U.S. Housing Market Valuation Surges Despite Local Variances

In a year marked by fluctuations in the housing market, the collective value of all homes in the United States has experienced an impressive increase of $2.6 trillion, as reported by Zillow. This growth, however, conceals localized disparities, with Metro Denver, in particular, witnessing a reduction in housing value.

Despite a drop in home prices in the latter half of 2022, attributed to a surge in mortgage rates, the national market has remained resilient. Nationally, home values have surged by 49% over the past year, now reaching a historic high of $52 trillion.

Orphe Divounguy, a Senior Economist at Zillow, attributes this national gain to several factors. While there has been a 1.3% increase in average home values over the past year, the bulk of the appreciation can be attributed to a surge in new construction.

Conversely, Metro Denver’s housing market paints a different picture, where it has struggled to match the national momentum. The local market has recorded an estimated loss of $5 billion in housing value over the past year, according to Zillow’s analysis. However, this decline is comparatively minor when viewed in the context of the market’s overall trajectory. Since the onset of the pandemic in early 2020, Metro Denver had witnessed an astounding gain of 41.6%, culminating in an overall valuation of $598 billion.

Divounguy highlights the factors contributing to Metro Denver’s divergence from national trends, citing lower affordability levels combined with a less robust new home construction landscape. He emphasizes that “the rapid increase in home values during the pandemic combined with higher mortgage rates caused housing affordability to fall to an all-time low in the Denver metro area.” Consequently, housing now consumes roughly 51% of the typical homebuyer’s income, effectively disqualifying many potential buyers.

Furthermore, a significant decline in local demand, coupled with elevated costs for builders, has led to a contraction in construction activity in Metro Denver, with permits experiencing a decline of approximately 17%. In contrast, the national market has benefited from a consistent flow of new homes throughout the spring and summer, helping to alleviate inventory shortages.

Zooming out to encompass the entirety of Colorado, the housing market, excluding apartments, reached its peak valuation on May 1, 2022, at $1.33 trillion. However, this value dipped to $1.2 trillion at the beginning of the year, only to subsequently recover to $1.27 trillion.

Data from the S&P Case Shiller Home Price Indices for July reveal a 1% year-over-year increase in U.S. home prices, while Metro Denver experienced a decline of 2.9% during the same period. Between June and July, Denver saw a modest 0.47% gain.

Looking ahead, the U.S. housing market faces challenges in the form of rising mortgage rates. The Mortgage Bankers Association reported that mortgage rates have reached their highest level in over two decades, with the 30-year fixed mortgage rate standing at 7.41%. Higher rates have impacted mortgage activity, leading to a 27% drop in applications for home purchase loans over the past year and a 20% decrease in refinancing activity compared to the previous year.

However, despite the challenges posed by higher mortgage rates, a persistent demand from buyers in a constrained market has continued to drive prices upward, contrary to typical expectations. This dynamic raises concerns about the resurgence of escalating housing costs, potentially affecting the Federal Reserve’s ability to manage a soft landing for the economy, as highlighted by Sal Guatieri, a Senior Economist at BMO.