January 6, 2023

Wells: Housing market on path to equilibrium after unsustainable demand

As we move into 2023,  we’ve begun to gain a better perspective of how real estate markets across the region are now situated relative to prior years — and where the market is heading based on market trends.

Just as housing became a driving force in the post-pandemic economic expansion, its slowdown has also become a major narrative and focus of economic attention. But here’s the first thing to understand:  2020, 2021, and the first quarter of 2022 were anomalous real estate markets, fueled by limited supply, heavy demand, record home equity, and extreme leverage that was fueled by low interest rates. Taken together, these factors created a surging housing market that operated at an unsustainable pace.  

Market equilibrium theory tells us that markets that get unbalanced, due to either excess of either supply or demand, will eventually seek equilibrium, or a better balance. In real estate, we historically see markets go through cycles — phases of both heating and cooling — but ultimately seeking a state of equilibrium. 

From the beginning of the economic expansion following the COVID shutdowns, I have stated that the artificially low interest rates then in place to stimulate the economy were stripping demand (or home purchases) forward for years to come. In other words, home purchases that would have occurred in 2023 or 2024 were happening earlier; the leverage created by low interest rates made it possible for people to speed up their housing decisions. This scenario was also coupled with a changing dynamic of what people wanted in their homes, as well as the strong equity position that people were achieving as a result of a historically long expansionary cycle of housing.

Consequently, what we see now is a slowing of the pace of the housing market, or a natural cycle as the market moves toward equilibrium. As for the pundits preaching doom and gloom about housing and real estate values, too many people are making comparisons to the Great Recession without recognizing today’s underlying factors that support a healthier market.

Let’s take a look at statistical comparisons between 2022 and 2008 based on national data:

2008 vs. 2022 (National data provided by National Association of Realtors)

Total Payroll Jobs 

130 million in 2008 vs 153 million in 2022

Active Homes For Sale

3.8 million-4 million in 2008 vs. 1 million-1.2 million in 2022

Mortgage Delinquencies (% of Total Mortgages)

10.1% in 2008 vs. 3.6% in 2022

Homes in Foreclosure 

4.6% in 2008 vs. 0.6% in 2022

Distressed Home Sales

30%+ in 2008 vs. 1%-2% in 2022

Locally, we have long used employment as a leading indicator whenever we forecast the health of our real estate market. It is important to understand that employment has rebounded well, returning to pre-pandemic levels, reflecting strength in our region’s employment markets and related housing markets. 

Here’s a snapshot of these job market trends:

February 2020 vs November 2022 County Employment Data

Unemployment Rate

• Weld County 3.0% in February 2020 vs. 3.5% in November 2022.

• Larimer County 2.7% in February 2020 vs. 2.8% in November 2022.

Total Employed

• Weld County 164,206 in February 2020 vs. 163,951 in November 2022.

• Larimer County 199,546 in February 2020 vs. 208,157 in November 2022.

As we embark on 2023, the pivotal dynamic at play in our market is the Federal Reserve’s inflationary fight. The continued decline in inflation — as well as recent relief in mortgage rates despite Fed increases — are positive trends as we look ahead. We have experienced four straight weeks of mortgage rate declines dropping from the 7% range on a 30-year fixed rate mortgage to low 6%.  Over the past six weeks we have seen roughly a 10% improvement of affordability for borrowers given the nearly 1% decline in rates. This will continue to help bring stability and improved opportunity for homebuyers. The underlying supply-and-demand economics and improving rates will bring further stability to housing prices.  

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.

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