventory (MOI), Closed Prices, and Days in MLS. MOI came in at .51 months representing the lowest April on record. While detached homes have only .46 months of inventory, i.e., 14 days, attached homes are roaring back to life with .64 months or 19 days of inventory. Average Closed Detached Homes again hit their highest price point at $699,039, with the Median closed in the DMAR 11 county area at $585,000. Looking for a deal? Only a slight one to be found. The attached Average Closed homes hit their highest on record at $444,252, while its Median counterpart came in at a record high of $376,360.
When will this trend of record-breaking months end? When the rates go up? It might not be that simple, but then again, it could be.
On the last Wednesday of April, Chair of the Federal Reserve, Jerome Powell unequivocally stated that he has no intention of tapering the Fed’s purchasing of mortgage-backed securities and treasuries from their $120 billion a month until 2022. In fact, he said they are not even going to think about tapering until they see “substantial further progress” on their goals of full employment and a stable 2 percent average inflation over the long run. Well, with another one million jobs expected in April and the Personal Consumption Expenditures Price Index, which is the Fed’s favorite measure of inflation, hitting 2.32 percent this month, we all have to know it’s coming, either now or in seven months. Additionally, April saw 104 million fully vaccinated Americans and a 1st quarter GDP rebounding to pre-pandemic levels at a 6.4 percent growth. A strengthening economy will force the Fed’s hand. So what happens when they stop buying and start tapering? It depends. In May 2013, Bernanke hinted the Fed would begin reducing the pace of its purchases, and the market experienced what became known as a “Taper Tantrum” with rates jumping from 3.35 percent to 4.50 percent and mortgage purchase applications dropping by 20 percent in 8 weeks. But, it doesn’t have to come in extremes.
The 2021 housing market has buffered itself against any significant downturn or bubble with a substantial equity cushion. Ninety-five percent of all homes nationwide have a minimum of 10 percent equity. Eighty-seven percent of them have at least 20 percent equity. Thirty-seven percent of all homes are owned free and clear. Here in Colorado, only 2.5 percent of our homes have less than 10 percent equity; 1.3 percent of them have negative equity. In addition to the equity safeguard, there is the quickening exit of forbearances and the moratorium on foreclosures protecting those at risk from losing their home.
While homeowners will hold onto their homes, especially those with interest rates below 3 percent, the demand keeps coming. DMAR’s April Pending Home Sales is up 5.92 percent from last month, pointing to a continuing strong summer. Consumer confidence is now at its highest level since February 2020. Births 29 to 12 years ago will protect our housing market for years to come, with millennials between the ages of 26 and 34 accounting for 12.5 percent of the U.S. population. Denver builders are also trying their best against staggering lumber prices up 240 percent, steel up 160 percent, and sheet goods up 400 percent. Yet, Denver permits are up 26.60 percent from last month.
I never claim to have a working crystal ball. In fact, I often joke about the one I had broke a long time ago. But, I am willing to highlight a few key factors I believe will ultimately have a cooling effect on the current market.
As interest rates rise, the ecstatic demand and resulting appreciation levels will cool and may moderate some home prices. Yet, we have to know sufficient inventory is still a few years away from having a material impact. So, in the short term, we will experience months like this one, with year-over-year Median Price growth of 20 percent and month-over-month of 5.2 percent. So, for the remainder of the summer months, I predict we will continue the current full-on real estate party we are experiencing here in Colorado.
Keeping you updated,
Producing Branch Manager with The Rueth Team of Fairway Mortgage