Denver Market Trends | December 2020
The Demand is Far from Over
DMAR’s December Market Trends Report was released this morning and provided numbers supporting what I imagine many of us already knew. Demand is strong!! Shattering last month’s record, inventory hit an all-time low of 3415 active listings at month-end. Compare this to the average active listings for November month-end of over 14,000 and a happier place of 6,000 units and it’s clear that sellers are exceeding the typical seasonal holiday slowdown of decreased supply. The added fears of job security, prospective buyers entering their home, and finding a replacement home are adding to their resistance to sell.
Potential Sellers are also starting to face what will become more widespread, something called rate lock, which is where the appeal of staying in their current home with a lower rate and monthly payment will outweigh their overall desire to move. We will continue to see tenure increase from its current average of ten years, as well as homeowners holding onto their primary homes with low interest rates and choosing to convert them into rental properties
But Supply Isn’t the Story…Demand Is.
Yes, supply is the pain point, but it isn’t the story. If demand curbed, supply would come back in line. I could also argue that for some price, any home is for sale. So it’s not supply that’s the issue. It’s demand.
Demographics
Twenty-three and a half million humans in the United States are ages 25 to 29, which are peak home buying years. Twenty-two and a half million humans are 30-34, which are historically prime investing years. And twenty-two million humans are 55 to 59 years old, which equates to prime income years. People want to buy their first home, their second, or investment property and their forever home. These age groups dictate strong demand and they are fueled by artificially low interest rates. Year to date, we have hit the lowest historic interest rate thirteen times. Earlier in November it was thought – for a moment, rates would increase with the good news from not one but two companies who produced a vaccine with a greater than 90% efficacy. And the ten year treasury did. But after doing a head fake, the 30-year rate settled back into its record breaking streak.
Rates
Low rates will continue to be the headline story going into 2021 as the Federal Reserve capitalizes on the tools at their disposal, such as buying longer-term government bonds while selling short-term, with the aim of influencing longer-term rates. Also as the largest purchaser of mortgage backed securities, the Fed is buying an increasing amount of 1.5 MBS Coupons. Add this to their commitment to continue their monthly purchase of at least $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities; you have a powerful force to keep rates low.
Rates are also impacted by the uncertainty of our economic strength. While there was a temporary pop with good news, rates will remain low as COVID cases continue to surge and states struggle with containment. There will need to be a vaccine made available to the greater population and two quarters of economic growth and recovery before higher rates can be expected to take hold.
A third, and more subtle, impact to rates is happening in the lender environment. There is a relationship between the 10-year treasury yield and 30-year mortgage rates. Although short term they can diverge, long term they normally average 165 basis point spread. That spread increases with financial instability, as experienced during the initial outbreak of COVID when rates first spiked due to uncertainty, fear, and risk. At the end of November, that spread decreased to 185 basis points. Many mortgage lenders went public this year during the record-breaking volume, for both purchase and refinance. When the economy strengthens and rates start to break to the upside, lenders will tighten their belts and contract that spread further, keeping rates and their shareholder profitability up as long as possible.
Political
There are also shifts happening to encourage homeownership from the new political leadership. Biden’s $640 billion dollar plan includes a first time home buyers tax credit at closing and an increase in affordable housing. Both of these initiatives will drive an increase in buyer demand. There is also a push to cancel student loan debt, another fiscal policy that would likely stimulate housing demand. And with Yellen the front runner for Treasury Secretary, Fed Chair Powell will have an advocate for the continued pressure on lower rates.
Summary
Pending Sales, although down month over month due to seasonality and lack of supply, is up a whopping 15.57 percent. Considering new listings are down 40.96 percent from last month and up only .52 percent over last year; it’s hard to see how this can continue. If you look at my favorite chart in the report, the active listings versus closed homes, we have been upside down since July resulting in an incredible median price growth of 11.67 percent over last year and an extremely healthy 7.14 percent year to date.
This insatiable demand will continue to put upward pressure on prices, even those homes with the unfortunate destiny of foreclosure, protecting our homes from any loss in value. While we need to be watching for a tipping point in affordability, right now is an incredible time for both buyers and sellers to take advantage of low rates, increasing values, and long term wealth gain.
As your champion in building wealth through real estate, it is my pleasure to keep you updated.
Nicole Rueth
Producing Branch Manager with The Rueth Team of Fairway Mortgage
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