Pricey homes, limited inventory: A look at Santa Fe’s housing economy

Santa Fe real estate broker Amanda Godlove Erwin, right, talks with prospective homebuyers Jim and Michaelene Squires at an open house in mid-January. (Mike Sandoval/For the Journal)

Santa Fe home prices continue to be among the priciest in the state, and the current real estate environment has only exacerbated that.

Home sales dropped precipitously in 2022, while prices continued to climb, according to new data released by the Santa Fe Association of Realtors.

Rising federal interest rates have forced mortgage rates to rise sharply, leading to a 42.3% drop in single family home sales in the fourth quarter of 2022.

But despite decreased demand, home prices rose 13.8% — now standing at $608,700 — over the same time period.

That increase in prices is caused chiefly by a shortage of housing, according to economist Kelly O’Donnell.

“When demand goes down, supply should loosen up and prices should fall. If demand goes down, and prices are still going up, that means that you have a real shortage,” said O’Donnell, who works at Santa Fe housing nonprofit Homewise.

This combination of limited inventory and more expensive mortgages made it more difficult than ever for working Santa Feans to buy homes.

“Yes, it’s definitely harder now than it was a year ago, but it was very hard a year ago,” O’Donnell said. “I can’t overemphasize how little affordable housing has been built in Santa Fe.”

A short supply may also cause potential sellers who want to stay local to reconsider listing their homes, according to Drew Lamprich, president elect of the Santa Fe Association of Realtors.

“Where are they going to go if they decide to sell their house?” he said.

Hundreds — if not thousands — more new affordable homes are needed in Santa Fe to unsnarl the current shortage, O’Donnell said.

A home for sale at 2819 Don Quixote in Santa Fe. Home sales dropped precipitously in 2022, while prices continued to climb. (Eddie Moore/Journal)

Home affordability

The problem goes back to the stoppage of home construction during the 2007 subprime mortgage crisis, and new solutions are needed, O’Donnell said.

“The most significant thing the city could do to increase the supply of affordable housing in Santa Fe is to really revisit how land use decisions are made,” she said.

Many neighborhood associations oppose new developments in an attempt to maintain property values, but O’Donnell says the opponents are a vocal minority. Those who the developments would benefit are too busy working to organize, she contends.

The city has tried to build more affordable housing but progress is slow-going. Between June 2021 and June 2022, city programs resulted in the availability of 110 affordable rental units and the purchase of 29 new price-restricted homes, according to information provided by Alexandra Ladd, director of Santa Fe’s Office of Affordable Housing. In the same period, city programs contributed to construction beginning on 98 affordable units.

“Santa Fe’s affordability needs will not be met with any singular project, which goes without saying. About 300 affordable homes (mostly homeownership) are in the pipeline for getting land use approvals or building permits,” Ladd said in an email.

The city also attempts to assist homebuyers by offering no-interest loans of up to $50,000, due upon sale of the home, to increase eligible buyers’ down payments. This program helps 20 to 25 people a year, according to Ladd.

Rising mortgage rates

Housing shortages are a standing issue for Santa Fe. But the sudden increase in interest rates — reaching 7% for a 30-year fixed mortgage rate in October, according to Freddie Mac — added a new, challenging dynamic to the market, said mortgage lender Lance Armer, who owns Santa Fe Mortgage.

“There was a period in early summer when things stopped. I wasn’t getting any calls, didn’t write any pre-qualification letters, you know basically everything was quiet and at that point I kind of felt like we were in a new rate environment,” Armer said.

For first-time homebuyers, he said, the math doesn’t work out. He provided the example of a two-person household making $74,400 annually or $6,200 a month. After a $19,000 down payment, the total monthly payment on a $380,000 house could be $3,000, or nearly half their income, at current rates.

Having a larger down payment can reduce the amount of interest a buyer owes, but achieving that on an average salary is not easy, according to Armer.

“First of all, ask yourself (this): If you are a first-time homebuyer and you are paying Santa Fe rent for your apartment, are you really going to be able to scrape together $37,500 for a down payment?” Armer said.

Homes in the Las Campanas subdivision near Santa Fe. (Eddie Moore/Journal)

High rates make investment buyers wary

Rising interest rates are also affecting investment buyers, according to Kelly McReynolds, a mortgage loan originator at Guardian Mortgage.

“Santa Fe is a very common second home or investment property community. Since we are a sort of destination location, we get a lot of people who are interested in that sort of housing,” McReynolds said. “I will say that the interest rates have impacted some investment buyers’ willingness to jump into investment purchases.”

Behind this is an additional rise in mortgage rates targeting investment properties, announced in January 2022 by government-sponsored lender Fannie Mae. It was designed to discourage purchasing homes as investments, in order to free up housing stock amid a national shortage, McReynolds said.

Before that price adjustment, mortgage rates on investment properties may have been half a percentage point higher than those on owner occupied properties, according to Armer. Now they can be a full point higher.

“So that’s a dramatic change, and that’s a change that impacts Santa Fe,” he said.

The Fannie Mae rate increase has particularly discouraged first-time housing investors from entering the market, according to McReynolds.

“For buyers that are experienced investors, I would say that they are not as concerned about the interest rates because they just have more experience over the years,” she said.

For buyers with more money to spread around, there is a way to circumvent the whole business of mortgages.

“We are seeing more cash offers than we were seeing in the last couple of years,” said Lamprich.

Traditionally, Lamprich said, Santa Fe has been a town where home purchases in cash were common. In the low interest rate environment before last year, however, buyers who could afford a lump sum transaction sometimes chose to finance out of convenience.

“Now with the rise of interest rates, we’re going back to where a lot of people are leveraging the power of that cash to purchase the home,” Lamprich said.

These kinds of sales are often associated with out-of-staters buying second homes, which exacerbates the housing shortage for locals, according to O’Donnell.

“I think that one thing that sadly has come to characterize Santa Fe increasingly over the years is income disparity,” she said. “You’ve got a fairly small but very wealthy population of folks, and you’ve got a larger population of folks who are struggling economically.”

O’Donnell estimates that this dynamic causes roughly a third of the working population of Santa Fe to live outside the city.

“It’s easy to say, ‘Yeah, it’s the real estate community that’s up against it, get over it.’ But the reality is, society is up against this,” Armer said. “We’ve all got a problem if people who make a reasonable amount of money here can’t afford to buy houses and stay. If they’re more likely to leave, it’s bad for all of us.”

The city remains attractive for new homebuyers due to its position as a destination for outdoor activities and cultural heritage, according to Lamprich.

“I think we’re seeing a continued draw for that outdoor space, but also proximity to amenities — to go run to dinner, to do all that,” he said. “So how do you get the most space and the best sense of belonging within a community, but also have access to what Santa Fe offers as a region, is really top of mind for people.”