Economic Overview:
As we move into the second half of 2024, despite the record-breaking temperatures across the country, the U.S. economy is cooling. Inflation, as measured by the CPI, declined 0.1% in June, the first month-over-month decline since May 2020 as inflationary pressures continue to recede. Year-over-year inflation was 3.0%, the lowest reading since June 2023. Core inflation, a better measure, rose a scant 0.1% month over month, the mildest rise since January 2021 and 3.3% year-over-year, the lowest reading in three years. Very importantly, housing inflation, a key component of the index, is lessening. If we need additional confirmation that the economy is starting to slow, 24Q1 GDP was revised downward to 1.4% from 1.6%, well down from 23Q4’s 3.4%, and the decline was entirely due to a large downward revision of consumer spending. Current projections for 24Q2 growth are between 1% and 2%, which suggests an economy approaching stall speed.
In the labor markets, employers created a respectable 206,000 net June jobs, but April and May totals were reduced by a hefty 110,000. The unemployment rate rose from 4.0% to 4.1%, its highest level since November 2021, a troubling rise since the April 2023 low of 3.4%. Average hourly earnings of private employees have been steadily slowing from a peak of 6% in March 2022 to 3.9% last month. The quit rate, which is highly correlated with wage growth, has plummeted from a stunning 3%/month as recently as April 2022 to 2.2%/month last month. The 24Q2 job creation numbers are the worst since the early days of the covid shutdown, and while the jobs data is not entirely bad, overall, it is yet another sign of across-the-board weakening.
In the stock market, July 2024 has been a month of records for all three of the major market indexes, boosting portfolios and minting new millionaires. But there is concern about market concentration, to wit, the combined valuation of six tech companies in the S&P 500, Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia, is $15 trillion, while the other 494 companies are worth $33 trillion. Through 24Q1, year-over-year earnings growth for the Magnificent Seven is 100%, while for the other 493 firms it’s -3% year-over-year. Even within the tech sector, most of the innovation and investment is in artificial intelligence, a sub-concentration within a concentration. Most importantly, the gains in tech are camouflaging weakening in the rest of the economy.
Finally, much is riding on the results of the 2024 Presidential election. A recent survey of 50 economists, including professional forecasters from business, Wall Street, and academia, finds that 56% predict inflation will be higher under a second Trump administration compared to 16% under a second Biden term. As for deficits, 51% expect them higher under Trump compared to 22% under a democrat. Thus, 59% see higher interest rates with Trump versus 22% with a democrat. Bottom line, if we continue to see inflation cool without a meaningful deterioration in the labor markets and the Fed follows through and lowers rates in the fall, it’s still entirely possible that we dodge a recession. However, if we see a marked shift towards a recession, expect the Fed to dramatically cut rates.
Q2 2024 National Housing Market Overview:
While annualized home sales continue to hover slightly above the depressingly low sub-4 million trough of last fall, the housing market does appear to be improving slightly for several reasons. First, simply the passage of time has increased demand, regardless of high interest rates and high prices. Families marry, divorce, and change jobs, and eventually people must move, regardless of interest rates. We see this in the declining number of mortgages that are at 5% or below. Two years ago, nearly 90% of mortgages were below 5% while the most recent data shows that only 76% are sub-5%, and estimates are that nearly half of the mortgages originated since 2022 have rates exceeding 7%.
Second, we have seen inventories of both new and existing homes for sale rise. June inventories were 36% higher than last year and have grown for eight straight months, however nationally they remain well below pre-pandemic levels. New home listings are up about 6% from last year, and mortgage rates have eased just enough that with increasing demand and more active listings, we are finally seeing a slight improvement in sales numbers. But the news is not all positive; pending home sales slipped 2.1% in May, after falling a larger 7.7% in April. On a year-over-year basis, sales are off just 6.6% after last year’s year-over-year decline of 20.7%. That leaves the NAR Pending Home Sales Index at 70.8, slightly lower than the April 2020 covid-induced low and at the lowest level since the series began during the 2001 dotcom bust.
In response to improving inventories, during the month of May the percentage of active listings with price drops was 19.2% of all for-sale homes. That is up from 13.2% a year ago, and close to the all-time high of 21.7% set in October 2022. For comparative purposes, in the years leading up to Covid the rate was about 12%. That said, even as inventories increase, they remain at historically low levels, and combined with pent up demand, we have not seen the steep price declines of the Housing Bust. In fact, the median home sale price in May 2024 was a record $419,300, an increase of 5.8% from a year ago.
In terms of new construction, May housing starts were 1.3 million annualized, down 19.3% year-over-year and at their lowest level since June 2020. Multifamily starts fell a whopping 52% year-over-year, and while single-family starts were off just 1.7% year-over-year, they are down three months in a row for the first time since early 2023 and are at their lowest level since October 2023. Moreover, single-family permits have fallen four months in a row and are at an 11-month low. The NAHB Builder Sentiment Index reflects the slowdown, as it dropped to 43 in June 2024 from 45 in May and was at the lowest reading since December of 2023. When inventories were less than two months, many buyers were willing to stretch to afford a new home, but as months’ supply of existing inventory approaches four months, there is less incentive to purchase a newly constructed home.
In summary, Dr. Eisenberg says, “At this point it’s difficult to imagine the housing market really picking up until we see rates come down by more than half a point, but I also don’t see it meaningfully deteriorating. With inflation declining pleasantly, I see almost no possibility that rates will rise, the question is how quickly and by how much they decline. I anticipate rate cuts in September and December, with an increasing possibility of a half-point cut in December.”
Q2 2024 Colorado Overview:
Unemployment in Colorado in May was 3.8% compared to 3.1% a year ago and a peak of 11.7% in 05/20. For comparison, the pre-pandemic rate was 2.8%. Colorado’s rate remains well below the May national average of 4.0%. Statewide continuing claims for unemployment for the week of 06/29/24 were 26,866, compared to a pre-pandemic level of 20,735, while a year ago it was 18,800.
Statewide, the June 2024 median price of a single-family home was $599,000 and was 3.1% higher than June 2023, while the year-over-year average price rose 2.1% to $739,610. In the condo/townhome market, the year-over-year median price remained virtually unchanged at $419,900 while the average price declined 0.7% to $506,569. Through June, closed sales across the state are down 4.4% while new listings are up 11.7% from last year. There are 24,830 active listings statewide at the end of June, up 22.3% compared to last year and representing 3.6 months’ supply of inventory. Across the state, the percentage of list price received at sale was 99.1%, down from 99.3% a year ago. During the first half of 2024, the average home spent 51 days on the market until sale, up from 48 days last year.
Colorado made headlines in the recently issued Federal Housing Finance Agency report on the mortgage rate lock-in gap, or the ‘golden handcuffs’ phenomenon that has bedeviled the housing market since rates began rising in 2022. The spread between Colorado’s 24Q1 average mortgage rate of 3.8% and the current 7.25% market rate on a new loan is 3.45 points, the biggest gap in the nation. Going from a rate of 3.8% to 7.25% on a $500,000 home would translate to a monthly payment increase of $1,081, making it much less likely for existing homeowners to move and take on a new, higher-rate mortgage. There are several factors to explain the high Colorado gap, but key among them are average credit score (Colorado residents generally have a higher credit score than the national average), and when the loan was originated (in Colorado, more loans were likely to have been initiated in 2020 and 2021 when rates were at their lowest). While the golden handcuff effect has been particularly hard on the Colorado real estate market, the large increases in statewide inventories suggest a softening market as more and more Colorado homeowners slip out of the golden handcuffs.
