Rising home prices and interest rates are making it more difficult for buyers to qualify for the home they want.
Experts expect the upward trend to continue, which will push some potential homebuyers out of the market or require them to rethink the type, size or location of the home they would like to buy.
Interest rates were low and stable for about six years until November last year. Since then, rates have risen about one-half percent.
Home values have also been increasing for six years; the upward trend doesn’t appear to be near an end anytime soon. Some buyers who qualified to finance a home in a particular price range are no longer qualified. Others will lose their ability to qualify in the near future.
The median price of homes in the city of Durango increased 7.7 percent from 2015 to 2016. Bayfield rural home prices increased 11.7 percent. High demand and limited supply, particularly in the lower price ranges, will probably keep upward pressure on prices.
To illustrate how higher interest rates affect a buyer’s ability to qualify, let’s take the case of a buyer with a monthly gross income of $4,500 and consumer credit payments of $450.
The buyer can qualify for a maximum house payment of $1,575 a month. After taxes and insurance are deducted, the buyer will have about $1,400 a month left for a mortgage payment. At 4 percent, the $1,400 would result in a loan amount of $293,000. At 4.5 percent, the loan amount would fall to $276,000. If rates go to 5.5 percent, the loan amount would fall to $246,000; That’s almost a $50,000 drop in purchasing power.
The median price of a home in La Plata County was $355,000 in 2016. If property values increase by 5 percent this year, the median price will be $373,000, an increase of $18,000. So the combination of a 1.5 percent rate increase and a 5 percent appreciation rate would wipe out $68,000 in purchasing power for our buyer. The buyer would have to find a home that was $50,000 less expensive in a market where the average home costs $18,000 more.
That would mean finding a less expensive home, which would require looking in an area that has lower prices, or finding a smaller home, a condominium or town home.
These alternatives could affect the quality of life, add to a commute time, and/or add to the fuel and maintenance costs for a vehicle. The other alternative would be to continue renting.
If you are thinking about homeownership, start the process early because erroneous items on a credit report could take months to correct.
It’s important that your loan is fully approved when the volume of new homes coming on the market increases in April. The key is to be able to buy before rates and values increase further.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or steve@durangore.net.
