Yielding Housing Insights

Yielding Housing Insights_EnergyLogic Blog

What is the yield curve, what does it mean when it’s “inverted,” and why is it important to the residential construction industry?

Aside from coverage of stock market volatility in the last two months, financial media has written volumes dedicated to the shape of the yield curve and what it means for the broader economy. Some have argued that an inversion signals a coming recession, while others assert that it’s merely a small warning that can be misleading in the midst of an otherwise robust, sustained economic expansion. What’s been largely missing from the popular conversation is a discussion of what exactly the effects may be on homebuilding and mortgage lending.

First, a brief explanation of what the yield curve is and what it means when the curve inverts. Basically, the yield curve is the difference in interest rates for bonds of similar risk across different durations. The most commonly-followed yield curve is that of U.S. Treasury bonds, which currently looks like this:

It’s upward-sloping, which make sense intuitively because the borrower should have to pay more to the lender in order to keep borrowed money for longer, as the risk to the lender is greater. In this case, the government (borrower) pays a lower annual rate to borrow for a month than they do to borrow for 30 years. This is called the “term premium.”

If you look closely, you’ll see that the curve is not upward-sloping throughout. This is the “inversion” that is referred to; specifically, the going rate for 1-year Treasury bonds is currently higher than the rate for 3-year bonds:

A number of things are baked into these rates, including expectations for economic growth, inflation, monetary policy and government spending. Broadly speaking, an inversion is thought to be a signal of a coming recession because it means that investors are betting that growth and investment returns will be higher over the short-term than over a longer period.

For a more detailed discussion of the circumstances determining the current yield curve, see this helpful post from the Brookings Institution. Keep in mind, the current yield curve inversion is modest and has occurred between the 1- and 3-year bond notes only. A steeper inversion, or one that encompassed a wider portion of the yield curve, would be a stronger signal of economic woes to come.

So what does the yield curve inversion mean specifically to the homebuilding and mortgage lending industries? To understand this we need look no further than the Federal Reserve’s October survey of banking professionals, the Senior Loan Officer Opinion Survey on Bank Lending Practices. From the report:

Banks were also asked how their lending policies would potentially change in response to a hypothetical moderate inversion of the yield curve [3-month to 10-year notes] prevailing over the next year. Significant shares of banks indicated that they would tighten their standards or price terms across every major loan category if the yield curve were to invert… Major shares of banks indicated that their bank would interpret this scenario as signaling a less favorable or more uncertain economic outlook and as likely being followed by a deterioration in the quality of their existing loan portfolio. In addition, major shares of banks reported lending would become less profitable and their bank’s risk tolerance would decrease [emphasis added] in this scenario.

This last change is concerning because banks borrow in the short-term and lend in the long-term. For example, banks will “borrow” from balances held in savings accounts (considered short-term assets) and pay the lender a very small interest rate. They then loan these funds for mortgages (long-term) where they can receive a much higher rate. Banks make money on the spread between the interest they pay when borrowing short and the interest they receive when they lend long. Since these rates are primarily driven by the “risk-free” rate – U.S. Treasuries being the benchmark – a steeper yield curve inversion would make mortgage and acquisition, development, and construction lending a losing proposition, and banks would rein in lending activity. That is, they could just buy “risk-free” bonds versus doing more risky mortgage lending.

The effects of a substantial yield curve inversion on homebuilding are less clear. Some builders self-finance and their ability to fund operations would not be contingent on bank lending. Moreover, for-sale housing supply remains tight both in Denver and nationally, with just 1.9 months of supply in the Denver metro area in November. Both the pace of residential construction and the number of delinquent mortgages remain historically low, which support the argument that there is no imminent glut of housing. Absent the risky lending and over-building from the housing boom a decade ago, there needn’t be a big drop in homebuilding volume in order to maintain a balanced market.

On the other hand, inventories are rising (albeit from a low level), sales are starting to fall, and mortgage rates have risen to a level not seen in over seven years. Home price gains have outpaced wage growth for years and it’s likely that low interest rates are priced-in, meaning that buyers have little wiggle room if mortgage rates continue to rise. The Urban Institute’s Housing Credit Availability Index shows us that banks have become very risk-averse in their lending practices in the last 10+ years and remain so. If the bears are right and we see a more severe yield curve inversion followed by recession, then there would be a further contraction in both the supply and demand for housing credit. In this scenario, home sales would fall but the relative scarcity of housing suggests that demand for rental units would persist. In case this course plays out, homebuilders would be wise to concentrate efforts on housing that is similarly attractive both for-sale and for-rent.

The US Treasury bond yield curve has inverted in one small range, but this does not definitively mean a recession is coming soon. We plan to continue monitoring the yield curve for a more severe inversion, since we know that a severe inversion would curtail lending, affect the type and quantity of housing demand, and provide stronger evidence of a coming recession.

Colorado Housing Market Forecast – November, 2018

energylogic colorado housing market forecast november 2018

November’s Colorado Housing Market Forecast includes economic indicators, as well as single-family, and multi-family permits for metro Denver, Colorado Springs, and Northern Colorado markets. 

November 9, 2018

Denver-Aurora-Lakewood, CO – Economic Data


Denver-Aurora-Lakewood, CO Economic Indicators

Denver single-family permits are trending down, totaling 1,024 in August and 858 in September. However, despite underperforming the forecast, the decline appears to be seasonal, with the permit totals little changed from one year ago (1,007 in 08-2017 and 902 in 09-2017). On the other hand, multi-family permits have plummeted in the second half of 2018, and with 180 permits approved in August and 1,440 in September, the six-month average fell to a rate of just 466 per month. Denver multi-family units were being approved at a rate of over 1,000 permits per month at this time last year.

Sounding like a broken record at this point, the median sales price for Denver housing continues to outpace wage growth. Redfin reported that half of Denver homes sold in September went for more than $396k, up 6.2% from a year ago. My biggest concern moving forward is buyer exhaustion, as rising interest rates continue to stretch buyers’ budgets, with Zillow reporting that the typical new mortgage payment increased by 15.4% in the last year. (1) A former Chair of the Federal Reserve once joked that the Fed’s job is “to take away the punch bowl just as the party gets going.”(2) It’s debated whether tariffs are deflationary (due to a slowdown in economic activity) or inflationary (due to higher prices for both producers and consumers), but on balance this month’s robust jobs report with 250k jobs added and wage growth of 3.1% makes it likely that the Fed will continue tightening in the near future, with the central bank slated to increase the benchmark federal funds rate for a fourth time this year in December.(3)

Moreover, we can expect that interest rates will continue to see upwards pressure with the Fed accelerating its pace of balance sheet normalization. In short, to stabilize financial markets the Fed bought up troubled assets such as U.S. Treasuries and mortgage-backed securities (MBS) in the wake of the financial crisis, and consequently, the Fed’s balance sheet ballooned from under $1T in 2007 to over $4.5T in 2014. In the last year, the Fed has begun to allow maturing assets to roll off the balance sheet instead of reinvesting the proceeds.(4) The pace of this process will accelerate each quarter. As such, a large buyer of Treasuries and MBS has left the market while, simultaneously, the increased 2018 Federal budget deficit must be funded via greater sales of Treasuries. Higher supply and reduced demand for Treasuries will pressure the price of those bonds, causing rates to continue increasing into 2019.

Poor housing affordability may be starting to suppress sales in the Denver housing market, with the number of homes listed for sale at its highest level since fall 2015. Available inventory would provide for 1.9 months of supply at the current sales pace, which is the highest measure since early 2016. However, with 1.9 months of supply, this is still solidly a home sellers’ market and Denver remains one of the tightest major housing markets in the nation. It will be important to continue monitoring supply and pricing trends in the coming months to determine just how much higher interest rates and home prices are affecting the market.

Still, there are reasons to remain optimistic. Denver employment growth has stayed strong, with the metro area adding 39k jobs in the last year versus just 20k new housing units permitted. Denver unemployment, while creeping upwards, remains very low, and national measures of consumer confidence are at their highest levels in 15 years or more. There’s clearly still strong local demand for housing, but the question is whether buyers can stomach ever-higher prices — and whether, if prices do fall with rising interest rates, builders can rein in construction costs to keep building at lower price points. Economic expansions don’t die of old age, but this one is getting long in the tooth. It remains to be seen whether the party will continue once the Fed “takes away the punch” by ending this extraordinary period of the accommodative monetary policy. Looking forward, our forecast model suggests we’ll see single-family permit totals of 1,076 in October, 998 in November, 1,019 in December, and 1,029 in January 2019. With Denver rental vacancy below 4%, we should expect a rebound in multi-family permits. The forecast is for 943 MF permits per month for the six-month period ending January 2019.

(1) https://www.zillow.com/research/mortgage-payments-21610/
(2) https://www.nytimes.com/2007/12/23/business/23view.html
(3) https://www.cnbc.com/2018/11/02/us-created-250000-jobs-in-oct-vs-190000-jobs-expected.html
(4) https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Denver-Aurora-Lakewood, CO Single-Family Permits Forecast


Denver-Aurora-Lakewood CO Single-Family Permits Forecast

Denver-Aurora-Lakewood, CO Multi-Family Permits Forecast


Denver-Aurora-Lakewood CO Multi-Family Permits Forecast

Colorado Springs, CO – Economic Data


Colorado Springs, CO Economic Indicators

Colorado Springs, CO Single-Family Permits Forecast


Colorado Springs CO Single-Family Permits Forecast

Colorado Springs, CO Single-Family Permits Forecast


Colorado Springs CO Multi-Family Permits Forecast

Fort Collins, CO – Economic Data


Fort Collins CO Economic Indicators

Fort Collins, CO Single-Family Permits Forecast


Fort Collins CO Single-Family Permits Forecast

Fort Collins, CO Multi-Family Permits Forecast


Fort Collins CO Multi-Family Permits Forecast

Greeley, CO – Economic Data


Greeley CO Economic Indicators

Greeley, CO Single-Family Permits Forecast


Greeley CO Single-Family Permits Forecast

Greeley, CO Multi-Family Permits Forecast


Greeley CO Multi-Family Permits Forecast

Economic Data Definitions

SFD_units This is the number of single-family housing permits approved in the metropolitan statistical area (MSA) each month, reported by the Census Bureau.
2to4_units This is the number of housing permits for units in buildings with two to four total units approved in the MSA each month, reported by the Census Bureau.
MF_units This is the number of housing permits for units in buildings with five or more total units approved in the MSA each month, reported by the Census Bureau.
total_employment This is total employment in the MSA, reported each month by the Bureau of Labor Statistics.
total_employment_yoy This is the change in total employment in the MSA from one year ago.
unemployment_rate This is the U-3 unemployment rate for each MSA reported by the Bureau of Labor Statistics.
construction_employment This is total construction sector employment in the MSA, reported each month by the Bureau of Labor Statistics. This varies by availability in each location, some MSAs report residential building construction employment while some report only construction employment as a whole.
case_shiller This is the S&P CoreLogic Case-Shiller Home Price Index for the MSA. This is a repeat-sales index, tracking price changes for individual homes that have sold multiple times. Jan. 2000 = 100.
FHFA_HPI This is the Federal Housing Finance Agency’s House Price Index for the MSA. This is a repeat-sales index like Case-Shiller, but with coverage for more MSAs.
NAHB_HMI This is the NAHB/Wells Fargo Housing Market Index (HMI) for the Census Region. The HMI is a survey of NAHB members measuring sentiment about the residential construction industry. The HMI is a diffusion index with values between 0-100; sentiment is negative at values below 50, neutral at 50, and positive over 50.
UM_CSENT This is the University of Michigan’s Index of Consumer Sentiment. Survey data is used to estimate consumer optimism or pessimism. This is a national statistic. Mar. 1997 = 100.
construction_price_index This is the Construction Price Index as reported by the Census Bureau, which gives an account of the costs to builders when building new homes. This is a national statistic. 2005 = 100.
RVR This is the rental vacancy rate for the MSA as reported by the Census Bureau’s Housing Vacancies and Homeownership survey. These data are released quarterly and we use linear interpolation to estimate monthly figures.
hcai This is the Housing Credit Availability Index published by the Urban Institute.  A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, while a higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks.



Doom, Gloom and Reasons for Housing Optimism

Housing market media coverage image

Recently, news outlets have written that home construction and sales are plunging and crashing, with some arguing that we’re at “peak housing.”  We’re not so worried yet.  We could be due for some economic pain if the trade fight continues to escalate, and debt is an increasing issue for all parties.  In our opinion, there’s been such an unmet demand for housing that there shouldn’t be a huge drop in volume.

There may be some price pain as marginal buyers are discouraged by increasing payments with rates rising, though.  Builders will have to get the right product mix, which might mean a continued shift away from large, luxury units, as decreased purchasing power means buyers across the board will likely settle for less house than they otherwise would have sought due to caps on state and local tax deductions, rising mortgage rates and tariffs on imported lumber, steel, and aluminum.  Trulia recently noted the mismatch between those seeking entry-level housing and its availability, while the supply of affordable housing has dwindled in places like Colorado Springs and DallasNAHB research showed new home sizes increased in the first quarter of this year, but floor areas have fallen generally from a peak in 2014.

We like what Bill McBride at Calculated Risk has written about housing markets recently, arguing that existing home sales will be mostly flat over the next few years, but expecting continued increases in new home construction and sales.

It seems valuable to look at the year-over-year (YoY) change in permits and starts; on a rolling six-month basis, both single- and multi-family are still trending up.

year over year single family and multi family permits graph

US housing permits and starts graph

Still, it looks like June was the first time since 2016 that SFD starts were flat YoY, so it’s worth watching:

US housing permits and starts graph

Another hunch is that the market’s view is being affected by seasonal adjustments.  With housing so tight in recent years, it feels like there’s been some smoothing of seasonality.  If builders are ramping up activity in the winter months, “pulling forward” units, then they will both permit and start fewer units in the summer months as they work to complete the units begun earlier in the year.  We can look for evidence of this by taking a subset of years of housing data and comparing trajectory, for absolute numbers:

single family dwelling_starts_units graph

single family dwelling_starts_units graph

The view is clearer if we set values so that January of each year equals 100:

single family dwelling starts values

More consistent volume throughout the year, as is evident by looking at the standard deviation of the indexed series for each year, means that construction in the winter months will look comparatively strong and construction in the summer months will look comparatively weak.  In other words, if, say, 75k units in January has in the past been seasonally adjusted to a 1.2M SAAR, and 110k units in June is also adjusted to a 1.2M SAAR, then a smoothing of construction volume across the year could mean we interpret the data as a fantastic January and a terrible June, without adjustments to seasonal adjustment methods.

This last hypothesis needs more exploration, but there’s evidence that homebuilding isn’t crashing yet, particularly when we look at the total number of units under construction.  Note, however, that latest Census data for units under construction is from January 2018, so this deserves to be monitored in coming months.

privately owned housing units under_construction

About the Author

Jonathan Scott

Data Scientist

Email Jonathan


Jonathan is fascinated by the intersection of human behavior and economic outcomes, and his work helps to increase objective decision making by reducing cognitive bias. Jonathan studied Economics, History, and Philosophy at CSU.

EnergyLogic’s service offering expands to include National Green Building Standard (NGBS) Certification

Have you heard about NGBS Certification

EnergyLogic is adding National Green Building Standard (NGBS) Certification to our suite of “above code” energy-efficient and green building programs.

The National Green Building Standard™ certification goes well beyond saying that a home is energy-efficient; it provides independent, third-party verification that a home, apartment building, or land development is designed and built to achieve high-performance in six key areas:

  1. Energy Efficiency
  2. Water Efficiency
  3. Resource Efficiency
  4. Lot Development & Site Design
  5. Building Operation & Maintenance
  6. Indoor Environmental Quality

While any residential project can earn the NGBS Certification, it has significant value for multifamily projects that need to meet Housing and Urban Development (HUD), or other governmental green building requirements.

With bronze, silver, gold, or emerald levels, our partners can pursue a certification level that is appropriate for their project and achieve a nationally recognized and rigorous certification.

How do the various certification levels compare?

NGBS certification level comparison graph
Source: Home Innovation Research Labs

Discover more of what the NGBS Green Certified promise means for you.

If you would like to learn more about NGBS or have a project which may be appropriate, please contact Rusty Buick, Director of Sales at EnergyLogic.

Who to Contact:

Rusty Buick
Director of Sales/Customer Relations

Email Rusty

How can you help NGBS Green?

EnergyLogic is a National Green Building Standard (NGBS) Green advocate. We believe it is affordable and among the most rigorous green building rating systems available, and we believe that developers should have a choice of green certification programs.

The City of Denver is currently collecting comments on their Green Roofs Building Policy Proposal. In short, they have proposed that as an alternative to the mandate for a green roof, new and existing buildings are allowed to install a cool roof and elect for LEED Gold or Enterprise Green Communities certification.

The Denver Department of Public Health and Environment (DDPHE) is leading a formal stakeholder engagement and public input process to review and possibly modify Denver’s Green Roof Ordinance. Based on the ICC/ASHRAE – 700 National Green Building Standard (NGBS), EnergyLogic has respectfully requested that NGBS Green Certification be recognized as a named alternative to LEED Gold or Enterprise Green Communities as one of the allowable green certification compliance options for new or existing building to comply with the Denver Green Roof requirements.

Will you join us in supporting NGBS?

Please consider sending comments requesting that NGBS Green is included as a certification option for their policy.

Click here for a sample letter on Denver Green Roof Proposed Policy that you are free to use or edit to help make your submission easier.

Comments are due by noon on June 3rd and can be sent to Katrina Managan via email:

Click here to email Katrina Managan


EnergyLogic would like to thank you so much for your consideration to join forces and support NGBS!


If you have any questions, please reach out to Michelle Foster:

Michelle Foster | Vice President, Innovation Services

400 Prince George’s Blvd. | Upper Marlboro, MD 20774

P: 301.430.6205 | C: 240.997.8027

HomeInnovation.com | Follow us on Twitter @HomeResearchLab @NGBSGreen

Find a better place to call home: ngbs.com