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4 Scenarios: Home Prices and Interest Rates

In Buyers, Homeowners, Sellers by Doug Phelps

It’s no secret that the Denver real estate market is still fast-moving and presents a lot of both challenges and opportunities.  In the current real estate market, both buyers and sellers can encounter a lot of variables along their journey and it’s my job as a good Realtor to look out for any potential pitfalls and guide my clients through every step of the way towards their dream home.  One of the biggest concerns buyers have when looking at homes are of course price and interest rates, especially for buyers who are financing their home purchase.  Over the years, I have seen some patterns and scenarios, especially that relate to interest rates, which have been somewhat common in this market and I’ve highlighted them below.  Here are four hypothetical scenarios as it relates to interest rates and home sale prices.

1. Rates are down and sale prices are up.

This is where we have lived in varying degrees for the last 11 years, especially as seen in Colorado. Interest rates are consistently down and sale prices have gone up making it a hot market.  Significantly, more so for the last two years as we see in the current housing market.

2. Rates are up and sale prices are up

This is the market condition we seem to be moving into. Many buyers and sellers are confused by this, as there is usually the typical correlation between rates increasing and values going down. Remember, as shared in this blog earlier in the year, our challenge has been and continues to be that of supply. We only have 2500 homes on the market. While some buyers will opt out of the market because they can no longer afford the payment associated with a higher interest rate at the same purchase price, this only means we are moving from 9 buyers for every property to 4 buyers for every property. We still have demand that outpaces supply.

3. Rates are up and sale prices are down

There is an assumption that at some point in the future as rates continue to climb, the supply demand ratio shifts. When this happens, we may see a pullback in real estate values. However, again, current market conditions simply don’t add up to this occurring in the near term.

4. Rates are down and sale prices are down

If you are considering a move, you may say you’re going to wait for values to drop and interest rates to drop. Or if you hear friends and colleagues who are considering the same say this. This is an economic improbability. In addition to the reasons listed above, if rates go back down, we will see another flood of buyers to the market and values jump again.

Many buyers may look at this list and wonder if now is the right time to buy and there is only one of the above scenarios where buyers should not act: #4. If anyone truly believes that interest rates are going down and values are going down, then wait to purchase. The obvious argument is the economic improbability of that scenario which says this thinking is just wrong.

For all the other scenarios, potential buyers will be well served by purchasing now. Here’s why:
  1. Right now, interest rates have increased a little bit. Even so, with the low inventory the Denver metro marketplace currently has, values will continue to appreciate because of this supply and demand pull. This means buyers will continue to benefit from locking in a relatively and historically low interest rate and benefit from increased equity in their homes.

  2. If rates increase and values go down some, home ownership is a long-term play for most people. Even if they lose some equity through short-term reduction in value, the monthly payment is less at a lower interest rate on a more expensive home, and the lifetime value of interest paid is lower, at a lower interest rate.

  3. If purchase today at what may feel are “elevated” interest rates and rates go down in the near future, two things will likely occur:
    • values will climb (again)
    • refinance to get the lower rate (and maybe grab some equity for home improvements, a vacation, etc.)

Are you wondering if now is the right time for you to buy a home? Are you in the market to buy or sell your home?  Call and text me at (720) 323-4176 or email me at [email protected]