The third quarter of 2023 is likely to turn out well for the U.S. economy. While most market watchers and economists thought that we would have drifted into the long-awaited recession by now, most third-quarter data is fairly strong. Largely because of substantial fiscal stimulus, which has yet to fully dissipate, the current expansion has not yet turned recessionary. However, by early 2024, excess savings will probably have been depleted, and on October 1, 2023, student loan repayments recommenced. We are already starting to see early indicators of slowing consumer spending and falling real income, as August auto sales slumped 4.6% M-o-M and consumer credit card balances are increasing. Nationally, September payrolls rose by a surprisingly strong 336,000, and July and August numbers were revised up by 119,000. Moreover, job growth was widespread, the labor force participation rate is rising, and wage growth slowed to 4.2% Y-o-Y and to an annualized rate of 3.4% over the last three months, a rate nearly commensurate with 2% inflation. All things considered, the overall labor market remains solid.
In terms of inflation, September CPI rose 0.4% M-o-M, largely attributable to more expensive gasoline and diesel. Core inflation rose 0.3% M-o-M, its highest reading since May, but just 4.1% Y-o-Y, its lowest reading since September 2021 and the eleventh decline in 12 months. August core services inflation rose 0.6% M-o-M, unchanged since March, and the Fed's favorite measure of inflation, core services minus housing, rose 0.4% M-o-M in August, its highest reading since March. Thus, while generally falling, inflation remains uncomfortably high, and therefore, the Fed left the Fed funds rate unchanged in late September and signaled a willingness to possibly raise it 25bps in the future, a hawkish pause. However, it doesn't matter if the Fed raises rates once more or not at all because inflation and the economy's health do not hinge on 25bps. Instead, what matters is how long the Fed keeps rates at the terminal level, and that is still to be determined. According to the latest Fed releases, the plan is to reduce interest rates at the slowest pace ever. However, be assured that regardless of how long it takes to happen, if and when the weak economy arrives, as it almost always does, rates will quickly fall, or, as the saying goes, "Interest rates go up on the staircase but down on the elevator." Alternatively, if the economy stays pleasantly strong, the Fed may or may not raise rates more, but will certainly not lower them anytime soon.
There are other significant headwinds that still pose a risk to the hoped-for smooth landing. In addition to the resumption of student loan payments in October, the possibility of a U.S. government shutdown remains high, especially with the chaos in Congress.
The ongoing Russian attack on Ukraine, and now the prospects of an extended conflict in the Middle East will have continuing economic impacts on the world economy and raise the potential of spikes in fuel prices. Ongoing labor strikes offer the real possibility of impacting GDP in the short term and generating additional wage inflation. Still, all things considered, the prospects for the fourth quarter of 2023 are good, with the probability of a recession shifting to the first half of 2024.
The national housing market continues to be dominated by high mortgage interest rates, the highest since 2002, and the impacts to both supply - in terms of the iron grip of mortgage rate lock-in, as evidenced by the lack of new listings, and on-demand - by pushing the monthly home mortgage payment out of the reach of many potential buyers and showing itself in very low closed sales.
Existing housing sales slipped to their lowest level since January 2023 in August, and August pending home sales fell 7.1%. High interest rates have pushed up the average interest and principal payment for new borrowers using a 30-year mortgage to over $2,306. Two years ago, only 5% of new borrowers had a payment over $3,000/month, today it’s almost 25%. Moreover, high rates have depressed the dollar volume of cash-out refi activity by about half from 22Q1 when it was almost 1% of available equity/quarter to 0.4%/quarter, a decline of $40 billion/quarter.
Still, even with high rates, home prices remain high and stable. On a Y-o-Y basis, the Freddie Mac Home Price Index, which includes only loans purchased by Freddie and Fannie and includes appraisals, was up 4% in August, versus 3% in July. Y-o-Y appreciation peaked in July 2021 at 19.1% and annual appreciation bottomed out at 0.9% in May 2023. Median home prices increased from $406,700 in July to $407,100 in August 2023, and made this the third consecutive month with home prices above $400,000. It was the highest August price ever and is up from $389,500 in August 2022.
Home prices have stayed at or near record levels in most areas for one key reason – the relative lack of available inventory. Inventory ticked down slightly from 1.11 million units in July to 1.10 million units in August, the lowest August level ever and well below the 1.28 million units on the market a year earlier. After record housing inventory lows during calendar years 2020, 2021, and 2022, CY2023 started off differently. January through April 2023 for sale inventories were slightly above the record lows set in 2022. However, from May through August, inventories set all-time lows, and by wide margins, and it’s likely that monthly low records will keep being set for the rest of 2023. Homebuilders recognize the gap and are trying to fill the available inventory void, and because of this increased new homebuilding activity, the percentage of homes for sale that are new is around 30%, double the historic average.
While the single-family housing market is enjoying solid price appreciation and strong construction activity due to a severe lack of existing inventory, the multifamily market struggles mightily. Financing is increasingly difficult as vacancy rates and insurance premiums rise, along with mortgage and capitalization rates. The market struggles to absorb substantial recent overbuilding and rents are declining. As a result, multifamily starts have declined a sharp 41% Y-o-Y.
Banks are currently tightening lending standards for commercial real estate loans and commercial and industrial loans, and as a result, office and retail space is somewhat shaky, while other types of non-residential construction like student housing, warehouses and logistical hubs, and manufacturing facilities are doing well.
While the shakeup in commercial real estate and construction is no surprise given rising rates, what is interesting is that it takes over a year for that tightening to make its way through to credit growth. This is an excellent example of why the effects of the rate hikes that began in March 2022 are only now having a material impact on areas outside of the housing market.
Unemployment in Colorado is 3.1% as of 08/23, down just slightly from last year after hitting a peak of 11.6% in 05/20 (for comparison, the pre-pandemic rate was 2.8%) and well below the U.S. national average, marking it difficult for Colorado employers to fill positions.
Statewide continuing claims for unemployment hit a high of 265,499 for the week ended 5/16/20 (compared to a pre-pandemic level of 20,735) and are now at 22,588 for the week ended 09/30/23.
Colorado’s economic and job growth still exceeds the national average, and the State’s amenities and location continue to make it an ideal home base for millions of residents, new and old.
Statewide, the September 2023 median price of a single-family home of $575,000 was 2.7% higher than September 2022, while the year-over-year average price rose 12.3% to $762,585. In the condo/townhome market, the year-over-year median price gained 2.6% to $425,857 while the average price increased 5.6% to $571,851.
Through September, closed sales across the state are down 21.2% while new listings are down 18.9%. There are 20,124 active listings statewide at the end of September, down 13.0% compared to September 2022, representing 2.8 months’ supply of inventory. Across the state, the percentage of list price received at sale was 98.7%, the same as last year and down from 99.7% at the end of June 2023 and days-on-market has increased to 46 days, up from 37 days last year, suggesting a market that is slightly weakening