Metro areas are on thin ice
A≠ordability melts in state, and interest rates fan the flames.
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