The most recent report from the Mortgage Banker’s Association (MBA) showed the average 30 year fixed rate to be 6.81%. It’s hard to believe that interest rates have jumped about 3% since January! This is a big deal – the combination of record high real estate prices (great for homeowner equity) and record high mortgage rates (relative to the last decade and a half) really does hurt and makes the pursuit of the dream of homeownership or trading up more challenging and without a doubt more difficult to stomach for many. (Have hope, there are some ideas below). How has this affected the real estate market here in the Denver metro area?

Denver Real Estate Sales Graph

We’ve seen demand from buyers cool off which has in turn reduced pending and closed sales. With that, the number of active home inventory has finally begun to grow. The days on market for homes has grown to an average of 26 days, 37% longer than the previous month. Homes are sticking around longer and buyers have more choices. Cool, a win from that perspective. Have we seen prices drop yet? While we ARE definitely seeing more price reductions happening across the board, we haven’t yet seen actual year over year reductions in the average home price. In fact, last month the average single family home in the Denver metro area still grew by 8% to $745,947. Back to the drop in demand… what does that look like? It starts with the number of purchase mortgage applications. Compared to the last few years, the number of purchase mortgage applications nationally has dropped to 2013-2014 levels (by the way, that was another time we had a spike in interest rates and people were talking about real estate prices crashing..). With that, we’ve also seen the number of home showings drop considerably to 2018-2019 levels (beating a dead horse here…yet another time we had a spike in interest rates….)

Interest Rate Trends Affecting Denver Area

Ok, so how do we reduce the real pain for homebuyers with the rapid increase in interest rates? What can a buyer do to continue their pursuit of homeownership or trade up plan, etc?

A few ideas:

1. Increase your down payment so that your loan amount is smaller. This may not be possible for most, but it is a great option if you can swing it. More equity in your home right away and if you plan to stay put for a while or eventually rent it if you do have to move – you’ll be doing fine despite what ebbs/flows may happen with overall pricing trends.
2. Let’s be honest – buyers have WAY MORE power in negotiations now than they have had in recent years. With that, take advantage where you can with a reduction in price OR EVEN BETTER, have the seller provide concessions/credits that can go towards your closing costs or your interest rate. Less cash to bring to closing or an overall lower interest rate is a big win too.
3. Yes, you can buy down your interest rate OR do a 2/1 buydown option with your lender that the seller pays for. I wont dive into the full mechanics of it here (needs a separate write up to fully appreciate it, and is worth speaking to one of our awesome lenders about), but basically your monthly payment is reduced for 2 years thanks to the seller concessions provided. The idea or expectation is that interest rates will be lower in the next two years than they are now (assuming monetary policy has adjusted to pull us out of a recession). So then you can plan to refi at the lower rate in the future.

Quick example for this 2/1 buydown scenario:
If you’re buying a home for $555,000 with a $450,000 mortgage and secure about $10,400 in seller concessions, your monthly payment savings in year 1 would be about $573/month and $293/month in year 2. That’s a pretty significant monthly savings that could help dampen the blow of higher interest rates and still allow you to buy that dream home that’s (probably) still sitting on the market waiting for you!

If you’d like to discuss the market in your neighborhood or the greater Denver area and what that means for you, please reach out anytime. Give us a call or text at 303-929-7844 or reach Drew at Drew@modernwesthome.com. We want to be real, show you what’s really happening locally (thus not falling prey to any hype or fear-mongering), and ultimately be your trusted guides for real estate. Thanks for reading. Looking forward to talking with you soon!