The recent rise in mortgage rates could price even more prospective homeowners out of the Front Range housing market.
The average interest rate on a 30-year fixed-rate mortgage has increased sharply inthe months since the election,hitting a two-year high of 4.32 percent in late December, up from 3.54 percent in early November, according to Freddie Mac. Rates have stayed above 4 percent so far this year, averaging4.17 percent last week.
And whilethe change may seem relatively insignificantcompared with historic mortgage rates, it’senough to take a noticeable bite out of borrowers’buying power.
According to a recent analysis by Fitch Ratings, the average millennial homebuyer in the U.S. lost about 9 percent in mortgage capacity between early October and last month, all elsebeing equal.
“For the marginal borrower who’s just squeaking by to qualify, it can make a huge difference in the type of property they can get,” said Bill Warlick, a senior analyst for the credit rating agency.
That’s aparticularly troubling thought in metro Denver’s hot market where homeownership rates continue to fall,inventory remains constrained and themediansale price for a single-family home was $380,000 in January, according to the Denver Metro Association of Realtors.
“There are always buyers right on the margin in every market,” said Lawrence Yun, chief economist for the National Association of Realtors. “In Denver, particularly with rising home values, that in itself is beginning to price people out. On top of that, you’re seeing higher interest rates. It’s a double hit.”
Fitch’s study looked at the median mortgage amount for borrowers under 35 according to the most recent Federal Survey of Consumer Finances— a group of mostly first-time homebuyers who have already seen their mortgage capacity impactedin recent years byrising student loan debt, higher rents, stagnant wages and tighter underwriting standards.
A borrower whose maximum loan amount was the median $120,000 when rates were at 3.42 percent in early October would have watched that same loan fall to $109,000 at 4.2 percent interest, all else being equal, according to Fitch.
In other words, the rise in rates would have eroded$11,000 in buying power.
“When rates go up, payments go up and peoplelose buying power— it’s just simple math,” saidMathew Schulz, president of Firelight Mortgage Consultants in Greenwood Village and a board member of the Colorado Mortgage Lenders Association. “But it’s not just first-time homebuyers. It’s any buyer.”
According to the National Association of Realtors, for every 10 basis point increase in interest rates — from 3.5 percent to 3.6 percent, say — homebuying nationwide decreases by 35,000 transactions a year. For every full percentage point — from 3.5 percent to 4.5 percent, for example — it’s 350,000 fewer transactions, Yun said.
Pencil out the monthly payment numbers andyou can begin tosee why.
According to a recent NAR analysis, in Denver County, where the median home price was$359,485 in the third quarter, a borrower who put 10 percent down and locked in a 3.5 percent interest rate could expect monthly payments of $1,453.
At 4.2 percent interest, an increase of 70 basis points, that monthly payment would jumpby $129. At 5 percent, it’s$284 more a month.
In Adams County, where the median price was $272,764, a monthly paymentof $1,102 at 3.5 percent interest would jump by $98 and $216, respectively.
Of course, that assumes home pricesdon’t also increase, somethingnot likely to happen in the metromarket. The amount varies depending on the source, butmedian home prices in Denver are expected to rise again in 2017, although perhaps not at the double-digit pace they have in recent years.
Nationwide, a Realtor.com forecast puts themedian home price gain at 3.9percent this year, down from an estimated 4.9 percent in 2016.
“From a buyer’s point of view, higher rates are less comfortable, but if they’re still financially capable, the longer they wait, the rates may move even further,” Yun said. “And in a hot market like Denver, prices will certainly be rising further.”
The ultra-low interest rate environment of the last few years is probably over, Yun said. Rates could reach4.5 percent by the end of 2017.
“People should not anticipate that if somehow they wait, the rates might dip down to the super-low conditions,” he said.
Longmont carpenter Thomas Moran, 27, began house-hunting right before the election and said his lender urged him and his fiancee, Hallie, 30, to get their rate locked in as soon as possible.
They closedMonday on a two-bedroom condo-style townhome in Longmont — but not without help from Hallie’s parents, who co-signed the loan. Moran is already planning to build a third bedroom and another bathroom in the unit’s unfinished basem*nt to help build equity.
“We knew if we had the opportunity we needed to get in while we could,” Moran said. “I saw (the rates) going up every week as I was going to deposit my check at the bank. We got in. It was pure luck.”
“Realquick it was looking like I wasn’t even going to be able to afford to live where Igrew up,” he said.
Before prospective buyers throw in the towel, itis worth meeting with a mortgage professional to talk out your individual situation, Schulz said. Programs are still out there that can extend your buying power “a little bit.”
“Until we can create more lower- and middle-income homes, condos and townhomes to buy and can increase that inventory of homes, I almost see that as being more of a challenge to buyers than rates going up half a percent,” Schulz said.
And for those who are still shopping for ahome, there is a silver lining of sorts: Rising rates may actually take some heat off Denver’s super-hot market, Yun said.
Overall, NAR expectshome sales nationwide to be “essentially unchanged” from 2016, with strong job creation counteracting the rising mortgage rates.
“There is less competition among buyers with rising rates,” Yun said. “In that sense, it could be good news forsome potential buyers. But nonetheless, when they look at the bottom-line bill, a monthly mortgage payment is now higher.”
