Increase in home prices wipes out savings from lower mortgage rates for Denver metro - The Denver Post

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Lower mortgage rates during the pandemic have meant lower monthly payments, providing buyers across the country with a strong motivation to purchase a home. But in metro Denver, home prices have appreciated so rapidly this summer that the benefits of that cheaper money have evaporated.

Metro Denver recorded a 12.1% annual gain in the median price of a single-family home sold in August, according to the Denver Metro Association of Realtors. That was up from a 7.5% annual appreciation rate in July, a 3.2% annual pace in June and a 0.9% gain in May.

“If home prices rise 10% plus more than where we are today, consumers will really start to feel pinched and many may become priced out of the market,” said Ali Wolf, chief economist at Meyers Research, in an analysis of the last week of July housing numbers.

Based on Denver’s current rate of home price appreciation, Wolf said that the savings lower rates provided are pretty much gone. Buyers going forward face a squeeze in affordability — the pinching has begun.

Here’s what the math looks like. In August 2019, the median price of a single-family home sold in metro Denver was $455,000, according to DMAR. And the average interest rate on a 30-year mortgage during the last week of August in 2019 was 3.58%, according to Freddie Mac.

Assuming a buyer provided a 10% down payment, the principal and interest payments on the mortgage would have been $1,857 a month.

Contrast that with last month, where the median price of a single-family sold was $510,000 and 30-year mortgage rates averaged 2.91% at the end of the month. A buyer faced a payment of $1,913, or $56 more a month than a year earlier.

Assume that builders and sellers had met buyer demand, keeping prices flat over the year. Lower mortgage rates would have resulted in a monthly payment of $1,707, or a savings of $206 a month.

“The assumption is that mortgage rates will stay low for the foreseeable future. That helps, but doesn’t eliminate, the risk that the housing market could still face an affordability crunch if home prices continue to rise at the rapid pace,” Wolf said.

A worst-case scenario would have continued rapid price gains followed by a spike in mortgage rates. And there are some early indications that buyers who responded to low rates may be having second thoughts.

LendEdu did a survey of people who bought homes during the pandemic, and 54% cited the desire to take advantage of historically low mortgage rates, while 15% were trying to escape areas hard hit by the pandemic and 24% said the outbreak didn’t play a role in the decision.

Of those pandemic buyers, more than half, 55%, regretted taking on a new home given all the economic uncertainty and about 30% said purchasing a home had caused them to struggle financially.

Affordability matters in another way. As affordability deteriorates in metro Denver, it will shrink the pool of available buyers.

Zillow published a study Tuesday that estimates there are 2 million renters working remotely who are priced out of the market where they live but who could afford a starter home if they moved. In metro Denver, Zillow estimates there are 61,321 renter households who could afford a starter home elsewhere while keeping their Denver-based job.

Those renters represent about 14.6% of all renter households, which was the fifth-highest rate among the metros examined after San Jose, San Francisco, Los Angeles and San Diego, all in California.

“If remote work becomes a bona fide long-term option especially with the pandemic, that could reshape the U.S. housing market by opening up homeownership to people renting in expensive parts of the country,” said Zillow economist Jeff Tucker in the report.

Whether they would actually move to buy their first home and then telecommute is another question, he adds.

Mike Hills, vice president of brokerage at Atlas Real Estate in Denver, suspects one reason home price gains are so strong is that people are relocating to metro Denver from denser metro areas like New York, San Francisco, Seattle and Washington, D.C.

“A lot of the research is suggesting that Denver is one of those cities that will experience a larger than normal rise in population because people are fleeing the big cities,” he said.

So long as demand outstrips supply, that should serve to support home prices, even if mortgage rates do rise, he said.

It is also worth noting that condo and townhomes, which were up only 3.7% in price on the year in metro Denver. still carry a cheaper payment than what was available a year ago.

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Increase in home prices wipes out savings from lower mortgage rates for Denver metro - The Denver Post
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