February 3, 2023

Wells: 2023 poses obstacles, opportunities for NoCo real estate market

Predicting how the real estate market will perform in any 12-month period is always a challenge; recent years certainly reinforce that understanding. But, by combining local market experience with a grasp of prevailing trends, we can construct an educated outline for what will influence Northern Colorado real estate in 2023. Here are four topics to consider:

1. Strong employment hints at healthy market in the future 

Employment is a reliable tool for forecasting the strength of our regional markets. Job growth typically predicts housing demand about 12-18 months later — and conditions at the end of 2022 suggest that employment across the region remains healthy.

In Larimer County, employment has rebounded from the pandemic-caused downturn and even surpassed pre-pandemic levels. The county’s employment rolls have increased by 3.7%, or an additional 7,5111 people employed, since February 2020. In fact, Larimer County has exceeded the state’s employment growth of 3.1% during that same time period. Unemployment in the county registered at just 2.4% at the end of 2022 compared to 2.8% in February of 2020. Weld County ended the year 596 jobs shy of the pre-pandemic employment totals of February 2020. At 3%, Weld County’s jobless rate is slightly higher than Larimer County; but both counties appear to be adding jobs and rebounding from the pandemic slump. There are no signs on the employment side that suggest trouble in the housing market for the coming 12 months. 

2. Slowing inflation could lead to stronger demand

As the fight against inflation continues in early 2023, expect Northern Colorado’s housing market to go along for the ride.

We are at an important pivot point in the Federal Reserve’s inflation fight. Over the second half of 2022, signs started pointing to a downward trend in inflation; the CPI (Consumer Price Index) reached a high point of 9.1% in June, then declined to 7.1% in November and 6.5% in December. As the Federal Reserve continues to increase short-term rates, it appears this approach has gained some traction and is easing inflationary pressures. Expect inflation to follow a slow but continuing downward path in 2023. Housing activity in the first half of 2023 will be slower year-over-year. But as consumer confidence strengthens around housing, the third and fourth quarters should witness improved conditions.

3. Expect further shortages in housing supply.

As the market shifted in the back half of 2022, many predicted the inventory of homes for sale would grow substantially. While supply has increased relative to 2021, the market is still tight. Compared to December 2019, there were 47.8% fewer homes for sale in Larimer County in December 2022: just 695 compared to 1,333 in 2019. At the same time, Weld County’s inventory in December 2022 was down 24% from December 2019, or 799 compared to 1,052.

Another factor in the supply side is builder confidence, which has declined throughout 2022 due to higher interest rates, unpredictable supply chains, and a shortage of skilled labor. The National Association of Home Builders forecasted a 25% to 30% decrease in nationwide housing starts in 2023, from about 1 million annual starts last year to about 700,000 starts this year. Expect these challenges listed above to persist in 2023, leading to reduced sales numbers while also keeping prices stable for our region. To start 2023, builder confidence has improved in January, a first in more than 12 months in a survey of the National Home Builders Association. 

4. Mortgage rates may relax as year unfolds

Perhaps the most significant real estate story in 2022 will continue to dominate headlines this year.

Rising mortgage rates slowed demand and reduced affordability for many prospective buyers last year. But since average mortgage rates topped 7% for 30-year fixed-rate loans in late 2022, we have seen rates gradually decline into the range of 6.25% to 6.5%. Most leading economists are forecasting rates to level off later in 2023, dipping into the range of 5.5% to 6%. However, gone are the days of record-low interest rates.

The new reality of mortgage rates will continue to impede sales activity; many existing homeowners aren’t willing to trade from the rates on their current loans — some under 3%. Nevertheless, as rates stabilize and the psychology of buyers and sellers adjust to the reality of today’s markets — which are still historically low — we will see housing demand rally in the back half of 2023. 

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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