First Quarter Market Report 2023 | Christie's International Real Estate Summit Colorado

Report Written By: Elliot F. Eisenberg, Ph.D.

Source: Matrix Multiple Listing Service

Photo: Johannes Plenio

Economic Overview Nationally

By: Elliot F. Eisenberg, Ph.D.

The first quarter of 2023 started off strong, with good job growth and declining inflation, but as growth slowed toward the end of the quarter, the preliminary forecast for 23Q1 slipped into the 1-2% range. In the largest economic news of the quarter, mid-March brought the failure of Silicon Valley Bank and several other large U.S. banks, followed by the Credit Suisse collapse.

These bank failures presented a new wrinkle in the Fed’s ongoing battle with inflation, as they must now simultaneously address inflation by raising interest rates while bearing in mind the possible impacts of additional duration risk to the banking system. As the markets watched to see what the Fed would do, in late March, they raised the Fed funds rate 25 basis points, but in a nod to current conditions, they removed the expected “ongoing increases in the target rate” in their normal presser and replaced it with the phrase “some additional policy firming may be necessary,” which is the strongest indication so far that this rateraising cycle may be nearing the end. However, this should not be construed as a pivot, and based on recent Fed announcements, we are likely to be into 2024 before we see rate cuts. The Fed will instead use other tools to help shore up the banking industry instead of lowering interest rates, since lowering rates could breathe new life into inflation, which would be much more detrimental in the long run.

Importantly, the stressors on the banking system make it more probable that credit standards will tighten, and bank financing will be harder to obtain. In the immediate aftermath of the SVB crisis, financial conditions and lending standards quickly tightened by as much as 150 basis points but have loosened substantially since. Fortunately, there are other sources of financing, such as capital markets and private funding. That said, if banks are more reluctant to lend, this will undoubtedly slow the economy. The key question now is how likely is the Fed to raise rates at their May and June meetings? Based on economic conditions in early April, a May increase seems highly probable, but one in June is quite unlikely as the Fed will probably want to assess the impacts of prior rate hikes to see how close to the peak of the cycle they are.

Overall, the economy remains hobbled by the fear of inflation, and with all the other factors at play, the odds of a mild recession are quite high. We are facing a significant number of headwinds at present. Manufacturing is in a recession and capital expenditures are down. Consumer sentiment is low and consumer spending is starting to slow as higher rates take their toll. The tech and financial sectors have taken a beating over the last several months. The yield curve is inverted, and most leading economic indicators are at levels traditionally associated with recessions. The key strength of the economy right now is in the labor market as job creation remains double trend growth. In the most recent jobs report, the labor force participation rate rose, and wage growth continues to decline.

“Overall, the economy remains hobbled by the fear of inflation, and with all the other factors at play, the odds of a mild recession are...”

Housing Market Overview

Nationally

In the national housing market, while high interest rates continue to stifle activity, prices remain relatively solid in most areas of the country, although nationwide year-over-year prices declined in February 2023 for the first time in more than ten years. The strongest housing markets are in the south and the weakest are in the west. In what is unambiguously good news for housing, the recent bank failures and increasing fears of recession have led to a “flight to quality” by investors, and as a result, bond prices are up and yields are down. Mortgage rates have eased slightly, leading to a mild uptick in new mortgage applications and hopes for some improvements in the re-fi market.

Nationwide, February sales picked up slightly on a seasonally adjusted basis as buyers took advantage of lower rates and more inventory to choose from. New pending sales improved dramatically in February, which promises a stronger start to the spring selling season. While inventories continue to rebuild, they remain at historically low levels, keeping something of a floor under prices. Builder confidence remains low but has improved slightly, and builders have generally been able to offer incentives and upgrades to move inventory rather than making drastic price cuts as was the case in the Housing Bust. Given the headwinds that the economy is facing, including high interest rates, mortgage lock-in, low inventory, high prices, and an overall weakening, the housing market remains relatively strong, and after the frenetic past several years, what we are seeing is a return to a more normal pace.

“Builder confidence remains low but has improved slightly, and builders have generally been able to offer incentives and upgrades to move inventory rather than making drastic... ”

Economic Overview

Unemployment in Colorado is 2.9% as of 02/23 after hitting a peak of 11.8% in 05/20 (for comparison, the pre-pandemic rate was 2.8%). 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 23,416 for the week ended 04/01/23. In Pitkin County, the unemployment rate has been declining and the February unemployment rate was 2.6%, a year ago it was 3.5% and for comparison, pre-Covid in 02/20 it was 2.5%. Essentially, the labor markets are back to where they were before the pandemic. While all signs at the national level point to a mild recession, the Colorado economy may enter the recession slightly later and given the broad appeal of the Colorado market and relatively low tax burden, will likely recover more quickly.

Statewide, the March 2023 (latest data available) median price of a single-family home of $551,000 was 4.2% lower than March 2022, while the year-over-year average price also declined by 4.2% to $686,864. Prices were a bit stronger in the condo/townhome market, and while the median price declined 2.4% to $410,000, the average price rose a tiny 0.1% to $546,249. Through March, closed sales across the state are down 19.1% while new listings have declined 18.3%. There are 13,131 active listings statewide at the end of March, a 42.7% increase over March 2022, but that only represents a 1.6 month’s supply of inventory, still well below the national level of 2.6 months. Across the state, the percentage of list price received at sale fell to 99.1% (down from a staggering 104.2% at the end of March 2022) and days-on-market has increased to 55 days, up from 27 days last year.

Statewide, the November 2022 (latest data available) median price of a single-family home of $545,000 was 2.8% higher than November 2021, while the average price of $717,642 was 5.2% higher. In the condo/ townhome market, the median price gained 6.3% to $420,000, while the average price was nearly flat at $556,764. Through November, closed sales across the state are down 41.8% while new listings have declined 25.4%. There are 17,466 active listings statewide at the end of November, a 61.6% increase over November of 2021, and that represents a 1.9 month’s supply of inventory, still well below the national level of 3.3 months. Across the state, the percentage of list price received at sale is 98.1% and days-on-market has increased to 46 days, up from 30 days in November 2021. As the Colorado real estate market continues to cool and inventories rise, buyers are finally seeing some relief as sellers offer price concessions. In terms of overall demographics, Colorado is now seeing very mild population growth, and ranked 19th in 2022 population growth with net in-migration of 29,000. Colorado has slipped from the top tier of in-migration states largely because housing prices are so high, and there are more favorable tax environments in other states. Still, there are no indications of an oversized market correction in the Colorado housing market as it remains highly desirable in terms of lifestyle and job opportunities.

“As the Colorado real estate market continues to cool and inventories rise, buyers are finally seeing some relief as sellers offer... ”

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