Colorado has the biggest gap between the average mortgage rate borrowers are holding and what the market is which could create a bigger disincentive to sell, according to a study from U.S. News & World Report. Why does Colorado have the largest “golden handcuffs” in the country? What does this mean for real estate prices? Will the golden handcuffs help Colorado real estate outperform the rest of the country?
What was in the data on Colorado’s Golden Handcuffs?
Colorado has the widest mortgage rate lock-in gap in the country, with a spread of 3.45 percentage points between rates on new and existing mortgages. Colorado homeowners have the lowest existing mortgage rates of any state at 3.8%, while new mortgage rates using typical terms in Colorado are on par with the national median of 7.25%.
Why does Colorado have the largest lock-in gap?
The average mortgage in Colorado is 4 years and 9 months old, while the average mortgage nationally is a year older. A larger share of Colorado mortgage holders were likely buying homes and refinancing existing mortgages in 2020 and 2021 when interest rates were at historic lows.
Think back to the pandemic and there was a huge rush to places like Colorado from 2019 to around 2021/22 which led to lots of transactions when rates were at their lowest levels. This trend has radically slowed down as buyers transitioned to lower cost options like GA, TX, etc…
“Golden Handcuffs” is a short term phenomenon especially in high cost areas like Denver
There has been a theory that the ultra low rates would prevent inventory from rising and furthermore we have a huge inventory shortage which will keep prices from falling. Unfortunately, this narrative is only partially true in the short term.
Depending on the economy if we have a very shallow recession and rates peak soon and then fall back shortly, the golden handcuffs scenario will likely hold up as property owners wait out the market.
The reality is that rates will likely remain higher for longer and the recession could also be deeper and longer. Higher rates for longer are the base case for most economists which means that inventory will ultimately increase for 3 reasons:
- Life Happens: Divorce, Marriage, kids, deaths, etc… In the short term if there is an economic hiccup most will hold on for a little while, but you can’t plan life around the economy and eventually life happens. From Marriage, Divorce, job changes, kids, empty nesters, deaths, etc… all these events will ultimately cause a sale or purchase of real estate which will cause real estate to turn. How extensive these events are will depend on how long the recession lasts and how high rates remain.
- Unemployment rate will increase: It is not possible to get inflation under control without addressing the wage pressures in the labor market. We are already seeing many high tech companies cut headcount from Google, Microsoft, Amazon, etc… As rates rise, the unemployment rate will also rise which will force people to give up the golden handcuffs. Although we have yet to see this occur in the labor market data, I can say with 100% certainty it will happen, it is just a matter of time.
- Migration back/out: As the unemployment rate rises, the bargaining power of employees will decline. You will see more companies requiring workers back in the office and/or adjusting pay to compensate for the location. Denver was recently ranked the second largest net “out migration” destination in a redfin study which will further crimp demand.
What happens to real estate prices in Denver when Golden Handcuffs loosen?
There are two primary scenarios that could play out depending on the depth of the next recession and how high the federal reserve must raise rates
- Golden Handcuffs buffer the market a little: Under this scenario sellers stay put longer buffering the amount of inventory coming online. This is the optimistic case which would lead to about a 10% decline in prices year over year sometime in 26 is my best guess.
- Base case of higher rates for longer prevails: If inflation doesn’t come down as quickly as the market is pricing in and the federal reserve is forced to keep rates high or even raise rates higher for longer the odds of a recession increase. Under this scenario, look for prices to fall around 15% in Denver metro. The biggest losers under this scenario will continue to be condos as higher rates coupled with higher HOA dues are hurting the condo market more than single family homes. Look at the chart below, the monthly supply of condo inventory is up 28% which means the only way for prices to go with the rising inventory is down.
Golden Handcuffs loosen leading to lower real estate prices in Colorado
Just like earlier in the year where everyone was stating that we were short millions of houses and yet inventory is now increasing substantially (not from new construction), there is a big question about how tight the “golden handcuffs” of low rates will be. Unfortunately, golden handcuffs are a short-term phenomenon so it is critical to analyze what happens when they loosen.
My base case scenario is for a drop of around 10% in real estate prices, with a probable scenario of a drop as large as 15-20% (maybe 25% in certain Condos). Remember what happens in Denver typically spreads throughout the state of Colorado within about a year, so brace for a rocky 2025 and 2026 in real estate throughout Colorado.
Additional Reading/Resources:
https://www.denverpost.com/2024/07/15/real-estates-golden-handcuffs-mortgage-rates-colorado/
https://coloradohardmoney.com/why-are-houses-outperforming-condos-in-denver/
We are a Colorado Private/ Hard Money Lender funding in cash!
If you were forwarded this message, please subscribe to our newsletter
I need your help as my goal in writing these articles is to provide the best information/insight on Colorado Real Estate that you cannot get anywhere else! Please like and share my articles on linked in, twitter, facebook, and other social media and forward to your friends/associates I would greatly appreciate it.
Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. He is the owner of Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Glen resides in Colorado, lends in Colorado, owns property in Colorado, and services loans in Colorado which provides a unique real estate prospective of what is actually happening on the ground both in Denver and throughout Colorado. My goal of this real estate blog is to provide an honest assessment of what I see happening in Colorado real estate and how it will impact real estate owners, buyers, realtors, mortgage professionals, etc…
Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the Front range, Western slope, resort communities, and everywhere in between. We also live, work, and play in the mountains throughout Colorado and understand the intricacies of each market.
When you call you will speak directly to the decision makers and get an honest answer quickly. We are recognized in the industry as the leader in Colorado hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games)
Tags: Denver hard money, Denver Colorado hard money lender, Colorado hard money, Colorado private lender, Denver private lender, Colorado ski lender, Colorado real estate trends, Colorado real estate prices, Private real estate loans, Hard money loans, Private real estate mortgage, Hard money mortgage lender, Hard money mortgage lender, residential hard money loans, commercial hard money loans, private mortgage lender, Hard Money Lender, Private lender, private real estate lender, residential hard money lender, commercial hard money lender, No doc real estate lender