October 7, 2022

Wells: Fed rate hikes pump brakes on once-red hot market 

The Federal Reserve’s fight against inflation has certainly made an impact on the housing market. As economic volatility and the upward trajectory of long-term interest rates continues to slow demand.

Here’s a snapshot of how housing conditions have changed course over the past year (August 2021 to August 2022) in Northern Colorado:

• Closed sales, which reflect the state of the market 30-60 days ago, are down year-over-year – 23.3% in Larimer County and 30% in Weld County – for single-family detached houses. Sales of attached homes (condos and townhomes) are down 12.3% in Larimer and 16.2% in Weld. 

• Homes under contract – a real-time indicator of demand – are down 24.3% in Larimer County and 15.5% in Weld County for detached homes. For attached homes, under-contracts in Larimer are down 36.3%, while Weld is down 17.6%.

• Inventory of available single-family homes for sale is up sharply – 40.5% in Larimer County, from 570 to 801, and 93% in Weld County, from 523 to 1,011. For attached homes, Larimer is up 15% and Weld is up 4%. 

Some perspective on supply of homes for sale

To start with, inventory is growing, but not for the reasons you may think. Rather than a surge of new listings, inventory is growing due to stagnant inventory – houses sitting on the market longer than expected after the past two wild years of an anomaly market. The number of homes for sale in both Larimer and Weld is just now approaching the number for sale in June of 2020.

Meanwhile, new listings coming on the market continue to decline month-over-month in both counties; year-over-year, Larimer is down 20% and Weld is up 8%.

What does this mean for buyers, sellers? 

For sellers, it might seem like there is a lot of competition from other listings. But a well-priced, well-presented property still stands out in the eyes of today’s serious buyer. The worst mistake a seller can make is to not price competitively according to the latest absorption trends in their given market. There is no latitude for stretching on price; sellers who try it will almost certainly find themselves as part of the stagnating inventory struggling to find a buyer. Be selective about who you choose to list your property with; make sure they can clearly identify pricing strategy as it compares to other listings on the market.
For buyers, the scales have tipped slightly in their favor. They now have a safer market in which to operate and don’t have to risk waiving inspections and appraisals in order to compete. Also, there are many creative financing alternatives to combat interest rate and affordability challenges – from buy downs and adjustable rate mortgages to seller-offered incentives – that can make a difference. Using a well-informed professional lender to understand all the different options is imperative. 

Indicators of optimism

The Fed has just recently announced another 0.75% increase to its federal funds rate and is signaling there are more rate hikes in store in order to curb inflation – which currently sits at 8.3% on the CPI scale. Its baseline goal of 2% inflation seems a long way off.

Still, there are some positive signs to point out. It appears inflation has peaked, after two straight months of declining inflation figures. Consumers are getting some relief, thanks largely to gas prices dropping 7%, month-over-month. Many prominent economists are suggesting the Fed may be oversteering, arguing that the impact of continued rate hikes is having more impact on inflation than the Fed’s metrics are showing. If we have indeed reached the peak of inflation, this is good news. But we are not completely in the clear.

I suspect there will be several months of continued disruption to markets as we transition into 2023. That includes real estate, where demand will continue to decline and inventory will increase, due to market volatility that’s driven by uncertainty and a lack of consumer confidence surrounding monetary policy. I do, however, believe the disruption is short-lived and is actually helping bring housing inventory to healthier levels.

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at bwells@thegroupinc.com or 970-430-6463.

Related Content