BOULDER – Today’s market is tough on first-time home buyers. Inventory of first-time buyer homes and condos had plunged to a record low, pushing prices higher in most markets. The number of first-time buyers is dropping. This is reflected in a January 2018 National Association of Realtors article reporting that out of all existing-home sales nationally, the percentage of first-time home buyer sales is down from 33% to 29% from a year ago.
Now first-time buyers are facing another challenge. As the economy recovers, mortgage interest rates tend to rise, and this recovery is no exception. Interest rates, which have been at record lows since the end of the recession, have risen from an average of 3.86% a year ago to 4.78% today. On one hand it seems silly to worry about an increase to 4.78%, remembering when mortgage rates hit 16% in the 1980s. Nonetheless, every time there is an interest rate increase, another group of potential buyers is eliminated from the market. This is because buyers are forced to choose a smaller, less expensive home, or wait until they get a raise or save more for a down payment. It is very tough to out-save an appreciating market or get a raise in time, so most will either buy the smaller place or step out of the market.
According to Jessica Shanahan, loan officer with Premier Lending, every time the mortgage interest rate goes up .25%, the buyer loses about 3% in purchasing power. As an example, on a $400,000 loan at 3.86%, the principal and interest payment is $1,877 and increases to $2,094 at 4.78%. Monthly income requirements increase from approximately $4,000 a month to approximately $4,600 a month.
In addition to interest rates increasing, first-time buyers face yet another issue. As prices have increased, the conforming loan limits have increased, but not enough to keep pace with Boulder’s significant home price appreciation. The national conforming FNMA loan limit is $453,100 with a minimum down payment of 3%. In Boulder, the FNMA loan limit is $578,450, just below the typical entry level price. In that program, 5% down is required or $30,000. On a $600,000 purchase, 3% down would be $18,000. However, that would not be enough to meet the maximum loan of $578,450 making the required minimum down $21,550.
When interest rates are on an upward trend, buyers start to get nervous and this creates a rush in the market place. Even with modest increases, interest rates are still very reasonable, relatively speaking. Hopefully, most buyers will still be able to make their home buying decision because they like the home, not because they are pressured by interest rates.
By Duane Duggan, RE/MAX of Boulder. Duane Duggan has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life.