Colorado’s housing market was moving in favor of buyers, but not anymore

When residential mortgage rates crossed 7% last November, home sales slowed sharply, and it looked like the housing markets in Denver and other hot metro areas were finally entering a new and more favorable phase for buyers — lower prices, wider selection and less competition.

But those expectations aren’t panning out, despite another surge in interest rates, due primarily to a lack of enough supply to meet the demand out there. While not as intense as in early 2022, bidding wars are back, some homes are commanding a premium above the list price, and the supply is tightening rather than loosening as the year moves on.

“Potential sellers aren’t selling because they like their sub-3% mortgages and don’t see value in making a move-up purchase right now. Yet, demand for housing remains at an all-time high, and homes are selling at a faster rate than they were in December, January or February,” said Fort Collins-area Realtor Chris Hardy, in comments contained in a monthly report from the Colorado Association of Realtors released on Tuesday.

After peaking in April of last year at $600,000, the median price of a single-family home sold in Colorado started heading lower, getting all the way down to $520,000 in January, according to numbers from the Colorado Association of Realtors. That 13% decline represented genuine relief for buyers on the edge of affordability.

But that downward trend reversed course in February, and in May the median single-family price was back to $575,000, a discount of only 4% from the prior peak. And to make matters worse, rates on a 30-year mortgage, which were at 5% when the market peaked last year, are now closer to 6.7%.

Price gains have returned even though 23% fewer homes sold in the first five months of this year than last, while listings are spending nearly twice as long on the market — 52 days versus 27, though mortgage rates are higher.

“You might say the market for buyers and sellers is all over the road until both find the lane that’s moving in a mutually profitable direction,” Hardy said.

The golden handcuffs aren’t coming off

Normally, higher mortgage rates push more buyers out of the market, crimping demand and resulting in a larger inventory of homes for sale. Rather than wait around, sellers start discounting, which helps improve affordability and draws in more buyers. But the market has been anything but normal following the pandemic.

There have been only 29,887 new listings for single-family homes in Colorado this year, compared to 34,200 in the same period last year. In the first five months of 2019 and 2018, there were 47,474 and 46,698 new listings.

What explains the gap of 17,587 new listings hitting the market so far this year versus 2019? Analysts blame it on the wide divide between what mortgage rate owners locked in and the much higher rate they would have to pay if they buy something else, what some call the “golden handcuffs.”

Most owners holding a mortgage won’t take the handcuffs off unless they absolutely have to, say because of a job relocation or divorce, or if they can have enough equity to put down to dampen the hit.

Redfin estimates that 92% of homeowners in the country currently hold 30-year mortgage rates below the most recent weekly average of 6.7%. A little more than 8 in 10 have a rate below 5% and 6 in 10 have one below 4%. And just under a quarter, 23.5%, have one below 3%.

Because so many potential sellers are locked in, the number of new listings has tightened, reducing the inventory of homes for sale and fueling more competition. Unlike the housing crash in the ’00s, where a glut of homes caused prices to crash, the lack of supply has put upward pressure on home prices.

“High mortgage rates are a double whammy because they’re discouraging both buyers and sellers – and they’re discouraging sellers so much that even the buyers who are out there are having trouble finding a place to buy,” said Redfin Deputy Chief Economist Taylor Marr in his report.

Nor does he expect the effect to go away any time soon.

“Mortgage rates probably won’t drop below 6% before the end of the year, and most homeowners wouldn’t be motivated to sell unless rates dropped further. Some of them simply don’t want to take on a 6%-plus mortgage rate and some can’t afford to,” he said.

Joel Kan, deputy chief economist with the Mortgage Bankers Association, takes a more optimistic view. He predicted a 5.6% rate on a  30-year mortgage rate by the fourth quarter during a mortgage forecast panel hosted by the National Association of Real Estate Editors in Las Vegas earlier this month.

That should shake loose some additional supply. He also noted that some current owners are willing to give up a historically low rate to get something bigger and better.

And it is worth mentioning that about 38% of homeowners, many of them in or approaching retirement, have paid off their mortgages and are sitting on a large pile of home equity. They aren’t encumbered by the golden handcuffs and the current rebound from the recent price swoon might motivate them to take action.

These mortgage-free owners appear to be playing a more dominant role in the market. More than a quarter of homebuyers, about 28%, are paying all cash to obtain a home, said Jessica Lautz, deputy chief economist with the National Association of Realtors during a housing market forecast panel held by NAREE.

Older buyers appear to be skewing the data on how far buyers are moving to purchase their homes. From 1989 to 2021, the typical move was 10 to 15 miles, which lines up with families moving to the suburbs within the same community. Now 50 miles is the median, and a quarter of homebuyers are moving 500 miles or more. Many buyers are headed to Sunbelt states with milder climates and more affordable homes — think retirees.

Lautz doesn’t see interest rates getting as low as Kan does, expecting them to end the year at around 6.2% on a 30-year loan. She predicts home sales nationally will be down 9.3% this year and median prices down about 1.8%. But she sees a rebound starting next year, with a 15.4% increase in home sales, a 2.8% gain in median home prices and 30-year mortgages averaging 5.6%.

More forecasts, however, are reversing course and calling for another year of price increases in 2023. Zillow economists late last year had predicted a 1.1% drop in home prices, but are now expecting a 4% gain this year. While that appreciation rate is tepid compared to the gains seen in recent years, it means buyers won’t get the price relief they were hoping for to offset higher financing costs.

“We are in another upswing,” said Skylar Olsen, Zillow chief economist, during her presentation at NAREE. “The pressure on home prices is back on.”

Home prices and mortgage rates have risen so much that owning a home, which used to be more affordable than renting prior to the pandemic, is now more expensive in all except a handful of metro areas, Olsen said. And because of inflation, renting isn’t the bargain it used to be either.

Housing economists advise consumers against spending more than 30% of their income on rent or a monthly home payment to avoid being “burdened.” But the typical rent, which consumed 28.6% of income in May 2019, prior to the pandemic, now eats up 31.5%, Olsen said. And that ratio is higher in more expensive cities like Denver.

Looking at renters who might want to move into ownership, the typical payment would consume 37.8% of median household income nationally and in Denver it is closer to 53%. That meets the definition of severely burdened. But lenders won’t qualify someone at that high a ratio. They are effectively priced out of the market.

Kan said the lack of existing homes for sale has made new home sales more important. Historically, existing homes represented 90% of sales. That is now down to 70%, with new homes representing 30%.  A key way builders are landing those sales is by buying down the interest rate for a couple of years on the mortgage, making the monthly payment more affordable.

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