Inflation and Higher Interest Rates Drive Market Conditions, But What is to Come?

May 1, 2024 | denver-housing-market

On January 1, 2022 mortgage interest rates were 3% and the real estate market was gangbusters.  The year kicked off with unprecedented market volume and rising prices.  

But it couldn’t last and at CHR, we were advising clients of rising rates to come and to not wait to purchase. A convenient narrative for real estate agents, but we actually knew what was going to happen, and why.  

How did we know? Because mortgage rates follow the Federal Reserve overnight funding rate and the overnight funding rate is used to control inflation. When money from the Fed is more expensive to borrow, businesses and consumers spend less, slowing inflation.  And at this point, inflation was out of control and the Fed had to act.  

While the 30 year mortgage rate was momentarily at 3%, inflation had skyrocketed from 1.3% just one year before, to 7.57% January of 2022. For 7 months from June 2021 to January 2022 the Federal Reserve and Treasury Secretary, Janet Yellen, became infamous for saying inflation was “transitory” and that no action was necessary. They were wrong.

It was actually easy to anticipate the economic catastrophe to come with disrupted supply chains around the world making products supply scarce, coupled with trillions of dollars of cheap money printed by the US government and pumped into the economy. Businesses and consumers were simply willing to pay more for goods and labor, driving inflation higher, and higher.  

As expected, the Federal Reserve had to act to get inflation under control and in March of 2022 made the first of 9 upward rate adjustments of the overnight bank funding rate in just 12 months.  

By October of that year, mortgage rates climbed to over 7%, the fastest climb of mortgage rates in history.

Colorado Real Estate Impact

Predictably, real estate buyer activity declined with the rapid change of homeownership cost and the inventory of available homes for sale grew, slowing the rate of appreciation and even caused declining values in some areas.  

Prices were sheltered from much decline however, due to current homeowners not wanting to leave their precious 3% interest rate for a 7% rate on a new home. This suppressed the supply of homes, making the market feel relatively competitive to the smaller number of buyers.  

With this constrained supply and a large Colorado population that still needed homes due to life circumstances of marriage, death, divorce, jobs and babies driving housing needs, the market remained stable to appreciating for the last two years.  

Surprising to some, April 2024 ends the month at an all time high for average sales price at $727,928 for all property types and $828,896 for detached single family homes.

What happens with home values next, all depends on where rates go.  

Rates Remain High

April 2024 also ends with 30 year mortgage rates again, over 7%. While inflation has come down, the February 2024 inflation and jobs reports were unexpectedly higher and quashed the hopes of the Federal Reserve dropping the overnight bank rate anytime soon.

But inflation has dropped almost 6% from its high in June of 2022 and hovered in the 3-3.5% range for the last 10 months. The lag between the rise of inflation, the Federal Reserve responding and the rise of mortgage interest rates was about a 12 month period. 

What is most likely to happen is the Federal Reserve responding to declining inflation later in the year and mortgage rates following suit. If inflation declines.  

Inventory is Climbing and Buyer Activity Slow

With elevated rates causing the cost of homeownership to feel out of reach for some, year to date buyer activity has slowed historically, while inventory of homes for sale has risen.  

If rates remain elevated and inventory continues to climb through the summer, as it historically does, home prices will fall. But then again they do every year from July through December.  

This question this year, how far will they fall?  

Below is a chart comparing property showings year to date over the last 7 years. While the Colorado population has grown over this period of time, property showings are down 21% compared to 2018 and 2019 and 11.4% slower than 2023.  2020 was our covid year and not valid comparison data and 2021 and 2022…well they were “unnatural”.

Over this same period of time, inventory has climbed with the Denver market hitting 6,875 homes available for sale at the end of April 2024. This compared to just 2,300 homes available at the same time 2021 and 2022 and 4,500 homes last year. 2024 could be the first year in 12 years where inventory surpasses 10,000 homes for sale.    

The impact on seller experience is the most significant with weekly property showings per listing historically low. Only one other time has a spring real estate market seen weekly showings slower, the beginning of the 2020 Covid lockdowns.

So, What Does it All Mean?

Some key takeaways:

  • Inventory will likely climb through the summer months, making marketing time for homes longer and sellers more likely to negotiate with buyers.  
  • Prices will see a decline through the end of the year starting the end of May, but that happens every year.  
  • If inflation remains stable to declining, the Federal Reserve likely drops the overnight bank rate by year end.  
  • Mortgage rates will fall following the Fed rate drop.
  • If mortgage rates fall, buyer activity will increase substantially and home values will again rise through the spring of 2025.  

Sellers should be prepared for a summer that contains fewer buyer showings, price reductions, longer days on market and offers below the asking price. This means partnering with a real estate professional who knows economic and price trends to anticipate future conditions and is dedicated to help sellers prepare their home for sale and adapt to how the market responds to their property. 

This summer most likely creates opportunity for buyers. Buyers will experience negotiating power they have not seen in a number of years. Even with rates higher, if buyers can afford to buy now and reasonably anticipate a decline of mortgage rates over the next year, values will jump in early 2025 and todays buyer can refinance to a lower rate. The only reason a buyer should not buy today is if they think rates will go higher, for which there is little evidence.

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