The Denver real estate market continues to move along at full speed. The demand for housing barely took a breath in December, which is typically a slow time of the year for home sales. To be fair, available homes for sale did drop significantly, which is not unusual, but demand for what was available stayed strong.
Interest Rates on the Move
Our robust economy and rapid growth has put Denver in the top tiers of hot cities over the last three years. But the new administration has put a twist into the future of home sales and interest rates which will directly affect Denver home buyers. No matter which side of the aisle you stand, business sectors responded quickly and positively to the election in November. A positive outlook on the economy means changes ahead.
of Nova Home Loans reflected on the potential interest rate hikes promised by the Federal Reserve late last year. “The Fed has indicated they anticipate increasing the prime rate ‘multiple’ times in 2017. They are now keeping an eye on inflationary factors, as opposed to the last four quarters where they were concerned about stagflation or in some rare cases negative inflation.”
Thus, as the economy gains momentum, the government will put actions into play that moderate the speed of growth, and in this case interest rate hikes are the tool to do so.
The Problem with Interest Rate Hikes
With rising interest rates, it isn’t really the fact that borrowed money costs more, but the idea that it “erodes the buyer’s purchasing power”, Kostoff explained. “For example, on a $200,000 loan the difference in payment between 4% and 5% is approximately $120 / month. This increases the borrower’s debt-to-income ratios pretty significantly and in some cases blows their qualification.”
While some buyers may be taken out of the market completely, others will find they can no longer afford to buy the home they qualified for last year. The message to buyers today is act sooner, rather than later. As the economy starts to churn across the country, and not focused in a few hot spots, inflation will become a factor and interest rate increases will be the result.
Not All Bad News
Does an increase in interest rates have any positive effects on real estate? Kostoff says yes. “Economically speaking it will slow demand and supply can catch up. Today’s market for homes under $400,000 is in ‘hyper’ mode. When market forces reduce the number of consumers who qualify, it will relieve the market pressure and we should see demand slow.”
The additional advantage to home buyers is the probability that home prices will level off and perhaps even retreat as seller’s adjust to maintain their ability to sell with higher interest rates.
What About the Seller?
Looking ahead, the seller is in a good position as long as interest rates don’t skyrocket. There is overwhelming demand for homes today that the market can barely maintain. Pulling back on the number of buyers begins to normalize the market. Prices may level off and adjust, but sufficient demand will keep sellers in a good position.