John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Hornung: No doubt, the expiration of the federal tax credits (that required a house to be placed under contract by April 30), dealt a serious body blow to the real estate market and July’s data fell off a cliff. However, the market has quietly been stabilizing, if not gathering strength in a few pockets, since mid-July. Why? Crazy low interest rates are attracting buyers to the market.
IREN: So low interest rates, hovering around 4.3 percent for a 30-year-fixed loan, trump the tax credits?
Hornung: People are realizing that rates can have a bigger effect on their purchasing power and monthly payment than home prices. They’re thinking seems to be, if we are not at the bottom, we’re probably pretty close, say plus or minus 5 percent as far as homes prices. However, they know that interest rates could jump a full percentage point in a matter of days. For a buyer putting 20 percent down and taking a mortgage out on the remainder, prices would need to drop 10 percent to offset a 1 percentage point rise in interest rates in order for their monthly payment to stay the same.
If prices don’t fall and rate rise, the buyer who one day was looking at homes in the $300,000 price range, will need to start looking at homes for $270,000.
So, despite all the doom-and-gloom in the media, buyers have determined that a 10 percent drop in home prices in less likely than a 1 percent hike in interest rates. They know that they may not time the bottom perfectly, which by the way is very hard to do, even for professional investors, but they need a home now and are there are deals to be had.
IREN: Lane, so given the case you make – that an increase in mortgage rates is much more likely than a big drop in prices – why are so many prospective buyers still on the fence?
Hornung: The reason the market is only stabilizing and not taking off – low interest rates only get you so far. The other pieces of the puzzle are not there yet. In particular, the job market remains weak, and the supply of listing inventory has swelled from 6 months of inventory to 8 months since the tax credit’s expiration. As long as jobs growth remains anemic, the real estate market will stumble around the ring with an occasional flurry of punches to stay in the fight. Of course, this is preferable to laying flat on your back, down for the count.
IREN: In the early 1990s, in the wake of the worst housing crisis in the Denver-area until this latest round, many Californians cashed out of their equity and moved to Colorado for a chance to buy a much bigger house and a shot at a better qualify of life. Given that we are experiencing the first nationwide housing downturn since the Great Depression, can we expect Californians or anyone else to come to our rescue this time?
Hornung:Low interest rates aren’t the only thing keeping the market in the fight. Relocators, who had become an endangered species in the last few years, have returned to our market. Relatively small in numbers now, but the wave is growing. Home prices in California and on the East Coast are up – 14 percent in San Diego, 11 percent in San Francisco, 10 percent in LA, 7 percent in DC, 4 percent in Boston.
Relocating gaining steam
Colorado, with its outdoor lifestyle and relatively affordable home prices, never lost its attraction for these relocators during the crash; they just simply could not make the move because they couldn’t sell their home. Now, they can actually sell their homes and head to Colorado. However, what we are seeing is that the California transplant who 10 years ago maxed out their mortgage and stretched for a 1 million dollar home, is now buying a $500,000 home, all cash.
IREN:Much has been written about New Urbanism and people returning to the city. But as you recently mentioned, far more people live and buy homes in the suburbs than in the city. Do you think suburban living gets the respect it deserves?
Hornung: Unfortunately, it really doesn’t. There seems to be a persistent view that surfaces every decade or so that people have had it with suburban sprawl and are moving back in droves to the city to enjoy the amenities of urban living. Only problem is that the market data has never really backed up these assertions. Now don’t get me wrong, I am not advocating for one or the other, urban living vs. suburban living. I am simply saying that both offer attractive amenities, but they appeal to different people, and the group of people who prefer suburban living has consistently been much larger than those who prefer urban living. Based on a quick Google search, opinion survey after survey indicates that people prefer suburban living over urban living. According to a poll sponsored by Smart Growth America, 13 percent of Americans prefer to live in an urban environment, compared to 33 percent who prefer the suburbs and another 18 percent who like to go even further out to the exurbs (think Castle Rock now, Elizabeth soon).
Suburbs still rule
These results are not all that surprising to people like myself in the business of helping folks buy and sell homes. We know that suburbs like Rock Creek in Superior along the Boulder turnpike, and Highlands Ranch, once featured as the poster child of suburban sprawl in a National Geographic article, are highly desired by home buyers. Residents of these suburban communities like them so much that it is very common for them to move within the community as their life situations change. Now that doesn’t mean that an urbanite in Highland or downtown Boulder is going to love Rock Creek or Highlands Ranch, but the folks who live there really do love them, and given the chance to move into a hip happening urban loft for the same cost, they would stay right where they are.
IREN: Still, at the same time, homes in the suburbs, where there is little limit to the supply of competing homes that can be constructed, have been hammered worse than areas such as Boulder or many downtown Denver neighborhoods, where there are constraints on supply. Yet, many people are priced out of areas that appreciate. So what should be some of the things that should be at the top of the list of a typical home buyer shopping for a suburban home?
Hornung: The No. 1 thing to consider is what does the future supply of homes look like in the area. What is the best way to determine future supply? Take a close look at the land surrounding your neighborhood. When you stand in the drive way of your new home or on the edge of the development, do you see homes or land, and if you see land, do you see tractors or trails?
If you see homes, there may not be any developable land around your community. That will limit future supply and help your home hold its value.
If you see land instead of homes, is the land covered by tractors or trails? Tractors indicate land that could be developed when market conditions turn favorable again. That means you will be competing with an increasing supply of new construction homes if and when you go to sell your home in the future. Basic economics tells us that an increasing supply will exert downward pressure on prices.
If you see trails, this indicates that the land is protected in some way and not open to development. This limit on supply in the area bodes well for the future value of your home.
IREN: And perhaps it is a disservice to speak of the suburbs as if they were one giant monolithic community.
Hornung: Remember, not all suburbs are created equal. Suburbs like Rock Creek and Highlands Ranch are surrounded by land that already has homes on it, or by land that is protected as open space. These communities are at, or close to, complete build out. As a result, supply is limited. Not surprisingly, Highlands Ranch and Rock Creek home values have held up quite well, even in this challenging real estate market.
Thanks, Lane.
For more on the Denver-area housing market, please visit COhomefinder.com
Contact John Rebchook at JRCHOOK@gmail.com.
Someone does not understand percentages.
“a 1 percent rise in interest rates” means that if interest rates are at 4.3% per anum, then a 1% rise would now have the rate at 4.343%.
It would be better and correct to say: “a 100 basis points rise”. This would mean 4.3 becomes 5.3.
Time for Lane to return to 6th-grade math class.
Re:Barnes comment
What he said about 1% could be interpreted either way. It was obvious to me what he meant
Why waste our time with meaningless quibbling?