High rates putting “golden handcuffs” on many sellers in Denver’s housing market


Owners are happy to have super-low mortgage rates, but are also limited by them.

Anna Vavruska and her husband would like to sell the home they purchased in the Sunnyside neighborhood at the start of the pandemic. But that would require a trade-off they aren’t willing to accept — a much higher mortgage payment.

“Since we had a child, we definitely have thought about leaving central Denver, but it is not a good time. Even though we have equity in our home, we would still need to take on another mortgage,” Vavruska said.

Instead of a 3% mortgage rate that now makes for a manageable monthly payment, they would be staring at something between 6.5% to 7%.

Likewise, Tyler Bellis and his wife, Shayla, wouldn’t mind switching out the central Aurora home they acquired in 2018 for something roomier as they prepare to start a family.

Yet, swapping out the low 2.7% rate they have on their mortgage for one at today’s rates would boost their monthly payment by $600 to $700  — even after slapping 31% down on the next property.

“We would be downgrading at this point,” Bellis said. “Not only did our house appreciate in value, but so did everything else. Unless there was some big reason to move, I see no reason to sell.”

Bellis said a higher payment in that scenario doesn’t add any value, unlike moving into a more popular neighborhood or getting more square footage. Instead, it just represents more expensive financing that he struggles to justify.

While thankful for refinancing when rates were near the bottom, and having an affordable payment, he also can’t help shake the sense of being trapped. And that leaves him searching for ways to get out.

Welcome to the “golden handcuffs” or the “mortgage lock,” a phenomenon keeping potential home sellers in metro Denver, Colorado and across the country stuck in place and their properties off of the market.

Single-family home sales are down 21% in metro Denver and 23% statewide in the first half of the year, according to counts from the Colorado Association of Realtors. Falling sales and rising rates normally should translate into more supply and lower home prices, but the opposite is happening.

The inventory of single-family listings available in metro Denver was down 18.4% and statewide it was down 10.9% in June versus a year ago. Having limited options to replace a home they are selling further reduces the motivation of would-be sellers.

For the first half of the year, new listings for single-family homes are down 23% in metro Denver and 22% statewide. Statewide, condo and townhome listings are down 18% this year. The handcuffs are firmly in place.

“It will take us decades to unpack the damage done in just a few years. This will put a hold on our existing home sale inventory for many years to come,” predicts Nicole Rueth, a senior vice president with Englewood-based The Rueth Team, which is affiliated with Movement Mortgage.

Inflation rates are coming down rapidly, but mortgage rates have remained stubbornly high as the Federal Reserve sells rather than buys mortgage-backed securities. Relief from higher mortgage rates, which she had expected in the second half of this year, probably won’t show up until next year.

Buyers appear to be slowly getting used to the idea of higher rates for longer, Rueth said. But sellers — not so much.

Shiny but confining

A study of payments on a 30-year loan at various interest rates can explain why so many homeowners feel constrained when it comes to selling.

The Colorado Association of Realtors estimates the median sales price of a single-family home purchased in June in metro Denver was $630,000. After putting 20% down, that works out to a mortgage of $504,000.

At a 7% interest rate on a 30-year loan of that amount, the monthly principal and interest would run $3,353 a month. At 5%, that same payment would be closer to $2,706. At 3%, it would be $2,125, and for those fortunate enough to borrow in early 2021, when mortgage rates dipped to 2.65%, the payment would be around $2,031.

Shedding the golden handcuffs comes at too high a cost for many. If they don’t have to sell, they won’t sell.

“Large-scale lifestyle changes are why people are buying and selling currently,” said Bret Weinstein, CEO of Guide Real Estate in Denver. That includes things like a divorce, a job relocation, or a big drop in income.

Brokerage firm Redfin analyzed data from the Federal Housing Finance Agency (FHFA) to try to understand where homeowners holding a mortgage were on the interest rate scale as of the end of last year.

The numbers are national, but about 92% of all mortgaged homeowners had a rate below 6%; 82.4% were below 5%; 62% were below 4%, and nearly one in four, or 23.5%, had a rate below 3%.

“The vast majority of homeowners with a mortgage hold a rate that is significantly lower than those which prevail currently. With home prices up sharply in recent years, many prospective sellers are simply unwilling to put their home on the market and trade up or down into a higher cost mortgage,” said Charles Dougherty, a senior economist at Wells Fargo, one of the nation’s leading mortgage lenders.

That extreme gap in rates is a big contributor to the tight inventory, but demographics also play a part, Dougherty said. Most transactions involve a buyer who is also selling a home. One property goes off, another comes on.

A lot of millennials, the generation now in the prime age range to move from renting to owning, have had to delay purchasing a home. They are behind compared to earlier generations, leaving many desperate to own, even with the sharp run-up in rates. But they can’t contribute a home back into the mix like a move-up buyer, now wearing handcuffs, would.

Older homeowners are more likely to have paid off their mortgages, and more likely to downsize into a lower-cost property and pay cash for it. They are less likely to be wearing golden handcuffs or better able to escape them. But compared to prior generations, baby boomers are choosing to age in place at a higher rate.

Although the study is a little dated, Move.org found in 2018 that 28.7% of homes in Colorado were free and clear of a mortgage — the 49th lowest rate of any state. Colorado homeowners held mortgages at the highest rate of any state besides Maryland.

And all of that hesitancy is contributing to a slower market. During the first half of the year, roughly 14 out of every 1,000 homes changed hands, according to another report from Redfin. That is down from 19 out of every 1,000 homes prior to the pandemic. Turnover is at its lowest rate in at least a decade.

The price of freedom

If higher rates locked the golden handcuffs into place, lower rates are the key that will release them, but how low do they need to get?

Bellis said 4.5% on a 30-year loan would likely be his trigger, while Rueth and Weinstein predict a 5% rate on a 30-year mortgage could unlock the market.

“If we get close to that 5% point, this market will explode. That is where real estate is right now. You survive until you can thrive,” Weinstein said.

Once the golden handcuffs come off, Rueth agrees that the market could get crazy again — like 2021 and early 2022 crazy — when years worth of home price appreciation were packed into a few short months. She is advising clients who own and are looking to buy something else to convert the original home into a rental if they can pull it off.

Following Rueth’s advice, Paul and Chelsea Cook decided to go that route with the home they bought in the Columbine West neighborhood four years ago.

The rent is high enough to cover the mortgage, which is at a low 3.12%, and spin off some extra cash. In June, they made a “lateral” move into a house comparable in age and size located in Centennial’s Willow Creek neighborhood. But they had to borrow at a much higher interest rate of 6.9%, which wasn’t comfortable.

“It makes it a scary endeavor because we are increasing our mortgage payment quite a bit. The original place can offset this a bit,” said Paul Cook. If they get in a bind, rent on the new home won’t cover the new mortgage. But the couple decided against waiting.

The Centennial home needs cosmetic upgrades that the couple can do on their own to increase its value. If rates start falling, they can refinance, bringing the payment down. They also expect home prices to take off and competition to ramp up given all the pent-up demand.

“Rather than getting into some bidding war, we were able to get a house at asking price that was listed at under its market value,” said Chelsea Cook. “Part of our thinking was we invest in our 401k, we invest in the stock market — it was just another way to diversify our investments for our retirement.”

For Jerrod Swanson, the mortgage lock has created a different kind of dilemma. He has a townhome in Lakewood that he is looking to sell so he can use the proceeds toward purchasing a cabin he is renting in Evergreen.

He left the townhome after adopting a rescue dog that needed more room to roam and is much happier living in the foothills with its great vistas and friendly neighbors, even though calling the place “rustic” is polite.

Swanson wants to buy the cabin, but the idea of paying all that extra money in interest each month makes him ill.  And his landlord, who plans to use the money from a sale to buy a place back east, isn’t under a lot of pressure to get a deal done either.

“Any sane human who already owns a house does not want to buy a house right now,” he said. “Lower interest rates would have made it an easier equation. If the rates were what they were a year ago. I would be owning this cabin by now.”

Swanson, who works at the federal bankruptcy court, knows firsthand what can happen when people get overextended financially. He predicts he will scream once the first mortgage statement on the cabin arrives in his hands.

But he also doesn’t want to miss out on the opportunity. He is in limbo, feeling out of control in a mortgage market that has paralyzed him and others.

“I am the dummy, not the ventriloquist. I have the strings on my hand,” he said.

By  | asvaldi@denverpost.com | The Denver Post

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