While 2016 is proving to be another record-breaking year for the local residential real estate market, the increasing likelihood of mortgage rate hikes is creating uncertainty for some and opportunity for others.
Although November saw a slight dip in home sales, monthly sales grew 46.7 percent above the same time last year, according to the most recent data from the Pikes Peak Association of Realtors.
With nearly an entire month still left in the year, the Colorado Springs market has broken its own record for the second consecutive time with a total number of 14,083 home sales in 2016 compared to last year’s record-breaking sales total of 13,250, according to PPAR.
This marks the sixth straight year that home sales have risen year over year, which many characterize as a sign that the local housing market has ended its rebound and started healthy growth.
Meanwhile, in the weeks since the presidential election, mortgage rates in the U.S. have reached an 18-month high (4.08 percent for a 30-year fixed and 3.34 percent for a 15-year fixed) and uncertainty looms in the form of a Federal Reserve short-term interest rate hike expected next week that is expected to bleed into the mortgage market.
“It’s not going to do anything good,” said Dale DeBoer, a professor of economics at UCCS. “The question is how bad the impact is likely to be.”
DeBoer, an expert in international economics, said that although the market has seen a slight mortgage rate increase — which many experts expect to continue — those numbers are still at historic lows.
But with what he refers to as an “unknown political environment,” DeBoer said continued market health depends on whether the Trump administration makes good on its promises for expansionary spending, tax cuts and a less stringent regulatory environment. If Trump does follow through, and is supported by Congress, DeBoer said interest rates could face more upward pressure.
“We could easily see the interest rates jump a point or two in the next year or two,” he said. “But we could also see a much smaller increase.”
He said that an increase of a point or two would most noticeably impact the bottom end of the market first, especially given that Colorado Springs has in recent months seen dramatic growth in demand for real estate under $200,000.
“The first people pushed out of the market are always the riskiest buyers,” he said.
Despite DeBoer’s realistic approach to the possibility of a slower housing market, he said he doesn’t believe what many in the industry have posited: A Trump presidency will have positive impacts in the short term, but send the nation quickly into the next recession.
“Forecasting a recession is like calling the top of the market,” he said. “It’s a bit of a fools’ game.”
So how does Colorado Springs fit into the mix?
DeBoer dispels the notion that the local housing market is safer because of its steady growth and lack of over-leveraging. Instead, he said the city’s ties to the larger Denver metro area could become an Achilles heel if the market heads for another downturn.
“Because the [local] market didn’t go up as much, it’s less likely to go down as much,” he said. “But in a sense, Colorado Springs is more exposed because so many people that live here have their employment in Denver … so whatever hits Denver will spiral down here. I actually think Colorado Springs is more vulnerable because of that.”
REAL ESTATE PAUSE?
Some Realtors think the slight uptick might create a pause, said local Realtor and PPAR President Charles D’Alessio.
D’Alessio, who owns Synergy Realty Group, said that he doesn’t foresee a significant effect on house hunters looking to buy near the middle of the market, but agrees that more rate-sensitive buyers are the most likely to be affected. But D’Alessio also believes that mortgage rates still have some climbing to do before they become a real concern to the economy.
“Any time you see large jumps in interest rates — like full points — that typically will create a little drag on the sales,” D’Alessio said. “I’m just guessing, but I’d say that if it got above 5 [percent] … I think it could definitely create some pause in the real estate economy. If we get to that point, I think there are going to be some real struggles for people; especially in the lower purchase price range ($200,000 or below) in Colorado Springs.”
The new administration could bring changes that not everyone wants, but D’Alessio said much of the real estate community is maintaining a “wait-and-see” attitude when it comes to policies that could impact the housing market.
“There is always some concern any time something is changed that has been working really well,” D’Alessio said. “I think there is a tendency to think that the baby will be thrown out with the bathwater — but we don’t know that for certain.”
GOOD FOR BUSINESS
For some, higher mortgage rates could mean more business.
Chuck Pistor, CEO of Miracle Method, makes his living by serving those looking to buy, sell or invest in a home they already own by providing bathroom and kitchen refinishing services.
In recent years, Pistor said his business has grown 15 to 20 percent annually. Part of the growth is due to consumers becoming aware of refinishing as a potential alternative to expensive replacement and repair work, while some of it is due to a more competitive market.
“Buyers will often use it as a negotiating tool,” he said. “And we talk to sellers about dealing with those objections —dealing with the ugly — before it even becomes an objection.”
Although Pistor’s business slumped from 2008 to 2012, it recovered quickly. The company works most with middle-market ($200,000-$400,000) homes, but Miracle Method has also worked with fixer-uppers, as well as million-dollar Broadmoor homes.
“Mortgage rates are low and the market is back — and it’s a sellers’ market,” Pistor said. “As the market tightens up, sellers are getting their homes ready to sell. If you want to get the best price, we’ll help you with that too.”
The potential for rising interest rates doesn’t bother him.
Pistor believes a rise in interest rates could result in homeowners choosing to invest in upgrades, instead of moving to a more expensive home.
“It helps people be more confident that where they are is where they need to stay and invest,” he said.
“Flipping and trading up is good for us, but it’s also good for us when people decide to make investments where they are.”