It was already tough, but a jump in mortgage rates and higher home prices are making it even harder to buy a home in metro Denver.

Builders are finally making a dent in the state’s housing shortfall, especially for apartments. But home prices and mortgage rates continue to outpace income gains, and affordability is worsening rather than improving.

“The story with interest rates is that they are only exacerbating the problem,” said Steven Byers, chief economist with the Common Sense Institute in Denver. “The fact is that wages aren’t keeping up with these huge jumps in home prices.”

For the first time since July 2022, home prices in all major U.S. metros, including Denver, rose year-over-year, reports brokerage firm Redfin. The S&P CoreLogic Case-Shiller Index for Denver has home prices up 2.7% the past year through February.

After five weeks of increases, the average interest rate charged on a 30-year loan reached 7.22%, the highest level since Thanksgiving, according to Freddie Mac.

Purchasing a home was hard before, and it is only getting harder. In 2011, a buyer in Colorado could expect to work 44 hours a month on average to cover the mortgage payment. That bar moved up to 96 hours last year, a 118% increase, according to CSI’s Colorado Housing Competitiveness Index, which Byers co-authored.

Things are only slightly better for renters. They had to work 45 hours on average to cover the monthly rent in 2011. Now they have to work 87 hours. Colorado tenants devote more hours of work a month to meet the rent than do residents of any other state, according to the CSI report.

After the Great Recession, metro Denver became a hot spot for young professionals and tech workers looking to relocate. Demand for housing outstripped supply, causing home prices and rents to rise. Net domestic migration has fallen the past two years, as more people pick up and leave and fewer move in, Byers said. Higher housing costs have made the state less attractive.

That is both good and bad. Slower population growth should reduce pressure on the housing market and give builders time to catch up, stabilizing home prices and rents over time. But it also leaves employers and the larger economy, long dependent on importing the talent it needs, vulnerable. If the economy stalls, those struggling with higher living costs could pay the price.

Of the 50 largest U.S. metro areas, only six have median home prices that align with median incomes, according to a study from Clever Real Estate. Denver had the 8th biggest gap between in the amount of income needed to attain a median-priced home.

Zillow places the typical home value in metro Denver at just shy of $561,000 in December. Assuming a 20% downpayment and at current mortgage rates, an annual income of $167,562 would be required to buy that home, according to the Clever Real Estate study.

But here’s where it gets painful. The median income for metro Denver households is $98,975 a year, resulting in a shortfall of $68,587. Denver residents earn above-average incomes, but the higher pay isn’t enough to cover way above-average housing costs.

Wages tend to be lower in other parts of the state, and the affordability “gap” statewide is a little larger at $69,587. Colorado’s median home price is $531,900, not too far behind the metro Denver median price. With 20% down, that requires an income of $158,889, according to Clever Real Estate. The median household income statewide is $89,302.

Absent outside help, first-time buyers are often hard-pressed to put 20% down. That would require $112,200 on the typical home in Denver. What could someone putting 10% down and making the median income in Denver afford after the recent jump in mortgage rates? Clever Real Estate puts that amount closer to $270,000 to $280,000.

Good luck finding that. Out of 6,458 single-family home closings in metro Denver in the first three months of the year, only 50 involved a home priced below $300,000, according to the Denver Metro Association of Realtors.

Buyers of condos and townhomes face better odds, with 452 out of 2,343 sales this year below $300,000. But even there, only 20% of listings are affordable to households earning a median income. Only 5.7% of sales, homes or condos, were attainable.

The hurdle is even higher for new home buyers. The median new home price in Colorado is about $650,000, according to a study from the National Association of Homebuilders. Only one in five households in the state can afford something at that price point. Two million households in the state can’t afford to purchase a new home at the middle price point.

Renting cheaper now, but costly long-term

Most renters have limited options when it comes to buying in metro Denver. But in their favor, renting offers a substantial discount over buying right now, according to a separate analysis from Bankrate, the personal finance website.

The typical monthly payment for the median-priced home is around $3,627 in metro Denver, including the mortgage payment, property taxes and insurance. By contrast, the typical rent is $2,027 when looking at a rent index from Zillow that combines apartment, condo and home rents.

Renting was cheaper than buying in all 50 metros studied, but Denver had the ninth largest gap at $1,600. That 79% premium was much larger than the 36.6% premium to own nationally.

“I wouldn’t say rent is affordable, but between buying and renting, renting is the lesser of the two evils,” said Alex Gailey, lead data reporter at Bankrate and the author of the analysis.

In an ideal world, renters would sock away that extra money as emergency savings. After that, savings would be invested in the stock market, which has provided a higher return than owning a home over time. If an employer matches a retirement plan contribution, that would translate into an automatic 50% return off the bat.

But most renters probably won’t follow that strategy, leaving them vulnerable long-term, Gailey acknowledges. If an area isn’t losing population, homes should rise in value even after accounting for repairs and maintenance.

That equity can be poured into buying a bigger home down the road, or it can help fund expenses in retirement or be passed onto children and heirs, building inter-generational wealth. Also, mortgage payments can be locked in, while a rent payment can’t.

“You are building equity for yourself rather than for someone else,” said Jen Ankrum, director of sales for KB Home in Colorado, when asked about the message the company shares with renters looking to buy.

First-time buyers account for about half of the sales at KB Home, which strives to provide a high-quality, energy-efficient home priced below the competition. Even with the heavy focus on first-timers, about a third of buyers make under $100,000, a third make $100,000 to $150,000 and a third make more than that amount.

Normally, the housing market tries to find an equilibrium, offsetting rising interest costs with slower price gains or even price declines. But demographics have prevented that from happening. Millennials, born between 1981 and 1996, are now the nation’s largest generation at 72 million. They are behind schedule compared to prior generations when it comes to buying homes and pushing hard to acquire them even if the conditions aren’t favorable.

Markets where more millennials relocated to have housing markets under the most pressure. A little more than six in 10 homebuyers in metro Denver are millennials — only San Francisco and San Jose in California and Boston have a higher share of millennial buyers, according to a study from loan portal LendingTree.

None of those markets would be considered affordable. In Denver, millennial buyers on average made a downpayment of $70,710 and borrowed $456,805 to purchase a home, LendingTree reports.

“A big reason why millennials concentrate in expensive housing markets is because those areas often have robust and relatively high-paying job markets,” said Jacob Channel, a senior economist at LendingTree and author of the report.

Large tech companies are reducing their headcounts and a recession, when it comes, could accelerate layoffs. What happens if those high-paying jobs go away but the high mortgage payments don’t? But Channel doesn’t see a systemic risk to the housing market.

“While there are doubtlessly some millennials who are currently stretched too thin and must contend with the prospect of downsizing or, in the worst case, foreclosure, the number of people struggling isn’t large enough for there to be a serious risk to the broader housing market,” Channel said.

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