2023 Real Estate Market Outlook

2023 is here we are eager to see how this year will unfold!

There are lots of things at play that continue to impact our market. We have the headline-grabbing interest rate hikes, continued low inventory numbers, some buyers waiting on the sideline to see if prices will plummet, and a building industry that has slammed on the breaks. One thing is clear- the industry as a whole has not been very successful in anticipating what will happen in the market in the short term. Pundits say we can expect it to zig and then it zags.

These factors leave us with plenty of questions. So what can we tell about the market? This month's focus is on buyer demand.

Mortgage interest rates started 2022 at 3.1% and ended the year at 6.5%. Here is a graph of the past two years.

This doubling in interest rate translates to a 35% increase in a buyer's monthly mortgage payment. That's quite the change in such a short period of time. It would be reasonable to expect that such a change would result in some drop in home values to account for the increased costs that buyers are having to bear. However, that isn't what has played out. Take a look at how home values in the Boulder and Denver metros have fared during that same period below. (Click on the graphs to enlarge them.)

As you can see, home prices in the Boulder and Denver areas were flat or actually slightly increased. Yes, home values have dropped 10-15% from their peak in spring, but some of that drop can be accounted for due to seasonality. You'll see in the year prior when interest rates were stable, there is a similar, albeit less intense, drop off as the seasons changed. If we assume about half of that drop-off can be attributed to seasonality then the rapid rise in interest rates has only lead to around a 5% drop in home prices from where we would have expected them to finish without a major change in interest rates.

Simply put, buyers at the end of 2022 are paying roughly 35-40% more for a home than buyers were at the beginning of the year.

That being the case, surely one would think that homes would be selling less quickly. However, although we've seen an increase in days on market in the fourth quarter, it is no more so than what we see in a typical winter season. See how 2022's increase in days on market compares to 2017, 18, and 19's winter seasons below.

Days on Market- Boulder and Denver

Interestingly, after a sluggish fall in which inventory numbers did increase for a short time, we are now back down to ~1 month of inventory in our area.

Months Supply of Homes for Sale-Boulder and Denver

It seems clear, that for the moment at least, many buyers have accepted that although homes are considerably more expensive they were last year, they are going to move forward with a purchase anyway.

Why haven't higher interest rates had a bigger impact? Here's our take.

First, we still have an overall shortage of housing. When one buyer drops out of the buyer pool due to affordability issues, there is another one who needs a home ready to take their place.

Second, the rapid rise in home values over the past couple of years have left families with large chunks of equity that they can now put towards home purchases. It is common for a parent to use a refinance or a HELOC to help a first time home buying son or daughter lower the monthly payments on their new mortgage. This can serve to largely nullify the increase in payment.

Third, and this is likely the most significant reason, we aren't seeing widespread job losses. It's true that we are seeing some losses in the tech sector but it appears that with the job market as it is now, and with the equity that so many folks have in their homes to fall back on, our market is holding up in the face of increased interest rates.

Here are the city-by-city numbers:

Median Closed Price- Boulder County- Single Family Homes

Median Closed Price- Denver Metro- Single Family Homes

Median Days in MLS- Boulder County

Median Days in MLS-Denver Metro

Months Supply of Homes for Sale- Boulder County

Months Supply of Homes for Sale- Denver Metro

Here is what else we're seeing this winter:

-While we certainly saw a drop off in buyer demand in late fall, it was short lived. Since interest rates peaked in the fall, there has been a continual flow of interested and serious buyers in the market.

-Buyers are now frequently negotiating credits in the form of interest rate buy downs and seller cash concessions.

-Showings activity has leveled out. At its current level, there is enough buyer activity to keep sellers from feeling the anxiety that would motivate them to make significant price drops.

It seems as though this year will be all about buyer sentiment. If interest rates tick up again and a recession comes to fruition, we may have a year that feels sluggish like this last fall did. If rates stay lower and the job market stays strong, it may feel much like a normal year.

No matter how the year plays out, you know we will keep you informed!