2024 First Quarter Market Report | Christie's International Real Estate Summit Colorado

Report Written By: Elliot F. Eisenberg, Ph.D. Source: Summit Board of Realtors Multiple Listing Service

Economic Overview:

A year ago, a national recession seemed an almost certainty.  Interest rates were rising rapidly and peaked out in July 2023, and overall economic conditions weakened for several more months.  Flash forward to today, and the economy continues to pleasantly surprise, to wit, 23Q4 GDP growth came in at a solid 3.4%, the sixth straight quarter that the annual growth rate has been above 2%.  Current estimates for 24Q1 are for a slightly slower but still respectable 2.1%.  There are a few key items that are driving current growth. The rise in home prices and equities is boosting consumer spending.  Second, immigration is meaningfully higher than we think, and income by those persons, be it reported or unreported, is also boosting spending.  Lastly, labor productivity is strong, helping reduce inflationary trends.

U.S. employers added a very strong 303,000 net jobs in March, the best level since 5/23, and there were upward revisions to January and February of 22,000. Better yet, the workweek rose, the labor force participation rate increased from 62.5% to 62.7%, and wage growth slid from 4.28% in February to 4.14% in March.  If there is a weak spot, it’s that only three sectors continue to generate almost all the growth, and the March report was no exception. Education/healthcare was responsible for 88,000 jobs, government, 71,000, and leisure/hospitality, 49,000. Outside of these sectors there has been little job growth since 11/22. It would be nice to see broader employment growth, and critically, more growth outside the public sector. 

Unfortunately, inflation remains stubbornly above the Fed’s 2% target.  March CPI rose 3.5% Y-o-Y, the 10th month in a row that headline CPI has been trendless and rangebound between 3.1% and 3.7%. The lowest reading since the 2021 inflationary rise was 3.1% in 6/23. Moreover, core CPI, which since peaking in 9/22 has fallen every month except 3/23, rose slightly, from 3.76% to 3.80%. Inflation’s decline appears to be stalling and thus Fed rate relief remains on hold.  With inflation not fully in check, and the size and timing of Fed rate cuts uncertain, the prospect of a ‘soft landing’ remains, although a mild recession is also still a possible outcome.  In 1989, the Fed’s last rate hike was in 6/89 and 13 months later a recession began. In 2000, the lag between the Fed’s last hike and the recession was 10 months. In 2006, the gap was 18 months, and in 2018, the lag was 14 months. The median and mean are both about 14 months. This cycle, the last hike was in 7/23, and therefore if past trends and history hold true, there is the possibility of a fall recession, although that is far from certain.

Consumer spending is a key driver of GDP growth.  Household net worth rose $4.8 trillion in 23Q4 and has gained $11.6 trillion since 22Q4. Net worth is now $156.2 trillion, slightly above its previous 22Q1 peak of $152.3 trillion. This recent surge is undoubtedly why consumer spending remains profoundly strong. The top 20% of the population saw their wealth rise by $4.1 trillion, while the bottom 50% saw a trivial $34 billion rise.  But far too many in that bottom 50% are tapping into credit for purchases.  Pre-Covid, revolving consumer credit totaled $1.10 trillion, was growing by $3.5 billion/month, and was 6.6% of disposable income. After collapsing through 4/21, it’s now increasing rapidly, at a rate of nearly $10 billion/month, and is now $1.34 trillion, or 6.5% of disposable income. Worse, the average credit card rate has risen from the mid-teens in the pre-Covid years to the low twenties today. These rapid balance increases, coupled with high rates, are concerning, and at some point, become unsustainable.

Bottom line:  the continuing strength of the jobs market and the fact that inflation remains stubbornly above the 2% target means the Fed is not likely to cut interest rates until sometime in 24Q3 and possibly even later.

Q1 2024 National Housing Market Overview:

In the national housing market, February existing home sales rose to a seasonally adjusted annualized rate of 4.38 million, well above the 3.92 million expected, and the best pace since 2/23, although down 3.3% Y-o-Y. Moreover, inventory is 1.07 million, up 100,000 Y-o-Y, and months of inventory is now 2.9, up 0.3 months Y-o-Y. The February median price was $384,500, up from $363,600 last year. Recovering sales, rising inventory, and reasonable price appreciation, is the “just right” scenario we hopefully continue to see. 

February new housing starts rose 5.9% Y-o-Y and permits rose 2.4% Y-o-Y.  Drilling down, new single-family starts are up an impressive 35% Y-o-Y, while multifamily starts sank 36%. Similarly, single-family permits are up 30% Y-o-Y while multifamily permits plunged 33%. Multifamily housing is meaningfully weaker than single-family, as high interest rates push up costs, and with a huge number of new multifamily units recently coming online or about to do so, there is a surplus of supply, pushing down occupancy rates, and ultimately, rents.  With rents continuing to slowly decline while interest rates remain high and home prices keep rising, it’s now cheaper to rent than own in all top 50 U.S. metros.

For a bit of perspective, compared to the 2006 Housing Boom peak, home prices are currently 71% higher. However, after accounting for inflation, home prices are just 10% higher. Thought of slightly differently, nominal home prices are exactly double what they were in 2004. That works out to a compound annual growth rate of 3.6%. While housing prices went crazy during Covid, over the long run price increases have been rather pedestrian.

While the long-term impact of NAR’s agreement to end litigation brought by sellers related to broker commissions may take a while to become fully apparent, the immediate results were clear. On the day the agreement was announced, the stock prices of RE/MAX, Redfin, Zillow, Compass, and Douglas Elliman all declined meaningfully, suggesting, at least initially, that overall commissions and brokerage profits will dip.  That said, house prices may well not get cheaper.  To a large degree that will depend on the competition between buyers and sellers and inventories.  In tight markets, we may see little change in commissions, while in weaker markets there may be more negotiation.  At the end, I suspect that commissions are a bit reduced, that the number of Realtors declines, and that the average Realtor probably completes more deals/year.

In terms of non-residential real estate, in 24Q1, the U.S. office vacancy rate hit a new high of 19.8%, besting the 23Q4 record of 19.6%, and the previous record of 19.3% for both 1986 and 1991. Those highs were the result of massive overbuilding followed by the S&L crisis recession that started in 90Q3.  The aftereffects lingered, and the vacancy rate, even in 2007, at the height of the Housing Boom, remained very elevated at 7.9%.  This time, the damage is the outcome of Covid and the work-from-home shift that followed, and the largest exposures seem to be in small and mid-size banks.  The Fed appears to be watching this issue closely to see if intervention becomes necessary.

With inflation falling slowly, the Fed may only cut rates twice this year, and unless and until we see the gap between the current 30-year mortgage rate and the 5.0% mortgage rate that more than 75% of mortgage holders enjoy, we are only going to see a moderate pickup in activity.  Even so, life happens, and eventually people must move because of marriage, divorce, jobs, and family, and over time we will see this sort of natural market activity rise.  Most expectations are that 2024 will be a year of transition, nothing like the rocket ship of 2021, but also nothing nearly as bad as the last quarter of 2023.  Dr. Eisenberg comments: “The timing and depth of interest rate cuts remain uncertain; however, they are now most likely to occur in late summer, fall, or even later than that, and we are unlikely to see more than two 25bps cuts.  This expected delay in interest rate cuts is likely to keep many homeowners locked-in to existing mortgages and thus keep inventories tight, with a solid floor under home prices.  Overall, I anticipate mid-single digit increases in home prices during calendar 2024.”

Q1 2024 Colorado Overview:

Unemployment in Colorado is 3.5% as of 02/24, up from last December’s 3.3%, after hitting a peak of 11.7% in 05/20 (for comparison, the pre-pandemic rate was 2.8%) and remains below the February U.S. national average of 3.9%.  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 28,434 for the week ended 03/23/24, a year ago it was 21,415.  In Pitkin County, the February unemployment rate was 3.3%, a year ago it was 2.6% and for comparison, pre-Covid in 11/19 it was 5.7%.  The final employment data shows that Colorado gained an average of 4,900 jobs per month in 2023, up from 2,000 monthly jobs in 2022.  Additionally, payrolls increased 2.5 percent in 2023, which put Colorado in 11th place compared to other states when it comes to job growth.  State and local government was the biggest job creator in Colorado last year, although that is expected to cool during 2024.

Statewide, the March 2024 median price of a single-family home of $576,945 was 4.1% higher than March 2023, while the year-over-year average price rose 5.1% to $724,475.  In the condo/townhome market, the year-over-year median price gained 3.7% to $425,000 while the average price increased 6.9% to $553,290.  Through March, closed sales across the state are down 3.1% while new listings are up 8.9%.  There are 15,881 active listings statewide at the end of March, up 2.3% compared to last year and representing 2.2 months’ supply of inventory.  Across the state, the percentage of list price received at sale was 99.2%, up from 99.1% last year and 98.1% at the end of last year.  The average home spends 56 days on the market until sale, almost the same as last March and down slightly from December 2023’s 62 days, suggesting a market that is still strong.

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