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Keep Calm and Rock On!

Borrowed from the music world, the phrase seems equally fitting when describing the mood of the Pikes Peak region’s mortgage and housing sectors.

A .25% interest rate hike by the Federal Reserve – the first in a decade – made headlines earlier this year. And if all goes as planned, we’ll see two more during 2017. The move came in response to a strong U.S. economy that showed signs of upbeat consumer confidence, low unemployment and a low inventory of for-sale homes. 

Financial analysts at the Mortgage Bankers Association, the Wall Street Journal and Bankrate.com all took note. Each has adopted a hopeful “wait and see” tone as a new president and Congress took office. They generally agree that 2017 will continue to be a seller’s market – especially in cities where affordable home inventories remain tight. By 2018 or 2019, however, homebuilders and mortgage lenders may see a downshift. As mortgage costs increase, homes will become less affordable, and houses will remain on the market longer. The Fed projects such pressures will be offset by job growth and higher incomes.

CB&T Mortgage Sales Manager Robert “Hutch” Hutchinson works with mortgage customers in El Paso and Fremont counties. He wasn’t surprised at the Fed’s decision and is upbeat about the outlook for spring. “I think we’ll see purchase loans close to last year’s levels – or up a little based on our tight real estate market and the city’s general economic health. 

Zillow.com, for example, posted that the Colorado Springs market “continues to improve,” noting that home values were up 8.2% last year – and will rise 4.3% in 2017. Similarly, the Pikes Peak Association of Realtors reported home prices rose by more than 5 percent in 2016, and 2017 looks very promising. The city earned a place on Forbes‘ Top 10 hottest markets list, and U.S News & World Report ranked it the 5th Best Place to Live.

Joe Loidolt is also optimistic about new home sales this year – even as interest rates begin their climb. “We’re assuming sales will be similar to 2016 thanks to job growth and contracts already in the pipeline -- but that’s tempered by rising interest rates,” he says. Costs for materials like lumber and drywall could also drive price increases.

Loidolt points to recent industry reports showing Colorado Springs’ growth as a city is beginning to “pick up steam.” He doesn’t expect the overall new home market to change much between 2016 and 2017 as buyer demand is offset by higher interest rates. “Let me be clear,” he adds. “We are not economists, so take what I’m saying with a grain – or maybe a handful – of salt because we are guessing like everyone else!”

Both men agree that in the Pikes Peak region, price is key. “Our strongest purchase mortgage market will be for homes priced $300,000 to $400,000 and under. Classic Homes saw its 2016 new home price hit $420,000, offering homes from $250,000 to $700,000. New home builders that stay in an affordable range will also continue to do well in 2017,” Hutchinson says, noting that Southern Colorado incomes haven’t risen as quickly as those in Denver or Northern Colorado. 

Because a home purchase is price-point driven, every .50% (one-half percent) increase in interest rates lowers the borrower’s ability to qualify for a new home loan by 10 percent. As a result, over time higher interest rates can change the upgrades a buyer adds on to a new construction purchase – or require choosing the $180,000 model over the pricier $220,000 new home.

Higher rates slow refinancing

The year ahead may be less optimal for homeowners who have delayed refinancing a mortgage. Higher interest rates may eliminate borrowers who can no longer afford higher monthly payments and fees.

Ent Credit Union Senior Vice President and Chief Lending Officer Jon Paukovich acknowledges that since last fall’s presidential election, interest rates have risen by at least .75%. “There’s still an opportunity to refinance your home loan at great rates today, but applications are likely to drop off even at the current level,” he says. 

Higher interest rates mean the refis will now comprise about 30 percent of Ent’s total mortgage business in 2017 – down from 39 percent last year. As a result, the credit union plans to focus more heavily on purchase mortgages this year. “Most forecasts are looking for refis to drop 40%, but purchase volume is expected to increase by 10% or more, he says.

Hutchinson, too, sees slower refi volume ahead, even as mortgage companies begin to market aggressively. He advises consumers find a trusted advisor to help evaluate tempting offers. Fortunately, Colorado’s Tangible Net Benefit law was crafted to protect consumers. It makes sure there is a valid reason to refinance. But don’t worry. Refis aren’t likely to disappear. “Equity in a home is a great resource for college, home improvement and other personal needs,” he says.