The Colorado Springs residential real estate market is returning to a more “normal” state, local agents say.
“On the one hand, it’s a ‘correction’,” says Harry Salzman, broker/associate at ERA Shields/Salzman Real Estate Services. “But what we’ve had in the past couple of years was not realistic.”
A year ago, in January 2021, the average 30-year fixed mortgage rate reached an all-time low of 2.65 percent.
“That was a gem for the buyer, borrower and people who did a refinance,” Salzman says.
But as of Dec. 29, 2022, the average rate was 7.07 percent, according to Investopedia.
“We have never seen a 100 percent gain in interest rates in six months,” Salzman says. Between June and December, “we went from 3½ to 7 percent.”
That’s not normal, he says, and it’s also deterring potential homebuyers who might have the income to purchase a home but are instead spending their money on consumer goods.
“If I’ve got to spend that much on interest, well, forget it,” Salzman says. “I’m going to buy fancier clothes or go on vacation or spend more for the holidays.”
What it boils down to, he says, is that the market has cooled and the unprecedented seller’s market has ended. But like most real estate experts across the country, Salzman doesn’t foresee a crash or drastic downturn in 2023, but rather, “a return to what was prior to 2020 — a normal, healthy market.
“What to expect in 2023 is that things will slow down in terms of time,” he says. “It will take a bit longer to sell and pricing adjustments will be necessary, but home values will still rise at a normal rate of 3 percent to 7 percent.”
CURRENT MARKET
According to the Pikes Peak Association of Realtors, single family and patio homes were staying on the market an average of 33 days. That compares with an average of only 13 days on the market in November 2021.
Although new listings in November were down more than 28 percent compared with the same month of 2021, prices continued to rise. The median price is up 1.3 percent, and the average price rose 4 percent.
Here’s a snapshot of the residential real estate market as of November 2022, compared with November 2021:
Median sales price, Nov. 2022: $457,823
Median sales price, Nov. 2021: $452,000
Average sales price, Nov. 2022: $526,576
Average sales price, Nov. 2021: $506,386
Source: Pikes Peak Multiple Listing Service
2023 PREDICTIONS
“What to expect in 2023 is that things will slow down in terms of time,” Salzman says. “It will take a bit longer to sell and pricing adjustments will be necessary, but home values will still rise at a normal rate of 3 percent to 7 percent.”
Salzman also predicts that:
• Seasonal fluctuations will return. Instead of the steady demand for homes year-round, he expects to see the spring buying season return and sales to slow down toward the end of the year.
• Interest rates above 5 percent will become the new norm. “Realtors like myself who have been in the business for a while can remember a time when 5 and 6 percent rates were normal,” he says. “Some of us even remember the high interest rates of the 1980s, when a VA loan of 13 percent was considered low and rates of 18-20 percent were not unusual.” By the end of 2023, he expects rates to level off at about 5½ – 5¾ percent.
• Assumable loans might become more popular. Salzman expects buyers assuming a VA or FHA loan is going to be a big trend for the next decade. “The process takes longer but can save the buyer a lot of money,” he says.
• The market will be more balanced. Although inventory will remain relatively low, interest rates and inflation will put the ball back in the buyer’s court when it comes to closing cost help, inspections, repair negotiations and offers below initial asking price, he says.
• Home prices will continue to appreciate, though not as rapidly as they have in the past. “When it comes to real estate, you can’t only look at the last quarter, the last year or even couple of years,” he says. “Real estate is a long-term investment. When you look at the value of ownership, it’s still going to be extremely positive.”
BUYER INCENTIVES
The local real estate market will continue to be stronger than in many other U.S. locations because of continued demand for housing in the Pikes Peak region, Salzman says.
“In any economic cycle, there’s always going to be people who need to buy and need to sell,” he says. That could be because a family that’s growing needs more space, or because a new family is moving to the area.
He notes that IT company Zivaro and manufacturer Entegris, which makes products for the semiconductor industry, announced expansions into Colorado Springs in late 2022 that will create up to 1,000 new, well-paying jobs.
“Those people are going to be looking for housing,” he says.
While inventory will remain low, sellers and their agents will need to be more innovative, aggressive and creative, working with buyers to overcome their reluctance to sign up for what they perceive as high interest rates.
Mortgage products like temporary buydowns, which offer short-term savings on interest rates, are making a comeback, Salzman says.
For example, a buyer who qualifies for a 6¾ percent 30-year mortgage might be offered a 2-1 buydown, which means the buyer gets a 2 percent discount for the first year and a 1 percent discount the second year. Sellers, lenders and builders cover the difference between the rate the buyer pays and the actual mortgage rate.
A 2-1 buydown could save the purchaser of a $500,000 home about $650 a month the first year, Salzman says. According to the Wall Street Journal, 3-2-1 buydowns are also being offered.
The buyer will have to prepare for higher payments but could refinance when rates come down, he says.
Lenders also are offering to waive loan origination fees if a buyer wants to refinance in two or three years with the same company.
“They’re putting that in writing,” Salzman says. “Because business is so far down in the mortgage market, they will negotiate to get deals. Nothing is black and white, and anything is negotiable.”
NATIONAL PICTURE
National Association of Realtors Chief Economist Lawrence Yun expects home prices to hold steady throughout most of the country because of low inventory.
“Some places are experiencing price gains, while some places, most notably in California, are seeing prices pull back,” Yun said at the annual NAR conference, NAR NXT, The REALTOR Experience, on Nov. 11 in Orlando, Florida.
Yun says he doesn’t foresee a housing market crash like the one in 2008 because conditions are fundamentally different.
He expects the national median home price to increase by about 1 percent while home sales decline by about 7 percent, but he also projects that the market will rebound strongly in 2024. The market will see a 10 percent increase in sales and a 5 percent increase in the national median home price next year, he says.
One area of concern is the spread between mortgage rates and the federal funds rate.
“The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically,” Yun says. “If we didn’t have this large gap, mortgage rates wouldn’t be 7 percent, they would be 5.8 percent. A normal spread would revive the economy. If inflation disappears, then we’d see less anxiety within the financial markets and lower interest rates, which would allow owners to refinance.”
Yun is quoted in a Nov. 11, 2022, post on the NAR website.
ECONOMIC BACKDROP
At the end of last year, mortgage rates showed signs of dropping from November’s 7 percent high. According to Bankrate, the average 30-year fixed mortgage rate on Dec. 29 was 6.59 percent, a slight uptick from the previous week’s 6.47 percent.
Economist Dr. Tatiana Bailey, executive director of Data Driven Economic Strategies and former director of the UCCS Economic Forum, expects interest rates to remain high as long as inflation continues to be high.
“Traditionally, what we’ve seen is that the interest rate set by the Federal Reserve has to be at or a little above the rate of inflation in order to really tamp down inflation. So if inflation is around 7 percent, it’s going to need to come down to 4 percent, or even 3 percent, in order for the Fed to start thinking about bringing down interest rates,” Bailey says. “Most experts are saying that’s not going to happen until at least 2024.”
The federal funds rate — the rate set by the Federal Reserve — influences the prime rate, which is the base rate from which other interest rates are determined. Mortgage interest rates are not set by the Fed, but they track the 10-year Treasury rate and tend to move in tandem with the federal funds rate.
In the current economic climate, “it hits the housing market fast and hard,” Bailey says. “But there are other reasons why raising interest rates is really tough. Most businesses that have variable-rate loans are also impacted. If they have lines of credit or if they want to borrow money, a higher interest rate makes it a lot harder for them to do so.”
Interest rates on credit cards, also based on the prime rate, also are increasing.
“We’ve seen pretty dramatic increases over the last few months in credit card usage,” Bailey says. Savings rates also are down to 2.3 percent, compared with 9 percent before the pandemic.
“That tells me a lot of people are dipping into savings in order to deal with inflation,” she says. “So we better get inflation down. But if you’re making it more difficult for people to borrow money, then is the medicine really helping? My personal view is that the Federal reserve had to raise interest rates, but I think that they should have done it more slowly.”
RIPPLE EFFECT
Higher interest rates also are helping to keep rental prices elevated as they ripple through the local housing market.
“You’ve got a lot of people, particularly young people, who thought maybe they were getting close to buying a house, and now they have no choice but to rent,” she says.
The National Association of Realtors® has estimated a nationwide shortage of 6.5 million housing units, she points out.
“That’s mostly because of all of the builders that went out of business during the Great Recession,” she says. “The ones that survived don’t do spec neighborhoods anymore.”
Bailey says she has calculated a shortage locally of 12,000 housing units, “and we have an average of 9,000-10,000 people moving to El Paso County each year, historically.
“On average, we have been meeting the annual threshold of new jobs needed to match population growth — that’s about 5,400,” she says. “So an additional 1,000 on top of that is great. But we’ve got to figure out the housing.
“With higher-income people, they’re going to buy the $700,000 house, the $800,000 or $900,000 house,” she says. “It’s a double-edged sword. We want the jobs and we want the economic growth, but I don’t see it helping the affordability issue.”
Source: news.google.com