Note: full report is available for download at coloradofuturescsu.org.
Colorado’s housing affordability challenge has been well documented, particularly as it became more acute in the second half of the last decade. The state’s strong recovery from the Great Recession and the pandemic, coupled with strong housing demand and limited supply on the market resulted in price pressures greater than any the state had seen in decades. However, the past few months have foretold changing economic conditions. While recession is not yet in the forecast, the state’s economy is showing vulnerabilities to broader macroeconomic conditions and is exhibiting signs of slowing.
It is reasonable to consider the cautionary economic news of the last months, specifically those related to the increase in interest rates and their impact on housing, and wonder if, under emerging economic conditions, the changing market will take care of Colorado’s housing affordability challenges. In fact, the “will the market correct itself” question is posed increasingly as the economic conditions evolve. This research brief explores the concept of the housing market “correcting” itself by assessing the extent of the decline in home prices required, by county, in order for the same share of owner occupiable housing stock to be affordable to the median income in 2021 as was affordable to the median income in 2015.
While markets do “correct,” achieving 2015 levels of affordability through a correction would require a significant decline in housing values. Specifically, a correction to 2015 levels of affordability would require a statewide 32% decline in housing values, with county level declines ranging from a high of 59% to a more modest 15%. Market correction alone will not restore relative affordability without considerable market pain.
“With mortgage rates breaching 6% last week, it is tempting to think an adjustment in home values will address a significant portion of Colorado’s affordability challenge,” said Dr. Phyllis Resnick, lead economist and executive director of the Colorado Futures Center. “Our analysis shows that is unlikely to happen without a dramatic — and in many counties, unprecedented — drop in home values. We cannot rely on market adjustment alone to address affordability.”