Hello Newsletter-ers!
What crazy land of 7% mortgage rates are we living in?! I hear things like “... rates used to be 18% when I bought" or "... they never should've been in the 2's to begin with" or there's the "... just buy now and wait for rates to go down and refinance" theory.
Well, here's my take on where we are with rates and the effects:
1. Yes, mortgage rates were 18% in 1981 but that was when the average house cost $74,400. In comparison, last month the average cost of a full-size pickup was $65,567. Real estate prices have increased so dramatically in the last three years (in Northern Colorado and across the US) that the increase in rates, and how quickly they increased, have had a dramatic effect on real estate transactions. Especially now that the average home sales price in Fort Collins is $686,000! So even though historically rates of 7-8.5% seem ok, they have had dramatic effects on affordability in the current market.
For example, if you take a common 1,200 sq ft 2br/2ba condo with detached 1 car garage in Fort Collins, the monthly PITI+MI payment is now about $3,200! The math on that is as follows: $350,000-375,000 sales price; 8.3% mortgage rate; estimated HOA fee of $325; 10% down payment; MI of about $45/month for not having 20% down. $2,536 PI + $333 taxes & ins + $45 MI + $325 HOA
Interestingly, rent has not increased as quickly as mortgage rates have so rents on these condos have remained in the $1,700-2,200 range. This has disincentivized these renters to buy. They can't afford to empty their savings for down payment AND have their monthly payment go up $1,000+ per month. We shall see what rents do going forward and how these two payments coexist, but right now the delta is big! It’s hard to see rents jumping up to $2,600+ per month for these 2/2 condos. I think the delta will remain larger than we’ve seen in the past.
2. Investor interest rates are somewhere between 8-9% depending on down payment. Even a 50% down payment leaves an interest rate hovering around 8%. With the increased values and relatively low rental rates, these homes don't make sense for investors that are borrowing. My analysis shows negative cash flow on a $500,000 home with 40% down. It doesn't flip positive until you get to 50% down. Your rate of return at that point is a paltry 1.1%. Yikes. Now those 5% CD's look decent.
For investors spending cash, there are some returns to be had when considering tax benefits and appreciation, but for those looking to put 25-35% down on a rental and see immediate cash flow, the numbers aren’t working.
3. There is an interest rate lockdown. I say that definitively because whether there is or isn't a lockdown is being debated throughout the land of red, white, and blue, currently. I happen to believe there is. An interest rate lock down means that people can't move because they are currently in a very low mortgage rate, and they can't afford to sell that home and buy a new home with higher market interest rates.
I follow Logan Mohtashami from Housing Wire and he insists there is not an interest rate lockdown. He says, among other things, that the proof is that we didn't have any more housing inventory in 2020 and 2021 when rates were low. In my opinion, he is looking at the wrong metric and that it isn’t about inventory, but volume of transactions, that shows there is a lockdown. When demand is stronger than supply- whatever supply is provided to the market is gobbled up right away, so either way supply is low. I think the best metric of the "lockdown" is overall transaction volume. In Fort Collins, the number of transactions are down 13.5% in 2023 over 2022. Nationally home sales are down 15.3%. Thus, less people are selling and moving because they're locked down. Inventory remains low but fewer houses are being brought to market and fewer transactions are happening because of the mortgage rate lockdown.
4. Lastly, I have been in real estate in the Fort Collins market for 21 years. I was in commercial lending in 2008-2010 for the subprime and mortgage meltdown. In the worst of times in that timeframe I didn't see home prices decrease noticeably. The stats show a mostly flat appreciation for the time period- even with all the foreclosures. What did change dramatically for resale homes was time to sell. I bought a house in November 2009. I don’t think the full effect of the meltdown was being felt but that house was on the market a whopping 106 days before we wrote an offer on it. If we think about a house being on the market 100 days in Fort Collins over the last several years, we would assume it was a dump…like barely livable. I think we may be headed back to these days of 100 days on the market next year. Houses will be on the market for months, not hours. Although I have to say we may see some depreciation this time around, unlike 2008-2010. Not like 2010 Phoenix housing market decreases but a noticeable one. I think it is only to be expected after the meteoric increases we’ve experienced. And, folks need to have patience when selling or price decreases will be exacerbated. For those that are truly “motivated sellers”, they will weigh the market down with a few low sales based on quick sale expectations. After all, they have plenty of equity that came quickly so some may be willing to sacrifice a portion of that equity for the sake of time. This will cause a slight, but noticeable, drop in value.
So what’s next? What’s 2024 look like? I think the trends we are seeing will continue down their path and strengthen. Longer listing periods, steady rates with a slight decrease, and continued fewer transactions. Most folks are not motivated to move. Election years are traditionally wait and see years and I think this one will be full of extra patient buyers and sellers. I think sellers will have to take time, money, and effort to prepare their house for sale to get the top dollar (and then be patient) and I believe buyers will be able to think through a purchase and take their time with their move and where they are going. It will be different. 2020-2022 was frantic. Rates were low and prices were rising quickly being driven up overnight by multiple offers and chaos. Now we slow down. There will always be cherries in our market that move quickly and gain lots of attention, but, overall, "normal" houses will sell normally! Once again, we will be thankful we live in a great area where prices are steady and demand remains. There may be some areas nationally that don’t fare so well in 2024.
ACTIVE LISTINGS:
5600 W 3rd St. 9-DD
West Greeley two-story condo in Turnberry Park at Kelly Farm with main floor master bedroom! 3br/3ba, 2-car attached garage, 1,600 sq ft offered at $375,000.
Pre-inspected, move-in ready, clean as a whistle!
Easy to show- See it today!!
UNDER CONTRACT:
4027 Berwick Ln in Fort Collins
Waterglen ranch- 3br, 2ba, 2-car garage listed at $415,000.
That’s all the good news I have for this month! Haha. See you soon.
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