- Fort Collins' median home sale price rose to $630,000 at the end of June 2022
- Rising interest rates have cut buying power by hundreds of thousands of dollars
- Still, 273 homes sold in June went for an average of 4% above asking price
- Price escalation is expected to slow in the second half of 2022
As a Realtor, knowing Northern Colorado's housing market is Elizabeth Atkins' business.
As a renter, it's personal.
Atkins and her family of four started looking to buy a four-bedroom, three-bath home in January after renting for eight years. Pre-approved for a $625,000 mortgage — about the median price of a home sold in Fort Collins today — she thought they'd be in a new home by March. They toured four homes but didn't find the right fit.
Then the ground shifted. Rock-bottom interest rates that had been fueling a surging real estate market nearly doubled from just more than 3% to near 6%. Their buying power dropped from $625,000 to about $450,000 in a matter of weeks.
The tectonic shift in market conditions is forcing some buyers like Atkins to pull out of the market. Builders are offering incentives as buyers cancel contracts made unaffordable by rising interest rates. Inventory is up, homes are staying on the market longer and offers are coming down to earth.
It might take time for consumers' mindset to catch up with the rapid change, said Brandon Wells, president of The Group Real Estate. "When the market transitions from a really white-hot market to something that is a more stable market, there's a gap between perception and reality. It takes about 60 to 90 days for consumer behavior to catch up to where the market truly is."
That means some sellers may have to temper their expectations as buyers who can still afford to buy regain some of their power.
In June, 273 homes were sold in northern Larimer County, the highest number of sales in one month so far this year, said Chris Hardy of Elevations Real Estate. The average list- to sale-price dropped a bit from a high of nearly 6% beyond asking price to about 4% beyond asking price.
But stable prices don't help those who can no longer qualify for a mortgage with a higher interest rate. Most impacted is the 25% of market who are first-time homebuyers. "It moves them farther away from that," Wells said.
Impact of interest rates on mortgage payments
Interest rate on $450,000 mortgage | Payment excluding insurance, taxes, private mortgage insurance |
---|---|
3% | $1,897 |
4% | $2,148 |
5% | $2,415 |
6% | $2,697 |
For Atkins and her husband, Jason, the loss of buying power meant they couldn't get the house they needed in the condition they wanted. At $450,000, any house they bought likely would have needed some work. "We wouldn't have the extra money to fix up a home at this time in our lives," she said. So, they decided to wait, staying instead in a three-bedroom rental with one bath upstairs and a three-quarter bath in the basem*nt in Fox Meadows.
They love their rental and their landlord, but it's just too small, Atkins said. There's nowhere for her parents to stay when they visit except on an inflatable mattress in the basem*nt. All four family members share one bathroom upstairs. "And one of them is a 17-year-old," Atkins said. "The house is just not big enough for us, but we don't have a lot of choices."
Atkins isn't happy about the loss of buying power but understands the market dynamics and economics. Generally, every 1% increase in interest rate decreases a buyers' purchase power by 10%.
"Houses are sitting on the market longer, but it at least has somewhatstoppedthe rising prices in Northern Colorado ... we need that to keep home prices from becoming even more unaffordable than they already are."
Northern Colorado's real estate price escalation should slow
Through the first six months of 2022, prices continued to rise in Northern Colorado, but the rapid escalation should start to level off, Wells said.
The median sale price for single-family homes in Fort Collins at the end of June was $630,000, the second-highest mark in Northern Colorado behind Timnath's $750,000 median sale price.
Timnath also had the largest year-over-year appreciation, jumping from $560,000 at this time last year to $750,000 at the end of June, a 34% jump. The median price for the 39 sales that closed in June alone was $706,913.
Greeley remained the least expensive regional community with median sales prices of $450,000. Wellington had the most affordable mark in Larimer County, still a tick under $500,000.
Realtors, including Atkins of Re/Max Alliance, say they've had several clients back away from the market due to higher interest rates; some out of principle, some because of affordability.
New construction:Johnstown center to add 1,200 apartments, 200 houses, 1 million square feet of retail
Morgan Merriman of Re/Max Alliance was working with clients moving from Ohio to Northern Colorado for a job. They made an offer on a home and locked the mortgage in at the mid 3% range, Merriman said. They backed out of the contract after an inspection and got outbid on three more contracts.
They ended up renting in Wellington as their search continued. "In the past two months I have found them a handful of homes that they liked, one that they were actually curious about putting an offer on," Merriman said. But, once they contacted their lender again, interest rates were above 6%, and the buyers suspended their search for now.
Five percent is still a good rate, but "unfortunately those low 2% to 3% numbers got normalized in many minds to the point that now individuals feel they are just too high," Merriman said.
Fellow Realtor JoAnn Caddoo had three first-time homebuyers who decided to rent for another year instead of buying. They were preapproved but as the interest rates began to rise, they lost buying power.
"A mix of factors combined: multiple offers, low inventory and rising interest rates were making it difficult for them to stay within their budget," she said. "Buyers who are in the higher price range have not been deterred as they have a little more flexibility in their monthly payment."
Atkins preaches the benefits of building equity to her clients, friends and family, but her family is living on her income as her husband begins a new photography business. "With the interest rates where they are, we just cannot do it yet, unfortunately," she said.
She always tells her clients to "marry the home, not the interest rate," because homes can be refinanced when interest rates come down. But if the interest rate results in a mortgage the buyer can't afford, the prospect of a future refinance means little.
'It's only going to get worse': Fort Collins still well behind housing demand
Unlike a few months ago in Fort Collins, "houses are on the market for more than 20 minutes and (buyers) can look at a house and think about it for a minute," without fear of losing out, said Jessica Foster, owner of NoCo Home Loans.
While rising interest rates represent pain for many buyers, there's also opportunity, she said.
People financing mortgages through some federal programs like FHA and the VA, or those who didn't have the cash to offer $20,000, $50,000 beyond a seller's asking price have a chance to compete now, she said.
Elevations Real Estate's Hardy calls it a boom-stall-boom market. March and April still saw multiple competing offers on nearly every home for sometimes thousands of dollars beyond asking price.
Then summer came, people started dispersing on vacation for the first time since before the COVID-19 pandemic and other buyers got tired of the housing race, he said.
Now interest rates are "downshifting" some buyers to a price point "like under $400,000 that doesn't exist," Hardy said. Of the 272 homes sold in northern Larimer County in June, only nine sold for less than $400,000.
Many of those buyers are now racing toward the sidelines.
The height of a hot market:Fort Collins home sells for more than $100,000 above asking price
At the same time, housing inventory is increasing. Today, there's a two-month supply of homes for sale in Larimer County, up from a paltry two weeks a year ago, said Eric Thompson of Windermere Real Estate in Fort Collins. That means it would take two months to sell all the homes currently on the market if no other homes were added.
With all of the current factors in play, the pace of price escalation will slow within the next couple months, Thompson said.
"The reason we're not seeing that yet in the numbers is that properties closed in June went under contract in April or May, during a more fast-paced market," he said. "Over the next 60 days, the pace of price appreciation will slow down and days on market will start to change."
Price escalation should slow to more historically expected levels of 4% to 5%, maybe lower if the country enters into a recession, Wells added. But Northern Colorado is still drastically undersupplied on housing.
A recent report from Up for Growth, a national network that's working to solve the housing shortage and affordability crisis,showed Fort Collins was 4,828 units short of where it should be in 2017-2019 and the situation has not gotten better with in-migration of residents and the COVID-19 fallout that makes it possible for more of the workforce to work remotely.
"It's only going to get worse," Wells said.
Advice for Fort Collins homebuyers and sellers
Wells is cautioning sellers to get their homes in the best condition possible and to not be overly aggressive in their pricing.
"Now's not the time for that," he said. "As prices have done what they've done, plus interest rates, it's become more expensive for the buyer and what they expect from a property has gone way up, too," Thompson said. "Properties in poor condition are the ones requiring price reductions."
Buyers who haven't had much leverage for the past several years are getting some of that back, he said. The days of waiving all contingencies are gone. The days of outrageous escalation clauses and bidding wars "are happening far less frequently than they were," he said.
Real estate is still about location and homes in certain locations and in certain price points — under $600,000 — will still likely experience multiple offers and potential bidding wars, he said. "But overall that dynamic has changed significantly."
Thompson suspects interest rates will settle in closer to just above 5%, consistent with what the market has done for 40 years. Even if the country falls into recession in the next eight months as many economists predict, "it's still reasonable in this low-supply environment," he said.
"Northern Colorado continues to be a sought-after place to live, especially in this work-from-home environment," he said. "We're seeing people relocating from Chicago, Houston, even Denver. They'd rather live here now that they can work from home."
Housing development:Improvements to Fort Collins' busy S. College, Trilby intersection to precede 268 new homes
Median price | January to June 2021 | January to June 2022 |
---|---|---|
Berthoud | $499,950 | $593,000 |
Fort Collins | $522,600 | $630,000 |
Greeley | $371,899 | $450,100 |
Loveland | $430,000 | $540,000 |
Johnstown | $445,000 | $520,000 |
Severance | $431,919 | $510,000 |
Timnath | $560,000 | $750,000 |
Wellington | $418,000 | $498,500 |
Windsor | $490,933 | $600,000 |
Homebuilders find themselves in a tough spot
Builders have found themselves in tough spots for the past couple years, saddled with supply chain delays, exorbitant lumber prices, increasing labor and materials costs, so it has been taking longer than usual to build a home, Windermere's Thompson said.
Now buyers who have been waiting for their homes to be built at an interest rate that no longer exists are no longer qualifying and are walking away from the purchase, he said. That puts more inventory back on the market.
"Builders have inventory to sell," Thompson said. "They're more motivated than they've been in a long time ... they're offering incentives we haven't seen in a long time and gone from holding lotteries for new releases to having inventory come back on the market because buyers had to walk away."
Hartford Homes hasn't seen many cancellations, president Landon Hoover said. "It's happening some, but it's not pervasive." He is seeing a slowdown in new contracts as "people are taking a big pause to see what is happening with rates and the market overall," he said.
"As sales slow, inventory is improving and competition is lessening," Hoover said. "Builders are starting to offer incentives, price decreases, etc. It seems like the market is returning to more balance and normalcy from the days of lotteries and multiple offers."
Regardless of what the numbers say, the reality is there are still large numbers of buyers driving demand for housing in spite of summer travel, inflation, rising gas prices, and rising interest rates, Hardy said. "Some houses will take longer to sell.Some houses will have multiple offers and sell very quickly. Navigating this volatile housing market and economy takes patience, practice and perseverance."