A new year is upon us and like so much of our world in general, the housing market seems to be suspended in midair, waiting for something to happen.
Rates are once again pushing 7%, there are more than four times the number of homes on the market that were for sale at the beginning of 2022 and uncertainty continues to abound.
It's a standoff between a shrunken number of sellers, a shriveled pool of buyers and a large (but rapidly declining) number of agents fighting over an ever-smaller pool of transactions.
The number of closed sales in the Denver MLS has plummeted from 64,000 in 2021 to 51,000 in 2022 to just over 40,000 in 2023.
Welcome to The Waiting Room.
Interest in housing hasn't gone away, it's just been put on hold. Aspiring buyers still want to buy. Many with changes in life circumstance or economic situations still want to sell. But with all the uncertainty, they simply wait.
I have a white board in my office which I use to keep track of my (prospective) buyers, sellers and current contracts. If we meet together and discuss buying a home, you become a prospective buyer. If we meet together and talk about selling a home, you become a prospective seller. And if we do the deed and actually embark on the buying or selling journey, you become a contract.
It's not uncommon, historically speaking, to have 4 to 6 prospective buyers, 4 to 6 prospective sellers and (in the good old days) 4 to 6 contracts working at any point in time.
But as we begin 2024, the status of my white board reflects the current status of the market.
Prospective buyers: 9
Prospective sellers: 13
Current contracts: I'd rather not say
The point is, there's a lot of repressed demand to both buy and sell that just keeps building up in our market. Pressure has been increasing since the spring of 2022, as more and more buyers and sellers "think about it" instead of taking action.
There's a high cost to 7% mortgages, for both buyers and sellers, and it de-motivates both sides.
So people wait.
In my view, there are two ways this pent up demand gets released. The first, and quickest way, would be for interest rates to drop. While different people have different opinions about what it would take to unlock this demand, I feel like the magic number is around 5.5%. If mortgage rates could get to 5.5%, you would have robust and engaged interest from both buyers and sellers. The number of transactions would soar and the market would boom.
Will we get there this year? I have my doubts.
I personally feel like the inflation fight is far from over. The consumer price index (CPI) bounced back up to 3.4% in December after falling for 10 straight months. And while 3.4% may sound a lot better than the 4.7% of 2021 or 8.0% of 2022... it's a long ways from the Fed's stated target of 2.0% inflation.
Seventy percent higher, to be exact.
If the Fed is committed to getting back to its 2.0% inflation target (and who really knows, because it's the Fed)... I don't see how rates fall as much as many of the optimists feel they will. It's more likely, in my view, that inflation remains sticky, the government continues deficit spending, and all that debt floating around on the secondary market requires continued higher yields to find buyers.
All of it feels pretty stag-flationary to me.
The second way to unleash the pent-up demand in the market is through (wait for it) more government intervention in the economy, likely through the tax code. This, I admit, is unlikely to happen in 2024 with a wickedly divided Congress and totally polarized political environment.
But once we get past the elections this November - and especially if either party takes full control of the levers of power - our broken economic condition suggest this would be the moment for monumental changes to the tax code. Especially since either Txxxx (the candidate who shall not be named) or Bxxxx (the incumbent who shall not be named) will be starting a final term regardless of who wins.
With $35 trillion (and counting) in debt, the role of the federal government is at a crossroads. Investment property rules, capital gains laws and inheritance tax policies could all be under the microscope soon, and any changes would definitely change how real estate is perceived and valued.
Under the first scenario, which is lower mortgage rates... the effect would be like a strong tailwind coming back into the market. Under the second, which is a radical rewrite of the tax code, the impact would be more like an earthquake, with lots of things being broken.
I don't know which path we will take to releasing the pressure that continues to build up inside the market. And until we have more clarity, it feels like the waiting room is just going to become more and more crowded.
