In a previous post, we established a strong correlation between the M2 money supply and housing costs in Colorado Springs - an 18-month lag with an r=0.61 correlation coefficient. When the Fed floods the system with money, it eventually shows up in your mortgage payment.
The natural follow-up: when does that break?
If the next crisis brings another round of M2 expansion - and it probably will - does that automatically mean another housing surge here? The data says no. Not automatically. The money supply is the fuel, but fuel without an engine doesn't go anywhere.
M2 doesn't magically become a higher home price. It has to travel through a chain:
M2 Expansion → Lower Rates → Cheaper Mortgages → More Qualified Buyers → Higher Prices
Break any link and the money never reaches housing. We can see exactly when each link held and when it snapped by looking at three conditions I'm calling the Transmission Score - the conditions that must be true for M2 to actually move local housing prices.
1. The Channel: Interest Rates
M2 expansion has to translate to affordable borrowing. Below roughly 5%, money flows freely into mortgages. Above 6%, the channel narrows. Above 7%, it's effectively blocked - the cost of borrowing overwhelms the benefit of available money.
2. The Capacity: Payment-to-Income
Even with cheap money, buyers have a ceiling. Lenders qualify at roughly 43% debt-to-income. When the total housing payment already consumes 40%+ of median household income, there's no room for prices to rise further. The market is full.
3. The Pressure: Months of Supply
Tight inventory (under 3 months of supply) creates bidding pressure that converts available money into higher prices. Above 4 months, competition eases. Above 6 months, buyers have options and sellers compete on price - M2 expansion gets absorbed by discounting, not appreciation.
Here's the story in Colorado Springs since 2019, with the transmission conditions scored:
| Period | M2 | Rate | Median Price | Payment | PTI | MoS | Transmitting? |
|---|---|---|---|---|---|---|---|
| Jan 2020 | $15,420B | 3.6% | $325,000 | $1,822 | 30% | 2.1 | 3/3 |
| Jul 2020 | $18,302B | 3.0% | $365,000 | $1,899 | 31% | 1.2 | 3/3 |
| Apr 2021 | $20,152B | 3.1% | $413,000 | $2,124 | 32% | 0.9 | 3/3 |
| Jan 2022 | $21,562B | 3.5% | $435,000 | $2,314 | 34% | 1.3 | 3/3 |
| Apr 2022 | $21,677B | 5.0% | $475,000 | $2,916 | 43% | 1.2 | 1/3 |
| Oct 2022 | $21,433B | 6.9% | $450,000 | $3,312 | 48% | 3.1 | 0/3 |
| Oct 2023 | $20,726B | 7.6% | $460,000 | $3,598 | 49% | 3.9 | 0/3 |
| Apr 2025 | $21,862B | 6.7% | $471,000 | $3,403 | 45% | 3.6 | 0/3 |
| Jan 2026 | $22,442B | 6.1% | $445,000 | $3,051 | 40% | 4.3 | 0/3 |
Read that table top to bottom and you can see the moment transmission broke: April 2022. M2 was at its peak. Inventory was still tight. But rates had just crossed 5% and payment-to-income hit 43% - the qualification ceiling. Two of three conditions failed simultaneously.
Since then, M2 has grown by $1,000B (from $21.4T to $22.4T). Median price has gone... nowhere. $450K in October 2022, $445K in January 2026. Four years of M2 growth, zero price movement. The money is going everywhere except into higher home prices here.
This chart shows M2 (blue) alongside median price (green), with the transmission score as a background color. Green background = all three conditions met, money is flowing to housing. Red = blocked.
The green zone tells the story of 2020-2021: all three conditions aligned, and M2 expansion translated directly into price appreciation. $15.4T to $21.6T in M2, $325K to $435K in median price. Almost dollar-for-dollar in proportional terms.
The red zone tells the story of 2022-present: M2 grew another $1T, prices went sideways. The channel is blocked.
The Fed will almost certainly expand M2 again. It's the primary tool. The question is whether it reaches Colorado Springs housing prices, and the answer depends on which version of the playbook they run:
If the Fed expands M2 and rates drop below 5%, transmission resumes. But there's a critical difference from 2020: we're starting from a much higher base. In January 2020, payment-to-income was 30%. Today it's 40%. The headroom is gone.
Even if rates drop to 4.5%, a $445K median home produces a $2,650/mo payment - a 35% PTI. That's manageable but not loose. There's maybe 10-15% of price appreciation available before hitting the qualification wall again. Not the 40% run we saw in 2020-2022.
If M2 expands but rates stay above 6% - which is what's happening right now - the money doesn't reach mortgages. It flows to financial assets, bank reserves, and treasuries. Housing is bypassed. This is the current state: M2 is up 4.3% year-over-year and prices are flat.
Colorado Springs has significant military and defense sector employment. A geopolitical shift that reduces defense spending hits this market specifically. In that scenario, it doesn't matter what M2 does nationally - local income drops, local buyers disappear, and prices follow employment, not money supply. The correlation doesn't just weaken, it inverts. The Fed printed aggressively in 2008-2009 (M2 up 10% in a year) and COS prices still fell from $210K to $173K because local employment dropped from 254K to 239K jobs.
We don't have to guess. We've seen this movie before. Look at 2008-2012:
| Year | M2 YoY | Rate | COS Price | MoS | Employment |
|---|---|---|---|---|---|
| 2007 | +5.7% | 6.2% | $210K | 7.5 | 252K |
| 2008 | +5.6% | 5.8% | $199K | 10.1 | 254K |
| 2009 | +10.2% | 5.0% | $173K | 11.9 | 247K |
| 2010 | +2.2% | 5.0% | $173K | 9.4 | 239K |
| 2011 | +4.3% | 4.8% | $170K | 12.1 | 241K |
| 2012 | +10.3% | 3.9% | $170K | 8.4 | 243K |
| 2013 | +7.7% | 3.4% | $185K | 6.0 | 248K |
The Fed expanded M2 by 10% in 2009. Rates were at 5%. Prices fell anyway - from $199K to $173K - because employment dropped 7%, inventory exploded to 12 months of supply, and lending standards tightened dramatically post-crash. The money existed. It couldn't get into mortgages.
It took until 2013 - four years - for all three transmission conditions to align again (rates below 4%, employment recovering, MoS dropping below 6). Only then did prices start climbing.
Current transmission score: 0 out of 3.
M2 is growing at 4.3% year-over-year. It is having zero effect on prices here. The money is real, the transmission mechanism is broken.
For M2 to start driving prices higher again in Colorado Springs, we'd need at minimum:
Get all three and we'd see a transmission score of 3/3 - M2 expansion would flow to housing again. But the headroom would be limited. The 2020 playbook started from 30% PTI. Any future cycle starts from 40%. The ceiling is closer.
If you're buying or selling in this market, the relevant question isn't "what is M2 doing?" It's "are the conditions in place for M2 to matter here?" Right now, they're not. Prices are being set by local fundamentals - employment, inventory, and what buyers can actually qualify for - not by the national money supply.
That can change. If it does, it'll show up in these three indicators before it shows up in price. That's the value of tracking them.
Data: Federal Reserve M2 Money Stock (FRED), elevateMLS closed transactions and active listings, BLS nonfarm employment. Payment calculations assume 3% down, 30-year fixed, property tax at 0.5%, insurance at $250/mo. Income: most recent ACS median household income for El Paso County.
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