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A home for sale on the east side of Colorado Springs.

A home for sale on the east side of Colorado Springs.

Finally, it appears that housing prices are moderating.

That doesn’t change, however, that housing prices have skyrocketed quite consistently across the country. I was astounded to see a report from Moody’s Analytics that showed, on average, housing is 24.7% overvalued across the United States. Some markets such as Boise, Idaho, are estimated to be 72% overvalued.

Interestingly, this overvaluation is about the same as it was during the Great Recession 15 years ago. During that time, overvaluation happened for a very different reason. Bank lending standards were way too lax, and many people got into homes they couldn’t afford in the first place.

The rapid housing appreciation this time around is mostly due to a shortfall in single and multifamily home construction that is, in fact, a result of the Great Recession. Many builders went out of business or simply became much more conservative in terms of building any kind of product. They got burned during the Great Recession.

The pandemic also caused the Great Migration, and many people were motivated by lower home prices in the South or Midwest. Some who could afford it moved to more beautiful places like Colorado. Many wealthier people started to buy or build second homes.

Now, with the 30-year mortgage rate being much higher at 5.7% versus an astoundingly low 2.7% at the end of 2020, it’s no surprise that existing home sales are 20% lower than they were a year ago. Permits for building new homes are down 12% compared with a year ago.

Given the embedded overvaluation and the increase in interest rates, I believe some cities are going to see significant adjustments, including home prices that decline. However, because of the inherent shortage of housing across the country to begin with, estimated to be 6.5 million homes according to the National Association of Realtors, I don’t think we are going to see the rapid and dramatic declines in home prices that we saw during and for a few years after the Great Recession.

Our region has a shortfall of about 12,000 homes if we combine all multifamily and single-family housing types, so the supply shortage applies to us as well. In addition, our state and region still have people moving here and most of our population growth is from in-migration, so it’s likely that our price adjustments will be very modest.

According to my sources and from what I see in the data, it’s more likely that housing prices will stay at roughly the current levels, barring any unforeseen economic surprises.

The issue is that those current levels are high enough that Colorado Springs is now considered to be too expensive for many young people who would like to move or stay here.

A good indicator of this is my preferred metric for calculating and quantifying the true affordability of homes in our region — the Housing Opportunity Index, calculated and compiled by Wells Fargo and the National Association of Realtors. It shows the proportion of homes sold in a region that are affordable to a typical household that earns the median income. It’s a great way to juxtapose a typical available home to typical income.

As the chart shows, the Housing Opportunity Index used to be almost 71.4% in Colorado Springs, meaning that about 71.4% of the homes sold in our region in 2019 were affordable to a household or individual who earned the median income. That’s actually pretty good. Fast forward to today, and that metric has declined dramatically across the nation. In our region, only 22.7% of the homes sold now are affordable to the median income household.

Think about that: Less than a quarter of the available homes for sale, new or existing, are in a price range that a typical-earning household can afford.

The good news for the rental market is there is still strong demand for apartments, condos, townhomes and even single-family homes that are up for rent. For this reason, investors in leasing properties are still bullish and absorption of these leasing properties is still very high locally and across most of the nation.

Young people, in particular, who are now priced out of the housing market due to the higher prices and higher interest rates have no choice but to rent. As an economist and a mom, I don’t like that because the primary mechanism for people building wealth is buying a home as homes are typically the largest asset the average American has. It’s also antithetical to the American dream.

Free markets do have a way of adjusting, however, even if it takes time. There is mounting pressure to rezone to include more residential space, fully utilize infill, build tiny homes and provide more standardization in how we build with more pre-made modular components. The communities that are ahead of the affordable housing game will do all of the above, and those are the cities that will attract and keep the workers we need.

Tatiana Bailey is the director of the UCCS Economic Forum.

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