Mortgage rates, affordability and the future of home prices
If you’ve been following the news lately, you must know that mortgage rates have been going WILD. On the graph below, Redfin had to go back to the ‘80’s to find comparable rates. There is no doubt that there will be consequences to this historic change in financing conditions. The Bank of England had to rescue the financial markets last week as the bond markets attempted to give up on them, reminding everyone that a liquidity crisis could happen in investors loose confidence.
The real estate market in the Roaring Fork valley is not immune to interest rates and this is what I see right now on the ground.
Affordability is plummeting:
There is no doubt that the demand is high for real estate in our valley. How many can afford it though? Affordability is down to record low. Local buyers unfortunately are priced out of a large portion of the market. Yet they remain very motivated, and they make the lower end of the price range still very competitive. It will remain so as long as the job market is as strong as it is right now.
Demand from wealthy out-of-towner is slowing down considerably
The affordability index is calculated by computing the average local income and the price of homes. The affordability being low means that it’s hard to buy a home with local wages. But the demand for real estate in our valley isn’t only local.
We have a lot of second home buyers coming from the front range and from out of state. Or out-of-towners relocating here and who’s income isn’t counted yet in the local average. The million dollars questions therefore is “are people still wanting to move into the valley at today’s price?”. There is a lot going into the answer to that questions. In a nutshell, our valley is incredibly attractive for front rangers because it’s far enough that it doesn’t allow for day trips from Denver and we avoid the crowds, yet it’s close enough to be perfect for a weekend trip. This demand is here to stay, as Denver and the front range grows.
Out of state buyers are a bit more volatile, because they see owning a home here as an extra, something they desire but might not need. Their interest goes up when money and financing are abundant, and down when it’s tighter. We can assume that right now they are few to be actively looking for a home. These trends can be verified by looking at the trajectory of different current listings. Homes listed above $1.5 million in the mid-valley are hard to sell due to uncertainty in the financial markets. Homes around a million Dollars that can qualify for short term rentals are quick to sell, in large parts due to demand from the front range and other areas that you can drive from, or fly from directly (TX…).
Low inventory is probably here to stay, maintaining prices high.
The rise in interest rates have cooled off the demand by hurting affordability. In the mean time, it’s keeping the offer low. Imagine that you own a house worth $1,000,000. Your debt on it is $500k and your refinanced it last year to take advantage of a 3% interest rate. You monthly mortgage payment before taxes and insurance would be $2,108.02. Now if you sell that home to buy another another one for $1,000,000, and finance $500k of it as well, your new payment at today’s interest rate (6.75%) would be $3,242.99. An increase of 50%! There fore who would want to sell their real estate right now? A debt at 3% is an asset. It’s (a lo) less than inflation and it makes you money. In fact, monthly mortgage payment have increased by over 50% since last year as reported in this Redfin article.
CONCLUSION
Locally, the decline in affordably and of liquidity are bad indicators for the real estate market as it weakens demand. On the other hand, inventory as been thinning even more. Price is the result of offer and demand, and with both offer and demand getting lower, we might just be in for a slow and expensive real estate market for the years to come.
