** All market information and data is taken from RE Colorado, IRES, or PP MLS. If you believe there is an inconsistency or misstatement, please let us know!! **
Vol. 2, Issue 8
August 15, 2018
Since the distribution of this monthly letter started more than a year ago, your overwhelmingly positive feedback encouraged me to slowly expand my audience. Today, I’m taking the plunge and sending this email to over 3,100 of our team’s closest friends. Thank you to everyone who is receiving this note for being part of our team’s story!
For those of you who are receiving this letter for the first time, here’s what you need to know before we get into our market discussion:
- Who is this guy??
- My name is Jared Frost and I’m a real estate broker based in Denver, CO. You are receiving this letter because you have had a professional relationship with someone on our team at some point in the last three years. I have a master’s degree in financial engineering and am a former Wall St. derivatives trader who had a front-row seat for the financial crisis. Like many transplants to Colorado, I came to Denver several years ago to pursue a different lifestyle and chase a girl; even though the girl didn’t last, I fell in love with living in the Front Range. Our team is built on principals of client-service and market knowledge that you should expect when buying or selling a house – it’s one of the most important financial decisions of your life and you should work with someone who appreciates the importance of that situation.
- If you want to learn more about me, here is a podcast on which I just appeared: https://www.abundantbeans.com/podcast/business-is-a-marathon-not-a-sprint-how-this-missile-engineer-has-built-his-business-jared-frost
- Why did I get this email?
- Our team is continuously growing and changing and so does our interaction with our sphere of influence. We’ve received feedback that the content in this letter is better and more relevant than the surface-level, fluffy pieces that most realtors send out to “add value.” Previously, we’ve only shared this information with our clients, referral partners, and investors… Now, we want to put this data in YOUR hands.
- If you don’t want to receive this email going forward, please click on the “unsubscribe” link at the bottom of this email. You will be asked to confirm your choice – please, click the confirmation and you should be all set. If you unsubscribe on this email and receive another one in the future, please let me know and I will personally remove your info from our mailing list.
SOOOO, let’s get into it…
The Macro Situation:
Over the last month, developments in the macroeconomic landscape are important to discuss first and we will get into the Denver real estate story next.
It’s been more than 20-years since the Federal Reserve lowered short-term interest rates after an expansion cycle without shortly entering, being in, or recovering from a US recession. The last time rates were lowered without being in a recession was 1998 when the Russian Flu and the Long Term Capital Management crises hit** and a liquidity injection was needed. Just in the last few days, however, Germany posted a contraction in the second quarter (the leading economy in Europe), China posted its worst growth since 2002 (the US trade war), and the S&P 500 is down 80 points. This doesn’t feel like the short-term liquidity squeeze in 1998, we are running out of runway and current trade policies are not helping.
As a result of the macro situation, we are paying closer attention to the broader US economy and its potential impact on Colorado’s economy. Colorado and Denver are still outperforming the US economy due to large immigration flows over the last decade and a state government that has been relatively friendly to investors and businesses.
In a recession, however, corporate budgets get tighter and it will be harder to make the investment to move your company to CO and you will likely look to add headcount in parts of the country where the cost of living is cheaper. It then follows that immigration inflows which have helped provide a tailwind to housing prices are more at risk than people might think when we enter a recession. Here is a pretty staggering chart for the average citizen in Colorado:
(Keep in mind also that renting is 15-25% more expensive than owning on a relative scale…)
For current, CO homeowners and future sellers of residential real estate in CO, we are still experiencing a shortage of housing options, so we will be theoretically less impacted from slowing demand or a US slowdown versus other parts of the country. For example, states with high property taxes and real estate values like NY, CA, and IL have already been experiencing corrections in their real estate markets since the Trump tax changes and the US economy was growing stronger at that time than it is trending now.
With that, let’s check out the drivers for local, residential real estate market!!
Demand Side: Time to Call Your Lender
When we test the market’s winds, we look at real estate within a 10-mile radius of Union Station as a proxy for what’s generally happening in the metro area. We saw a spike in closings in July… why? Just a bounce back from a tough June? Probably not…
Caption: I stare at this spreadsheet with a cup of coffee WAY too often. The data is from RE Colorado, the Denver-based MLS.
Closings in July are the result of buyers getting in cars and making offers in May and June. Here is a link to a chart of 10-year interest rates which is the best driver (in my opinion) of mortgage rates in the US where you can see the recent movement: https://www.cnbc.com/quotes/?symbol=US10Y
In May and June, we saw long-term interest rates fall which…
(1) Led to a decrease in mortgage rates;
(2) Therefore, buyers purchasing power increased;
(3) Which resulted in which more deals between buyers and sellers; and
(4) More moving vans in July.
Home prices are so high relative to wages that the “heat” of our real estate market is going to track mortgage rates very closely. Buyers will buy when rates are below 4% and be hard to find at current prices when rates go above 4.5% (like fall 2018).
Supply Side: Surprisingly Constructive
We’ve been watching a large increase in the number of homes are on the market starting in January this year. There were 50% more homes on the market to start this year than last year. Each month, that percentage slowly decreased and stood at 20% last month. While the absolute amount of supply on the market is increasing, we are seeing the relative trend continue to go down which is encouraging.
As mentioned in the discussion about demand drivers, it will be interesting to see how supply starts to normalize when interest rate volatility decreases. Based on our current market experiences, homes are not selling as quickly and there are less buyers in the pool up and down the price curve. We expect supply to steadily build over the coming months with less of a rebound in pricing next spring. If you are considering putting your home on the market and downsizing, the next six months are a great time to start getting ready to move.
Call us at 720-526-2583 ring or send us an email (info@BluePebbleRE.com) if you want someone to check your home’s current market value!
This trade war needs to end. Yesterday. Let’s use whatever negotiating channels we have to come to the best deal possible in which both sides can save face and move on. Rising prices due to import costs will hurt the consumer and lead to less discretionary spending. Less spending means less growth and increases the chances of a slowdown.
In the equity markets, we’ve been watching 2,950 in S&p 500 cash trading levels. This price level was previously “resistance” prior to the June market rally and became “support” when that level was broken this summer. After the equity market slide last week, S&P 500 cash trading levels broke BELOW this support; important support levels now are below current trading levels and can be found at 2,800 and 2,750. The equity market is typically the laggard when it comes to digesting macroeconomic news, so it’s not surprising that the stock market is just now trading in a “no man’s land” while some of the other indicators are turning bearish (rates & gold). From a trading perspective, I’m currently neutral on US equities and will look for a break below 2,750 to get bearish or above 3,025 to go back to bullish.
The Lighter Side:
On a lighter note, last month was Blue Pebble’s Summer Party and we had a Luau at RiNo Beer Garden! Thank you to everyone who attended and also for raising a little bit of money for Matt’s OVER THE EDGE rappel down the side of the Hyatt Regency. Our goal is to raise $3,000 for cancer research and the Cancer League of Colorado. If you’d like to support our term and our efforts, please visit this link:
Thank you for taking the time to read my thoughts on the Denver real estate market and other factors which impact our market. Please, give me a call at 720-526-2583 if you have any questions or would like to further discuss anything in this note!
** Please, note: this was based on my own inspection of a graph on my computer. I apologize if this is incorrect in any immaterial way. My hope is to convey that lowering rates is not something that happens often and tends to be around bad economic times. Thanks!!