Mortgage rates just one factor in housing affordability

LOVELAND — Mortgage rates, construction costs and home-price appreciation represent the driving factors behind housing affordability, with high student-loan and consumer debt derailing some younger would-be home buyers.

That was the message at the Mortgage-Rate Effects panel at the Northern Colorado Real Estate Summit, March 5, at the Embassy Suites by Hilton in Loveland.

Panelists included Brett Holland, principal, Home Mortgage Alliance LLC; Steve LaForest, branch manager, New America Funding; Brandon Myers, principal, WestMark Homes Colorado LLC; and moderator Michael Calcote, chief financial officer, Elevations Credit Union.

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Calcote noted that mortgage interest rates a year ago were projected to reach 5.4 percent in 2019 and briefly climbed above 5 percent late last year. But he said rates took a “significant drop” early this year, with 4.6 percent to 4.8 percent now projected for year-end.

“Bottom line, what we’re looking at is a lot more stable interest-rate environment than we were looking at a year ago,” he said.

Calcote noted that lenders view would-be buyers through various perspectives, including their total debt expense compared with income and their total debt-to-income ratio.

He said some higher ratios are allowed for compensating factors, such as larger down payments, strong cash reserves or high credit scores.

But higher mortgage rates, home-price appreciation and high construction costs mean that some buyers are being priced out of the market, he said.

Holland emphasized that the Federal Reserve does not set mortgage rates.

“While the Fed impacts mortgage rates, they don’t control mortgage rates,” he said.

He noted that the Fed began purchasing mortgage bonds during the Great Recession of 2007-2008, eventually amassing $4.5 trillion in bonds. Since that time, the Fed has lowered interest rates eight times and actually sold $500 billion in mortgage bonds at the end of 2017.

The Fed plans to sell another $500 billion this year and will then see how the market reacts, he said.

“So far, so good,” he noted.

Holland predicted interest rates at 5 percent to 5.5 percent by year’s end, adding that it is mortgage-backed securities that drive mortgage rates, along with inflation.

He said the quality of mortgages today is far greater than during the Great Recession, when loose credit drove down the quality of loans.

“Now, you have to be well-qualified,” he said.

LaForest said that even modest increases in mortgage interest rates can detract from affordability.

“It’s becoming more and more difficult, with rates increasing over time,” he said. “When rates were a lot less, more people could qualify for a new home.”

LaForest noted that an affordability index prepared by the Colorado Association of Realtors declined by 18 percent from a year ago. That means that if, for example, 100 people could afford a home last year, only 82 can afford one now.

“Income of the average wage earner has not kept pace with the appreciation rate that has taken place,” he said.

In Weld County, the average sales price was about $200,000 five years ago and has climbed to $350,000 today, he said. In Larimer County, the average price has jumped from $250,000 to more than $400,000 in that five-year span.

For an average young couple, “That’s a tough deal for them,” he said.

Consumer debt contributes to that dilemma, including high student-loan debt and consumer debt.

Additionally, home-price affordability has been influenced by the cost of construction, water, permits, land and other factors.

He said Northern Colorado cities should collaborate to promote affordable housing, including reducing the time required for zoning changes and development review. Municipalities should also eye reduced lot sizes that could drive down overall prices and explore out-of-the-box solutions, such as allowing housing on large unused parking lots at shopping centers.

Myers said that home builders and lot developers need $5 million to $10 million just to get a typical project out of the ground. He said fees for various types of loans, including development loans, builder lot financing, construction financing, home-equity loans for buyers to afford a down payment and the final home loan continue to increase.

He agreed that lot sizes will decrease in size as a way to improve affordability, with builders “taking more out of that land to reach more affordability.

“Land is at an all-time high,” he added, noting that builders prefer land costs to be no more than 20 percent of the end purchase price of a home. But the cost of carrying debt for development, builder lot financing and construction financing represent “silent but deadly” costs, he said.