Metro ar­eas are on thin ice

A≠ord­abil­ity melts in state, and in­ter­est rates fan the flames.

The Denver Post - - FRONT PAGE - By Aldo Svaldi

Home af­ford­abil­ity in Colorado’s largest metro coun­ties, with the ex­cep­tion of Mesa County, has dropped to its low­est lev­els in nine years, ac­cord­ing to an anal­y­sis from AT­TOM Data So­lu­tions.

“We are en­ter­ing some thin ice for hous­ing in mar­kets like Colorado that have reached af­ford­abil­ity ceil­ings,” said Daren Blomquist, a se­nior vice pres­i­dent with AT­TOM, par­ent of Real­tyTrac.

Di­min­ished af­ford­abil­ity is co­in­cid­ing with rapidly ris­ing mort­gage rates that are ex­pected to put a home pur­chase out of reach next year for a larger num­ber of buy­ers, es­pe­cially first-timers.

If af­ford­abil­ity re­flects the thick­ness of the ice, then ris­ing in­ter­est rates are akin to warm­ing tem­per­a­tures and peo­ple in places such as the Front Range need to lis­ten for the sounds of crack­ing ice, Blomquist warns.

“Higher rates could quickly put down­ward pres­sure on home prices by lim­it­ing de­mand,” Blomquist pre­dicts.

In a sep­a­rate re­port, Zil­low on Wed­nes­day said its U.S. Home Price in­dex reached a me­dian value of $192,500 in Novem­ber, up 6.5 per­cent over the past year and within 2 per­cent of sur­pass­ing the old peak reached in 2007.

That’s old news in metro Den­ver, where home prices passed their hous­ing bub­ble peak in early 2013 and haven’t looked back. Sev-

eral years of dou­ble-digit home price gains com­bined with low sin­gle-digit in­come gains have eroded af­ford­abil­ity to lev­els not seen since right be­fore the hous­ing down­turn.

AT­TOM stud­ied a dozen Colorado coun­ties with 100 or more com­pleted home sales in the fourth quar­ter, mea­sur­ing what share of the av­er­age weekly wage a buyer would spend to buy a home at the me­dian sales price, as­sum­ing a 3 per­cent down pay­ment.

As re­cently as two years ago, af­ford­abil­ity in all 12 coun­ties was at or bet­ter than the his­tor­i­cal av­er­age, de­fined as 100 on the in­dex. A higher num­ber on the in­dex means homes are more af­ford­able. Den­ver solidly crossed be­low its his­toric af­ford­abil­ity thresh­old in the first quar­ter of 2015.

Adams, Ara­pa­hoe, Jef­fer­son, Larimer and Weld coun­ties did so in the sec­ond quar­ter of 2015. Boul­der County joined a year ago. This sum­mer, af­ford­abil­ity in Dou­glas, El Paso and Pue­blo coun­ties dropped be­low nor­mal.

Hous­ing mar­kets can main­tain low af­ford­abil­ity for long pe­ri­ods, but the big­ger the de­vi­a­tion from the norm, the greater the po­ten­tial for price de­clines, Blomquist said.

Right be­fore the hous­ing mar­ket rolled over a decade ago, sev­eral of Colorado’s largest coun­ties had af­ford­abil­ity in­dex scores in the 70 to 80 range. Den­ver County’s af­ford­abil­ity in­dex dropped to 79 in the fourth quar­ter, a level not seen since the sec­ond quar­ter of 2006.

Af­ford­abil­ity isn’t just about home prices, but about the abil­ity of in­comes to keep pace and the cost of bor­row­ing money. If in­comes and home prices rise in tan­dem, and if mort­gage rates re­main sta­ble or fall, then a mar­ket can main­tain af­ford­abil­ity.

But that has hardly been the case. Home prices in the past year are up an av­er­age of 10 per- cent in the dozen Colorado coun­ties stud­ied, ac­cord­ing to the AT­TOM re­port. Av­er­age weekly wage growth is up only 1 per­cent, with Weld and Dou­glas coun­ties ac­tu­ally show­ing wage de­clines.

Low mort­gage rates have pro­vided a sav­ing grace, off­set­ting sky­rock­et­ing home prices and slug­gish wage gains. But mort­gage rates are now march­ing higher, re­mov­ing an im­por­tant sup­port.

“Al­though the econ­omy is ex­pected to con­tinue to ex­pand with around 2 mil­lion net new job cre­ations, ex­ist­ing home sales are ex­pected to see lit­tle ex­pan­sion next year be­cause of af­ford­abil­ity ten­sions from ris­ing mort­gage rates and prices con­tin­u­ing to out­pace in­come growth,” said Lawrence Yun, chief econ­o­mist with the Na­tional Association of Real­tors, in his 2017 fore­cast.

Higher rates mean higher in­comes are needed to qual­ify for homes, as­sum­ing prices don’t drop. When rates on 30-year mort­gages were down around 3.5 per­cent this sum­mer and fall, a buyer bor­row­ing $362,650 — the me­dian price of a home sold in Den­ver County — re­quired an in­come of $69,791, ac­cord­ing to BankRate.com.

Mort­gage rates on a 30-year loan are now solidly above 4 per­cent. Buy­ing that same home at a 4.5 per­cent rate would re­quire an in­come of $78,750 to qual­ify. If rates shot up to 5.5 per­cent, a bor­rower would need $88,247, ac­cord­ing to BankRate.com.

Af­ford­abil­ity, how­ever, is a rel­a­tive mea­sure. Boul­der County has the high­est me­dian home sold price at $435,000 among the Colorado coun­ties stud­ied, ac­cord­ing to AT­TOM. Hous­ing costs there have also long con­sumed more than half of the av­er­age in­come, as is the case in Dou­glas County.

In Pue­blo County, the me­dian home sold price is $146,000, and his­tor­i­cally hous­ing costs have con­sumed 26.3 per­cent of the av­er­age in­come. But Pue­blo and Boul­der are in the low 90s on the af­ford­abil­ity in­dex, mean­ing buy­ers are stretch­ing more than they used to to get into a home.

Broom­field, where wage gains have run higher, re­mains at its his­tor­i­cal av­er­age for af­ford­abil­ity. Mesa County is now the only large Colorado county where home buy­ers con­tinue to en­joy above-av­er­age af­ford­abil­ity than in the past.

Es­pe­cially con­cern­ing is di­min­ish­ing af­ford­abil­ity in coun­ties where lower- and mid­dlein­come house­holds sought homes to fit their bud­gets. In Adams County, the me­dian price of a home sold this year reached $285,000, up 14 per­cent, the high­est rate of in­crease among the dozen coun­ties.

Home pur­chase costs, which con­sumed 35.6 per­cent of av­er­age in­comes his­tor­i­cally in Adams County, are now eat­ing up 43.8 per­cent of the av­er­age weekly wage.

Blomquist isn’t pre­dict­ing a re­peat of the hous­ing bust. Mort­gage un­der­writ­ing stan­dards have re­mained tight, mean­ing bor­row­ers aren’t as vul­ner­a­ble as they were a decade ago. Also, home builders haven’t got­ten car­ried away as they did a decade ago. If any­thing, they are build­ing far too few homes, given job gains.

The likely out­come will be weaker home price ap­pre­ci­a­tion and even price de­clines in some parts of Colorado. And if home prices in Colorado some­how man­age an­other strong year of gains, that would not be a good thing, he said.

...ex­ist­ing home sales are ex­pected to see lit­tle ex­pan­sion next year be­cause of af­ford­abil­ity ten­sions from ris­ing mort­gage rates and prices con­tin­u­ing to out­pace in­come growth.”

Lawrence Yun, econ­o­mist

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