Economic Overview:
The national economy, when viewed from the 30,000-foot level, appears to be performing well, but beneath the surface there are underlying issues that could pose significant challenges. Recent revisions have shown GDP growth in Q2 to be 3%, indicating a solid economic foundation, and forecasts for 24Q3 are around 2.75%. This growth suggests that the economy is expanding at a steady pace.
Inflation has come down nicely, not yet at the Fed’s preferred 2%, but the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, is now in the mid-2% range, and both core and headline inflation are expected to be in the low 2% vicinity by the end of the year. The slow decline in inflation is at least partly due to the way rents are measured, with market rents showing little movement year over year, but with the official data still reflecting meaningfully large increases. The slow but steady decline in inflation is unequivocally good for the economy.
Despite positive indicators in GDP growth and inflation, the labor market has been showing signs of weakness, although the most recent data is excellent. Over the last year and a half, unemployment rates have been rising, job vacancies have decreased, and quit rates are down. Downward trends in employment typically indicate a broad-based deterioration in the labor market and historically, a weakening labor market has been a precursor to recessions. The Federal Reserve’s recent rate cuts are a response to these troubling signs, but there are concerns that the cuts may be a bit too late to prevent a recession. However, the positive September jobs report and recent revisions to income data suggest that the Fed is on target for a soft landing.
One of the brightest spots in the current economic landscape is the resilience of consumer spending. While consumers have been maintaining their spending levels by exhausting COVID savings, reducing savings rates, and maximizing credit card limits, the recent upward revisions to income suggest households have substantially more income than originally suspected. Additionally, strong home equity has provided a buffer for many homeowners. As interest rates come down, more homeowners may be able to refinance their mortgages, providing additional financial relief. Strong consumer spending has helped mitigate the impact of a weakening labor market.
Looking forward, while the overall national economy remains very solid, there are underlying issues that could pose significant challenges. The labor market’s weakness is particularly concerning, and the Federal Reserve’s recent rate cuts reflect the seriousness of the situation. However, consumer resilience and strong home equity provide hope that the economy can weather these challenges. The coming months will be critical in determining whether the economy can dodge a recession or if we eventually experience the long-delayed economic downturn. Even if a recession does occur, it is expected to be a “garden variety” recession, similar to those experienced during the S&L crisis or the dot-com bust, rather than a severe economic collapse like 2008-2009.
Q3 2024 National Housing Market Overview:
The housing market is currently experiencing a dichotomy, with existing home sales struggling mightily while new construction shows some resilience. Sales of existing homes have been scraping the bottom of the barrel for nearly a year, with numbers remaining at historically low levels despite the recent declines in interest rates. August closed sales came in at a seasonally adjusted annualized rate of 3.86 million, down 2.5% M-o-M and 4.2% Y-o-Y. This marks the 36th straight month of Y-o-Y sales declines, and August was the third straight month of sub-4 million sales, a level rarely seen. Nationwide, inventories are now at 4.2 months, up from 3.3 last August. Even with rates recently dropping 110bps, we don’t expect to see an immediate improvement in sales, as many potential buyers will wait for further action by the Fed to lower rates before jumping back into the market and letting go of the sub-4% mortgage they locked-in during 2021-2022.
In terms of home prices, while the national August median home price was up 3.1% Y-o-Y to $416,700, this was the second consecutive month that home prices declined M-o-M. Because inventory remains relatively tight but rising, prices continue to appreciate, albeit at a slower rate. This still-tight market, combined with high prices, has deterred many potential buyers, leaving only the most desperate to purchase homes. The good news is that the market has hit its lowest point, but the speed of recovery remains most uncertain.
The new construction market, particularly multifamily housing, is facing its own set of challenges. Higher interest rates have increased capitalization rates, reducing property values and making new projects less attractive. Despite this, total completions for the year are expected to be high due to projects initiated during the COVID-19 pandemic. However, with rents stagnating and vacancies slightly increasing, the outlook for new multifamily construction remains bleak, at least in the short run, and the influx of new supply makes a quick turnaround unlikely. Single-family home construction is also feeling the impact of high interest rates, which have slowed the overall economy, but starts have nonetheless been surprisingly strong by historical standards. However, large-scale builders are struggling with lower earnings as they offer significant incentives to attract buyers.
Dr. Eisenberg comments: “High prices, high mortgage rates, and a limited supply of available homes have combined to create a painfully sluggish housing market over the last several years. However, we are finally seeing signs of a more balanced market, as we are now at a 4.2-months’ supply of inventory at the national level. As mortgage interest rates hopefully further decrease in 2025, there should be a sales rebound on the horizon. However, outside factors like high insurance costs and property taxes may very well act as a damper even as rates decline. Overall, the housing market is in a state of flux, with significant challenges ahead, but I’m convinced the worst is behind us.
Q3 2024 Colorado Overview:
Unemployment in Colorado in August was 4.0% compared to 3.2% a year ago and a peak of 11.7% in May 2020. For comparison, the pre-pandemic rate was 2.8%. Colorado’s rate remains slightly below the July national average of 4.3%. 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. In Pitkin County, the July unemployment rate was 3.5%, the highest July rate since 2021. A year ago, it was 2.6% and by comparison, pre-Covid in November 2019 it was 5.7%.
Statewide, the September 2024 median price of a single-family home was $575,000, the same as last September, while the year-over-year average price declined 3.4% to $738,534. In the condo/townhome market, the year-over-year median price dipped 1.5% to $422,454, while the average price declined 3.8% to $556,204. Through September, closed sales across the state are down 3.8% while new listings are up 10.4% from last year. There were 27,204 active listings statewide at the end of September, up 16.4% compared to last year and representing 3.9 months’ supply of inventory. Across the state, the percentage of list price received at sale was 98.5%, down from 98.7% a year ago. Through September 2024, the average home spent 55 days on the market until sale, up from 46 days last year.
As active listings increase and approach pre-pandemic levels, the Colorado housing market is in the process of shifting from a strong sellers’ market to one that is a little more balanced. While inventory levels increased, with 3.9 months' worth of housing inventory available statewide, buyers still seem hesitant to jump back into the market, perhaps because they are waiting for further rate cuts, or maybe the outcome of the presidential election. We saw a cooling in the market during 24Q3, with median home prices stabilizing, rather than dropping significantly. While the market is softening, it also shows signs of resilience, and it is likely we will see a meaningful increase in buyer activity as interest rates hopefully drop later in the year and into 2025. Overall, the market is in a state of cautious adjustment, balancing increased supply with tempered demand.
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