Is the Bond Market Forecasting a Recession Sooner than Later

On more than one occasion when discussing the Denver housing market I have heard “This time is different”. While we have experienced an unprecedented bull market concerning housing and equities since coming out of the Great Recession; it is never different. Unless I missed the memo, business cycles have not ended.

So why this blog today? Well a couple of reasons:

The Bond Market May Be Advising A Recession is Not Far Off:  While I am a real estate broker I do keep an eye on the bond markets as they influence mortgage interest rates. It is well-known interest rates on mortgages have been ticking upwards from historic lows and still, historically are quite attractive at sub 5%. To be honest mortgage interest rates are not what is worrying me, it is what is called The Yield Curve.

While I can probably explain The Yield Curve the following from The New York Times is an excellent simple description:

“The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.

Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.

At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.”

What is worrisome, on the 21stof June (a few days ago) the gap between two-year and 10-year United States Treasury notes was roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years. Of note the Yield Curve fell below zero in late 2007 and the Great Recession started soon after.

Ok, so there is a risk of a recession. A layperson may argue the Yield Curve is not accurate HOWEVER it has predicted recessions over the last 60 years as noted by research conducted by the San Francisco Federal Reserve which can be found via the following link

However to be fair interest rates on long-term bonds have been somewhat manipulated downward due to worldwide central bank interventions i.e. long-term bond buying to shore up economies and keep interest rates low. Thus one could suggest and I partially buy into the idea that the flattening yield curve may be somewhat artificial and not truly representative of the economy’s future course.

Case-Shiller Housing Index: One of my favorite monthly reads and this month’s numbers are nothing new as the same cities continue to hold the top spots: Seattle, Las Vegas, and San Francisco continue to report the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 13.1% year-over-year price increase, followed by Las Vegas with a 12.7% increase and San Francisco with a 10.9% increase.

Yet what intrigues me (and I hope the readers of my blog) is the historical perspective coupled with factoring in inflation as noted from the most recent report in italics as follows:

Looking back to the peak of the boom in 2006, 10 of the 20 cities tracked by the indices are higher than their peaks; the other ten are below their high points. The National Index is also above its previous all-time high, the 20-city index slightly up versus its peak, and the 10-city is a bit below. However, if one adjusts the price movements for inflation since 2006, a very different picture emerges. Only three cities – Dallas, Denver and Seattle – are ahead in real, or inflation-adjusted, terms. The National Index is 14% below its boom-time peak and Las Vegas, the city with the longest road to a new high, is 47% below its peak when inflation is factored in.

Thus if you were a buyer in Denver even during the peak in 2006 and managed to hold onto your home through the Great Recession to today, you are actually ahead concerning real and inflation adjusted dollars.

However I have provided evidence of real estate purchased within the last few years when adjusted for inflation actually losing value.  Thus I decided to look at the annualized return on housing within Denver in a style similar to how mutual funds are profiled i.e. 3, 5 and 10 year annualized returns:

For Denver:

  • 3 Years: 8.17%
  • 5 Years: 9.06%
  • 10 Years: 5.20%

Based on the above-annualized return the last 3-5 years have been a great time to buy and sell. However 10 years ago when the recession started as you can see from the above the annualized return was 5.2%. Yes this beats inflation which we all desire, however when compared to the S&P 500:

S&P 500:

  • 3 Years: 7.30%
  • 5 Years: 7.07%
  • 10 Years: 6.76%

Over the longer term equities continue to beat the housing market.  My message is simple; I believe we may be in an inflated housing market in Denver. As I have provided evidence in past blogs the luxury market seems to be showing signs of resistance to upward prices as evidenced with price reductions coming on line sooner and days on market longer even in what should be peak selling season.

Even the middle and lower end of the market seems to be reacting to the interest rate environment with price increases not as dramatic as higher interest rates reduce affordability.

Between the whipsawing of economic news concerning tariffs/trade, the potential for an inverted yield curve, a slow down in the Denver housing market possibly due to interest rates or buyer fatigue due to lack of inventory based on anecdotal observations or just a bull market that is getting long in the tooth; maybe it is time to take profits and if in cash, maybe time to sit on the sidelines and chill.





Is the Market Slowdown Seasonal or an Indicator of Future Activity

As I have always advised clients one will rarely sell at the top of the market or purchase at the bottom. It happens as does winning Powerball i.e. right time, place and lot’s of luck.

Within the last month I have witnessed challenges to the market. At first I thought it was anecdotal based on eyeballing activity on the MLS, the proliferation of For Rent and For Sale signs and in discussions with peers. Yet it finally hit home on a listing I have.

Monaco Place is a popular condo complex located close to I-25 and Hampden Ave. The complex went through some rough times including the infamous shooting of a Denver Police Officer in 1997. During The Great Recession units were being foreclosed on a regular basis. The buildings also fell into disrepair related to the facades, roofs and common areas (most of the complex was built in the early to mid 1970’s). During the period from 2009-2014 one and two bedroom units were selling for under $65,000, this was not an anomaly.

Of course astute buyers saw the value in the complex including a great location, units with wood burning fireplaces (a rarity), low taxes and an HOA fee which includes heat and air-conditioning coupled with large open common areas, deeded covered parking and other positive attributes.

Earlier this year two two-bedroom units sold for new records for the complex:

In March of 2018 3307 S Monaco Parkway Unit C was asking $200K and sold for $215K after just 5 days on the market.

One month earlier in February 2018 3319 S Monaco Parkway Unit A was asking $200K and sold for $216K after just 4 days on the market. Of note, there was a $1,500 concession, thus the true sold price was $214,500.

In April of 2018 3311 S Monaco Parkway Unit C came on the market at $199,900 and closed at $209,500 after 4 days on the market.

The three sales were impressive and many brokers including myself thought those two sales would set a benchmark for the upcoming spring/summer sales season. All three were nicely updated and of similar quality. Based on averages, the three units sold for just over $213,000 with an average 4.3 days on the market before going under contract.

May 2018 saw little activity within Monaco Place, which was surprising with 2oo+/- units and a price point and location that is in high-demand including walking distance to shops, restaurants, supermarket, light-rail, two bus lines and easy access to I-25.

Fast forward to early June 2018. I am asked by a client to place his unit on the market 3351 S Monaco Parkway #F. A nice 2BD/2BA on the top floor of one of the south-central buildings adjacent to parking, steps from the indoor pool/workout facilities and the coin-op washers/dryers just steps from the entry.

The unit was renovated including new paint, flooring including wood and carpeting, replacement of the hollow core with solid doors, kitchen renovation including tile backsplash, granite counters and stainless steel appliances. The bathrooms also remodeled with granite and wood and all updated electrical. The unit, a top floor also offers vaulted ceilings and views onto the open-space surrounded by mature trees thus insuring privacy.

Based on the sales comps we wanted to be fair yet aggressive thus on June 6th we placed on the market for $209,900. The asking was based on the prior 3 sales as noted earlier in the blog.  Showings were limited and little interest. We were surprised again based on recent re-sales.

After 2 weeks we adjusted the price to $199,000 coming in just under $200 PSF. Showings have increased and multiple brokers have advised offers will be sent in the immediate future.

I am confident we will have the unit under contract before the end of the week.

My concern is as follows:

  • Were we overly aggressive pricing at $209,900? While the other three units came on at $199,900 and $200,000 they all sold for above $210,000 or more than 5% over asking. Even at $209,900 we were priced lower than at the price the past 3 re-sales closed.
  • Did the 5% price reduction open the floodgates? Again, based on past re-sales which are within the public domain one could argue instant equity even at the higher asking.
  • Did mortgage interest rates play a role? In Feb 2018 the average 30 yr. mortgage was at 4.32%. In May the rate was 4.61%. As of today (June 19th, 2018) Wells Fargo is quoting 4.75%.

Thus interest rates may be one factor i.e. higher rates increase one’s payment and subsequently can impact housing prices downward over longer periods.  Yet historically interest rates continue to be at record lows.

While the economy continues to gain steam nationally is Denver still experiencing the influx of buyers? At a recent closing in conversation with the title company closer she mentioning having two deals close earlier in the day; both sellers native to Denver moving out of state to buyers moving to the state flush with cash from their out-of-state sale. It seems the blockbuster pace in in-migration may actually be slowing and out-migration increasing as noted in the Denver Post last year: More Coloradans Moving Out….

I have provided statistical evidence in previous blogs concerning the slowdown on the upper-tier of the market. While the sale of $1M+ homes may have set records on a pure transaction basis, the reality is prices on the upper-end are stagnating and adjusting downward as days on market are increasing. And while the overall market set records for average and median home prices during the beginning of the 2ndquarter was that the top?

Monaco Place by most measures is an affordable opportunity where one can purchase with a monthly payment that is less than comparable rent.  Yet to generate activity my seller had to reduce his asking by 5% now at 7.5% less than comparable sales in the 1stand beginning of the 2ndquarter.

Is this a seasonal shift i.e. summer vacations or a signal that the market is plotting a new course? Only time will tell. However while the spring season used to be known for sizzling activity so far this season like the weather has been cool and mild.

Will keep you posted when the listing closes and what the final sales price will be.

Wish me luck.