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The housing market in metro Denver is facing a predicament like never before. Long lead times to complete new homes, combined with soaring interest rates at 15-year highs, have left homebuilders and buyers in a tough spot. Let's dive deeper into the challenges they are facing and how it is affecting the real estate landscape in the area.
A Shocking Reality
People who were expecting a 3% interest rate on their 30-year mortgages are now looking at rates above 6%. This drastic change has caught many by surprise and is causing buyers to reconsider their options. Few lenders are willing to lock in a mortgage rate for the extended period it takes to build a home, leaving buyers vulnerable to sudden interest rate hikes.
A Struggle for Homebuilders
The surge in interest rates has had a substantial impact on the new home market in metro Denver. The share of abandoned contracts has increased from under 15% to a staggering 45% by the end of July. Even more recently, around a third of contracts have been failing. The recent spike in rates has only added to the challenges faced by homebuilders in the area.
Image: Ricarda Dietsch, Denver Division president for Taylor Morrison homes inside the model home, Vail at Macanta Sept. 22, 2022, in Castle Rock. (Photo by Andy Cross/The Denver Post)
The Impact on Buyers
The rise in mortgage rates over the past month, from 6% to 6.8%, has resulted in significantly higher mortgage payments for buyers. For example, someone buying a median-priced home in metro Denver at $624,226 with a 20% down payment can expect to pay $271 more per month. This sudden increase in payment is causing hesitation among potential buyers.
Finding Solutions
Despite the challenges, some homebuilders have managed to find new buyers who can handle the higher rates, such as wealthier buyers relocating from other states and local move-up buyers with existing equity. However, overall, there has been a noticeable decline in customer visits to sales offices and fewer people signing contracts as they wait for the market to stabilize.
An Unexpected Upside
One positive aspect amidst the challenging situation is that buyers who are ready to make a purchase can now get a new home much faster than a few months ago. By getting involved early in the building process, they can still have a say in the finishes and customization of their home. Homebuilders are also assisting customers by buying down their interest rates, helping to save them money on monthly payments.
Image: Taylor Morrison homes, background, under construction at Macanta Sept. 22, 2022, in Castle Rock. (Photo by Andy Cross/The Denver Post)
The Consequences of Scaling Back
The cutback in construction due to the challenging market conditions will only worsen the chronic housing shortage in the area. Metro Denver has not reached the peak of 2006 in terms of housing starts, despite increased demand, record-low mortgage rates, and a growing population. This shortage of housing has resulted in rising home prices, restricted rental options, and limited opportunities for young adults to move out on their own.
Looking Ahead
While higher interest rates have made it harder to provide homes to the starter home market, the capacity to create new homes remains intact. The housing market is going through a healthy adjustment after an unhealthy period, according to industry experts. However, the next 6 to 9 months may prove to be a challenging time for all parties involved in the U.S. housing markets.
Image: Living room area in the Taylor Morrison Vail model home at Macanta Sept. 22, 2022, in Castle Rock. (Photo by Andy Cross/The Denver Post)
In conclusion, the surging interest rates have had a significant impact on both homebuilders and buyers in metro Denver. The real estate market is experiencing a period of adjustment as buyers reassess their options and builders navigate through the challenges. However, there are still opportunities for those ready to make a move, and with time, the market is expected to stabilize.
