In a recent Kentwood Real Estate team meeting, we discussed the Colorado housing market and heard tales of some buyers starting back off, deciding they’ll wait until the timing “improves” for buying their next home.
In the Metro Denver housing market, the mid-price range is generally thought to be $500,000 – $900,000. In Northern Colorado the mid-range is $300,000 – $600,000. The brokers at our meeting indicated there were listings in this range that saw fewer than expected showings this week and fewer than expected offers. Some of the buyers in this range (in specific locations and markets, not all) appear to be stepping onto the sidelines.
Questions our brokers are asking buyers who have become fatigued by the velocity of the market are:
- Do you think home values will be higher a year from now?
- Do you think mortgage rates will be higher a year from now?
If the answer to one or both of these questions is yes (which is likely) then here are a few things to consider if you’re one of those fatigued buyers.
Where will home prices be a year from now?
Averaging recent projections from major industry forecasters, the expectation is U.S. home prices will increase by 7.7% in 2021. The Denver Metro Association of Realtors reported April 2021 year-over-year price appreciation was 6.19%. The Fort Collins Board of Realtors reported at the end of April the YOY median price increase was 14.6%.
Let’s look at a house that’s valued today at $500,000 as an example of what happens by purchasing now versus waiting a year, when prices and rates have increased:
If a buyer makes a 10% down payment today on that $500,000 home ($50,000,) they’ll end up borrowing $450,000 for their mortgage. Applying the U.S. average projected rate of home price appreciation in 2021 (7.7%,) the same house will cost $538,500 next year. Next year, with a 10% down payment of $53,850, the buyer would be borrowing $484,650.
You can see that as a result of rising home prices, a prospective buyer will have to put down an additional $3,850 and borrow an additional $34,650 just for waiting a year to make their move.
Where will mortgage rates be a year from now?
Today, mortgage rates are hovering around 3%. However, most experts believe they’ll rise as the economy continues to recover. Any increase in the mortgage rate will also increase a purchaser’s cost. Here are the forecasts for the first quarter of 2022 from four major entities:
- Freddie Mac – 3.5%
- Fannie Mae – 3.5%
- National Association of Realtors – 3.5%
- Mortgage Bankers Association – 3.9%
What happens if both home values and mortgage rates increase?
A buyer will pay more in their monthly mortgage payment if both variables increase. Assume a buyer purchases a $500,000 home this year with a 30-year fixed-rate loan at 3% after making a 10% down payment, their monthly principal and interest payment would be $1,897.
That same home one year from now could be $538,500 and the mortgage rate could be 3.5% or greater. The monthly principal and interest payment on $484,650 (purchase price less the 10% down payment) would be $2,176.
The difference in the monthly mortgage payment would be $279. That’s $3,348 more per year and $100,440 over the life of the loan.
When asked if they should buy a home, buyers like to think about the nonfinancial benefits of owning a home. When asked when to buy, the financial benefits make it clear that doing so now is more advantageous than waiting until next year. Jumping into multiple offers can be deflating and exhausting, but with strong representation and a fighting attitude, there will be a win. As inventory comes on the market this spring there will be better opportunity to find a great home.
Navigating the Colorado Real Estate Waters
For more information on Colorado, Denver and Fort Collins housing, connect with a Kentwood Real Estate broker to talk about the best ways to navigate such an energetic market. Our residential and commercial brokers sell and lease properties across the Northern Front Range of Colorado from south of Castle Rock to Denver and up to the Fort Collins area. Search for your
Written by President and CEO of Kentwood Real Estate, Gretchen Rosenberg