Northern Colorado Market Update - October 2022
In August we saw our first home price correction since the interest rate hikes began at the beginning of the year. Larimer County lost about 4% of its median price and Weld county lost 1%. September prices were basically unchanged compared to August. These are month over month stats and we typically don’t pay a lot of attention to this data because it’s not seasonally adjusted. But because of how fast interest rates have gone up we’re watching it closely right now. Seasonally adjusted numbers would mean you’d compare August 2021 to August 2022. If you do that, you’d see a price gain of 11% for Larimer and 5.5% for Weld County.
Although the market feels completely different than it did last year, we continue to be surprised at how active it is. The average home is on the market for 12 days before receiving an offer and sells for 98.6% of list price. There are 3,035 total properties for sale in Larimer and Weld county right now and 43% of those are under contract and headed to closing. Inventory, which is the number of homes buyers have to choose from, is up about 50% compared to this time last year. However even with that big increase, there are still fewer homes for sale right now than there have been in more than a decade, with the exception of last year, when levels were at all time lows.
We have often discussed how nefarious the housing shortage problem is. The FED has obviously taken direct aim at cooling the housing market this year. And while their action has had a dramatic impact on demand and rates of appreciation, it cannot increase the number of homes that exist in the country which is the main reason prices have gotten so out of control. On average over the last 5 years there have been about 3 million more household formations each year (ie, kids leaving their parents home) than there have been new housing units created!
That’s the problem with the current rates hikes. They’re a blunt force instrument with many unintended consequences. One of those consequences is what we call an interest rate inventory lockdown. If you go get a new mortgage this week, you’ll pay about 6.7% interest for a 30 year loan. Now consider that 85% of existing American mortgages are currently enjoying a sub 5% interest rate. With 41% having a rate under 4%, and 23% have a rate under 3%! It doesn’t take a rocket scientist to figure out that in that kind of environment, people are not going to move unless they absolutely must. Folks that would typically be upsizing or downsizing in a given year, are finding good reason to stay put. This phenomenon perpetuates the supply shortage and is a big reason why prices haven’t fallen more despite the massive increase in borrowing costs. There are still too few homes on the market.
So you might say, let’s build our way out of this housing shortage! Build build build! But that’s another problem with the rate hikes: builders are dramatically reducing their output to compensate for the decrease in demand. So it’s hard to see us closing that multi million unit gap between the number of new households and the number of new builds created each year.
While the interest rate increases have been terrible for housing affordability. There are a couple silver linings: They have dramatically reduced the amount of bidding wars. This has allowed our buyers much more time to make decisions. Also, they’re able to keep their inspection and appraisal contingencies intact which means we can get more money for repairs and ask for price drops if we get a low appraisal. It also allows 1st time home buyers the ability to get homes under contract with a low down payment. Whereas in years past, low down payment buyers found it nearly impossible to secure a home. But this is assuming they are able to afford the painful increase in monthly payments.
Another thing that has kept the market active is the huge amount of equity that a typical homeowner has in their current property. It’s an average of 50% nationwide. So if they do need to downsize or upsize, they are able to transfer that chunk of equity into their next home, and therefore keep their loan amount and payments down to a somewhat manageable level.
Thank you for taking the time to read this report! To all of our past and current clients, your trust means the world to us! Please reach out if you’d like to discuss the market further or just catch up.
Grey Rock Realty
