Rising Rates Battle Demographics in Northern Colorado

We are finally seeing a significant effect from the massive interest rate increases in the NoCo market. For the last few months we have been waiting and waiting to feel the effects of rates surging from their all time lows of 2.5% to 6%. We are witnessing a battle between two market forces: Demographics and rising borrowing costs.

When I say demographics, I mean the sheer volume of buyers in the market. This is largely due to the massive size of the millennial population. This huge demographic patch is currently in prime home buying age and that has been far and away the biggest driving force in the market. Of course, low rates and pandemic effects have been additional accelerants. But now that rates have spiked, you can really see how powerful the demographic forces are. The market continues to hum along at an impressive pace despite 30 year rates in the low 6% range.

Somehow inventory remained near all time lows in February, March and April even as borrowing costs spiked. Finally in May we saw a small bump in the number of homes available for sale. In Larimer and Weld county there were 970 homes available to buy in May 2021 vs 1,107 active listings right now, that’s a 14% increase. I guess we’ll take what we can get. But given the 50% increase in borrowing costs during that same period, that increase in inventory is absolutely pathetic! It’s still less than half the inventory we had in 2020 and 2019. Even as a $400,000 mortgage is about $1,000 per month more than it was a year ago.

But while the numbers so far have not shown a significant increase in homes for sale. We are seeing a reduction in demand. On a recent outing to tour homes in the high $500k range in Northwest Fort Collins, I found 3 properties that I felt were priced well and had a lot to offer, but were sitting unsold at anywhere from 7 to 15 days on market. Something that simply would not have occurred 6 months ago.

We’ve also noticed some of our buyers deciding to put their search on hold. Those that continue to search are being very patient, and are much more price sensitive than they have been in years past. This week the number of people applying for mortgages is at its lowest level in 22 years! There’s no question demand is down. But the decrease in demand is not having the dramatic effect that buyers have been hoping for. With rates this high, and mortgage applications this low, our average home still sells in 6 days for 103% of list price. 75% of the homes for sale in Fort Collins either under contract or in their first week of listing!

It all goes back to demand. Inventory is so low, and the number of people needing housing is so high, that despite shaky consumer confidence, despite massive increases in borrowing costs. People need shelter and there isn’t enough of it. High interest rates are a double edged sword, while they do decrease demand, their other effect is that people that have 3-4% interest rates on their current home don’t want to trade in for a higher rate. So they stay put. And it can actually serve to perpetuate the supply shortage.

So what will this year hold? Buyer fear and price fatigue will subdue the massive 15-20% year over year price increases we have grown accustomed with current inventory levels. But it’s hard to envision prices falling meaningfully. In fact, there’s a chance that prices could climb further. On May 16, Zillow projected an 11.6% increase in the national home price. However, they have downgraded that estimate twice now in 2022. So it wouldn’t be surprising to see their price growth estimate continue to be revised downward as we move through the summer.

I sure hope NoCo does not follow suit. If we matched that 11.6% estimate (we sometimes out perform that national market), that would bring the median price for Larimer County from $550,000 to $614,000. And Weld County would go from its current median of $500,000 to $558,000. My guess is that prices will be more like 5% higher by this time next year. But if rates climb higher, our price growth could go flat completely, or some price corrections could be in the cards.

If you read through your news feed, the click bait headlines would have you believing that the real estate market is in a free fall. But if you dig into the numbers and understand how fundamentally strong the market is. You’ll see the market normalizing, not crashing. And while price growth should be much much lower in the coming years. A big correction that brings affordability back to Northern Colorado, seems unlikely given how well the market has weathered the current interest rate storm.

Grey Rock Realty