Why Home Prices Stay High When Rates Rise

Here is a question going around right now: rates are high, some people think the 30-year is headed over 9 percent, and yet home prices have not crashed. They grind sideways to up. How? The quick answer you hear is that the government keeps printing money. That is part of it, but it is not precise, and the precise version is more useful. Twenty years of Colorado Springs data says something specific about what actually holds prices up when rates rise, and it is not what most people think.

What a rate increase actually does to price

Start with the arithmetic. To keep a monthly payment unchanged after mortgage rates rise one point, the price of the home would have to fall about $43,000 on a typical Colorado Springs house. That is the full offset. If price fell that much, the buyer's payment would not change.

Now the reality. Measured from twenty years of monthly data, when rates actually rise one point, the median price falls only about $23,000, and it takes two to three years to get there. Prices give up only about half of what would fully offset the rate move.

That gap is the whole story. Prices are sticky. They do not fully adjust to rates, so a rate shock does not crater prices. The half that price refuses to give up has to go somewhere, and it goes into lost transactions. Colorado Springs sales volume is down about 30 percent from its 2020 peak. High rates did not crash prices here. They froze the market. Fewer people buy, fewer people sell, and the few homes that trade hold their price.

The floor underneath

Prices do not fall back for a reason, and this is where the money comes in. The money supply is roughly 35 percent larger than it was before 2020, and that flood never got withdrawn. It is a permanently higher base that every price now sits on top of. Housing rode that wave straight up in 2020 and 2021, prices rising about 40 percent as the money supply did the same. The wave crested, but the water never went back out. That elevated base is the floor under nominal prices.

And the backfilling that is still going on today is mostly fiscal. The government runs very large deficits, which means it issues enormous amounts of Treasury debt. That spending supports the economy and nominal demand, and the flood of new bonds pushes yields, and therefore mortgage rates, up. So the same force can hold prices up and push rates higher at the same time. That is the part that confuses people. Backfilling the economy and high rates are not opposites. They are the same deficit, seen from two sides.

Why it still cannot become the stock market

So if there is a money floor and prices are sticky, can housing just keep floating up forever, detached from what people earn, like the stock market has? No, and the reason is simple: a stock has no rent. A house does, and rent is tied to local wages, because a tenant pays it out of a paycheck.

That rent acts as a leash. Priced against rent, Colorado Springs homes are near their twenty-year average, not detached in a bubble. And the two are not independent. In the same twenty years of data, price changes and rent changes cause each other, in both directions. When they drift apart, the market pulls them back together. A home can float above its rent for a while, the way it has since 2022, but not forever, because eventually it either has to be affordable to a buyer earning a local wage or rentable to a tenant earning one.

Who is actually buying, and why it matters most

The leash is only as tight as the buyer. Capital does not care about local wages. A local family does. So the question that decides everything is who the marginal buyer is, and in Colorado Springs the answer is clear: about 85 percent of recent buyers are owner-occupants who live in the home they bought. Outside capital is about 4 percent. This is a market priced by people who have to make the payment from a local paycheck, which is the opposite of the financialized Sunbelt metros where investors have been 20 to 30 percent of buyers. You can watch this directly on the Marginal Buyer Index, and it is the single best tell of whether a market is tethered or floating away.

Putting it together

Here is the whole picture. The money supply sets a floor, which is why prices do not crash. Rent and local wages set a leash, which is why they cannot float away. Sticky prices and locked-in owners explain the freeze in between, high rates grinding volume down by a third while the median barely moves. And the marginal buyer, mostly local owner-occupants here, tells you how tight the leash is.

Housing can fail up in bursts when the money floods in, and it can freeze when rates rise. What it cannot do, that the stock market can, is detach from the real economy indefinitely, as long as it is bought by people who have to live in it and pay for it with a local wage. The floor is monetary. The leash is rent and wages. And in Colorado Springs the leash is still short.

So when someone predicts a crash because rates are high, the data points somewhere else: not a crash, a freeze. And when someone asks why prices keep rising while rates do too, the honest answer is that prices are sticky on a higher money base, supply is locked in, and the deficits propping up the economy are the same ones pushing rates up. What to actually watch is not the price. It is who is buying. If the marginal buyer ever shifts from local families to capital, that is when the leash loosens. For now, it has not.

The pieces behind this: velocity and affordability, rent versus the cost to own, what rent says about prices, how rates, rents and prices move together, and the live Marginal Buyer Index.

Sources: median closed price and rent from El Paso County and ELEVATE MLS records; the reported 30-year rate and the M2 money supply series; buyer composition from El Paso County assessor owner-mailing records. The price response to a rate change is estimated from a vector model on twenty years of monthly data, so it is a historical average, not a forecast, and median price reflects the mix of what sells. Prepared by Rob Thompson, Realtor, Iconic Colorado Properties.