The good times continue to roll on. Inventory is down and prices are stabilizing and…
Now that Trump has taken the reigns, many policies are becoming clearer including immigration, banking, and the federal reserve’s direction. How will these policies impact Colorado real estate? Will certain areas and price points be hit harder than others? With the changes in policies will borrowers be able to afford residential or commercial real estate?
For this article, I am going to focus on interest rates and expectations of economic policy. In future articles, I’ll touch on immigration’s impact on the Colorado market along with the proposed import taxes. In today’s Denver Post there was an article titled: Many potential homebuyers find Denver and Colorado Springs prices beyond reach. In a recent study, Denver and Colorado Springs had the second and third largest gaps in the country of the mismatch in starter homes. In essence there is a mismatch in the amount of people looking for starter homes (and trade up homes) and the amount of homes available in that price point. For example, in Denver 30% of house searches were for starter homes, yet only 17% of the market were actually in the starter home price point. I’m sure this is no surprise to anyone who has recently looked for a home, Colorado is expensive and getting more expensive. The median home price in Denver is 425,000.
Why is this mismatch important?
This signifies that not only are many buyers getting priced out of Denver and Colorado Springs but many more are “stretching” (using more of their available income) to get into the starter home or move up home. With the torrid pace of home appreciation, incomes are not keeping up with home appreciation. Most folks are not getting 10-15% raises annually which is what would be needed to just keep up with the recent appreciation in Denver (prices are now 49% higher in Denver than they were during the peak in 2006)
What caused this problem?
Basic supply and demand. More people are migrating to Colorado and building is not keeping up with the net migration. Furthermore, the building that is being done is at the middle/high end of the market. With the increased costs in the market (land, labor, water, etc…) it is very difficult for a builder to make money on the starter side of the market in the metro area. This net increase of demand for starter properties and decline in building at this price point has created the mismatch.
What does Trump have to do with Colorado real estate?
Trump has pledged to spend massive amounts on infrastructure, military, etc.. This proposed increase in spending has led to the perception that we will enter an inflationary environment with higher economic growth rates. The federal reserve has also internalized these proposals and created a path of moderate rate increases over the next three years. Remember long term rates are not directly controlled by the federal reserve. Longer term mortgage rates are market driven based on the 10-year treasury. Long and short, long term rates have risen and there is significant anticipation they will continue to rise. The prediction is that they will hit 6% in the next year or so
How will Interest rates impact the market?
I did a quick analysis based on 30 year mortgage rates and the increase in payments for a borrower buying the median home price (I put a link to an excel sheet so that you can play with the numbers to see the possible increase). In a nutshell, the same house will cost $550 more each month. Many borrowers will no longer qualify based on the large increase in payment. In order to qualify for a loan now on the median home assuming no other debt a borrower needs at least 85k if rates increased to 6%. This is a 17k increase in salary that is needed because of the increased rates. Although the table below focuses on the direct impacts to residential loans commercial loans/properties will also be impacted.
|Loan amount||$ 425,000||* assume median home price|
|Payment on a 30 year fixed mortgage|
|Prior rate||4%||($2,029.02)||* Former rate|
|Projected rate||6%||($2,548.09)||*predicted rate|
|36%||optimal debt to income ratio to qualify for a mortgage|
|$519||Increase in payment/month|
|$17,302||increase in salary needed to cover the increase in rates|
|$ 67,634||salary needed with prior rates|
|$ 84,936||salary needed with increased rates|
With prices this high have we created a problem?
With the high prices in Denver (and many other areas throughout the state, including almost every mountain town/resort) many people are going to be priced out of the market. This will encourage borrowers to use “alternative” loans that have lower down payment requirements and/or adjustable rates. If rates increase to 6% as many economists are predicting a large number of borrowers will be priced out of the market
Which areas are impacted the most?
All areas in the state would be impacted by the higher rates. The higher cost areas will be impacted more since mortgages typically take up a larger portion of a buyer’s income in higher priced markets
How do I think it will end?
I don’t think we are in for a total crash, but I do think the market will level off/slowdown from its torrid pace. The million-dollar question is how high will rates really go and how quickly.
Spreadsheet I created for the calculations above that you can manipulate: https://coloradohardmoney.com/wp-content/uploads/2017/02/interest-rate-changes.xlsx
CNBC fed raises rates for second time in a decade: http://www.cnbc.com/2016/12/14/fed-raises-rates-for-the-second-time-in-a-decade.html
The Denver Post: Denver too High: http://www.denverpost.com/2017/02/07/denver-home-prices-too-high/
The Denver Post: Denver housing market leads the nation for appreciation: http://www.denverpost.com/2016/06/07/denver-housing-market-leads-nation-for-appreciation/
Written by Glen Weinberg, COO/ VP 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 the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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