Lower interest rate won’t necessarily mean lower Denver-area home prices

Following the first cut in the Federal Reserve’s benchmark interest rate in more than four years, Denver real estate broker Bret Weinstein has advice for would-be homebuyers looking to capitalize on the move.

“People, if they want to buy, realistically should buy right now,” said Weinstein, founder and CEO of Guide Real Estate.

The Fed lowered its rate last week to about 4.8% from 5.3%. Interest rates had reached their highest point in more than two decades as the central bank battled inflation, which soared to 9.1% in mid-2022. As the central bank tightened its money policies to cool demand and rein in prices, inflation dropped, hitting 2.5% in August.

The cut of half a percentage point, larger than expected, could mean a bit of relief for people who’ve been paying higher interest rates on mortgages, car loans and credit card debt. The Fed has indicated it will further reduce the rate later this year with more reductions likely in 2025 and 2026.

A lower interest rate is a win for buyers because mortgages will likely become less expensive, Weinstein said. But he said people shouldn’t expect area home prices to drop for a few reasons, including that metro Denver is one of the most expensive markets in the country.

The median closing price in the Denver area at the end of August was $590,000, a 1.67% decline from July, according to a report by the Denver Metro Association of Realtors, or DMAR.

In addition, the metro area doesn’t have a lot of homes that are readily available and affordable, Weinstein said. Combine a limited supply with a likely surge in demand because of the interest rate cut, and the result could be higher prices, he added.

“Prices between January and April very likely could go up 6 to 7%,” Weinstein said.

A professor at Metropolitan State University of Denver has his own words of caution about the Fed’s attempted “soft landing” as it tries to balance stemming inflation with not stalling out the economy. Jeffrey Peshut said history shows that recessions follow when the Fed loosens its money policies after an extended period of restrictions.

“The fact that the Fed just lowered the federal funds rate by 50 basis points is one of the best signals we have that a recession is coming,” said Peshut, an assistant professor of finance and director of the real estate program.

High housing prices have helped fuel the inflation that led the Fed to start raising interest rates. For the time being, Weinstein doesn’t believe prices in the Denver area will fall because of the declining interest rates. DMAR reported that 10,724 homes were listed for sale at the end of August.

“We had the most inventory we’ve had since 2013,” Weinstein said. “Especially with interest rates where they were, that should have lowered prices in Colorado.”

Lower mortgage rates were “baked in” three to four weeks before the Fed’s decision because the market knew where things were going, Weinstein said. But home prices stayed relatively steady.

Weinstein believes the timing of the interest rate cut will temper the impact on house prices. The supply of homes on the market typically drops heading into October because people don’t want to be in the middle of selling their house during the holidays.

That means the interest rate cut will likely boost demand just as inventory starts decreasing.

“We’re already seeing more buyers starting to flood the market at a time when inventory starts to drop off,” Weinstein said. “I’m not suggesting that people should buy if they’re not comfortable, if the numbers don’t work. But if you can find a home right now, it would be more advantageous to buy now as opposed to when the inventory comes down.”

In the Denver area, labor shortages in construction are a factor in the state of the inventory, Weinstein said. Many builders left the market during the Great Recession and the area still hasn’t caught up, he said.

“And we didn’t build a lot of high-density condos because of our construction-defect law. Most major markets did,” Weinstein said.

Developers and real estate experts blame construction-related lawsuits by homeowners associations for a lack of condominiums. A 2017 law was an attempt to help spur more construction by requiring that more than half of the homeowners in a condominium complex agree to a lawsuit, but condo starts are still low in Colorado.