A surge in apartment and home construction in metro Denver combined with slower population growth to chip away at the state’s housing deficit during the pandemic, according to a report from Up for Growth, an advocacy group seeking to improve housing affordability through more residential construction.
Up for Growth, in its first annual report on the nation’s housing shortfall, estimated that Colorado faced a deficit of 127,000 housing units back in 2019, which was the second most severe shortfall in percentage terms of any state after California.
By the end of 2021, that underproduction had fallen to 101,141 units, which ranked eighth worst in terms of its severity. Nearly half of the state’s housing shortfall, or about 49,581 homes, was concentrated in metro Denver.
“Colorado is an interesting place in that you haven’t seen the mass exodus seen in places like New York, Washington, D.C., or certainly California. You have also seen an increase in homebuilding,” said Mike Kingsella, CEO of Up for Growth. “Colorado is in a relatively good position to chip away at its housing deficit if it continues to make the right moves at the right level.”
Nationally, housing underproduction jumped nearly 3% between 2019 and 2021, reaching 3.9 million homes. The number of counties experiencing housing underproduction rose by nearly a third compared to 2019, with the biggest increases in shortfalls seen in the country’s suburbs, small towns and rural areas.
Loosening rules on remote work allowed people to leave denser and more expensive urban areas and eased the shortfalls there. But workers leaving high-cost markets like Seattle or Los Angeles didn’t all head for other high-cost markets, nor did they go to the cheapest cities for housing in the Midwest or along the Gulf Coast.
“The places we have seen the biggest jumps in underproduction are high amenity, relatively affordable suburban and small-town places,” Kingsella said. “It is not the absolute lowest cost markets, but the medium cost ones.”
Colorado’s deficit reduction of 25,900 units was the third largest in absolute terms after California and Florida, and the percentage drop was the largest of any continental state. States with the biggest gains in their housing shortfall at more than 30,000 each in two years were Tennessee, Michigan and Ohio.
Idaho, despite its small population, added 18,600 homes to its deficit, which might explain why the state also had some of the biggest home price gains in the country.
A comparison of severity
One way to measure the severity of an area’s housing deficit is to compare the supply of homes, less vacation homes and places that aren’t habitable, to the number of households.
In Colorado, that gap was at 5.2% in 2019 but has fallen to around 4%. For every 100 households needing a place to stay, the state’s housing market has 96 units. But any gap can push up housing costs and force families to double up.
In metro Denver, the deficit of 49,581 homes and apartments works out to a severity ratio of 4.4%, while in Colorado Springs, which has a deficit of 13,025 units, that ratio is 4.3%. Fort Collins and Pueblo are also in that range, with severity ratios of 4.2% and 4.1% and a shortfall of 6,517 homes and 2,825 homes respectively.
Weld County, which surpassed Boulder County in population in the 2020 Census, has a deficit of 5,104 homes resulting in a severity ratio of 6.2%. Boulder County, a more expensive market with tighter rules on development, had a deficit of 661 homes, which works out to a severity ratio of 1.3%.
That’s the second lowest ratio of any metro in the state after Grand Junction and surrounding Mesa County, which had a shortfall of 726 homes, resulting in a severity ratio of 1.2%.
Weld County is home to several of the state’s fastest-growing cities along the Interstate 25 corridor and offers builders some of the most favorable conditions along the Front Range in terms of regulations and land costs. So why does it have a more severe underproduction problem than Boulder which limits new construction?
One explanation could be that Weld County’s greater relative affordability is driving the formation of more households and greater in-migration. People aren’t just searching for a place to live, they are searching for places where they can afford to live.
An affordability problem
Although Colorado has gained ground in reducing its housing gap in recent years, severe damage has already been done when it comes to housing affordability.
The damage is so severe that home prices and apartment rents will likely not be able to realign with incomes to the degree they did in prior decades, said Phyllis Resnick, executive director of the Colorado Futures Center at Colorado State University, which released an update to its Housing Affordability study this summer.
Colorado now has four of the five most expensive metro areas outside the coast when it comes to median home prices in this order — Boulder, Denver, Fort Collins and Greeley, according to Zonda, a real estate research firm. Greeley, long considered a pocket of affordability in the region, has now surpassed Portland, Ore., in terms of how expensive its homes are.
Combine those high home prices with much higher interest rates in the past year, and the squeeze on would-be buyers is intense. Seattle-based real estate brokerage Redfin estimates that someone looking to qualify for a mortgage on a median-priced home in metro Denver now needs a household income of $158,157 a year.
That is just for the mid-point home, not the fanciest home. That number also assumes a 20% down payment and the payment including principal, interest, property taxes and insurance now approaches $4,000 a month.
That’s a problem because nearly half of Colorado households make $75,000 or less a year, notes Resnick and her co-author Jennifer Newcomer in their report.
Household income for millennial renters, the prime demographic for homebuying, is even less, at around $62,000. Based on calculations made earlier this year, when 30-year mortgage rates were around 6.85%, a buyer in that group could afford a home valued at $257,100 or less. Only one in five units on the market fit that bill.
“While housing markets statewide appear to be correcting, there remains a significant mismatch between the cohorts of potential buyers and inventory affordable at their buying capacity,” Resnick said.
Essentially, the market is not only building too few homes and apartments, per Up for Growth estimates, but what is being built disproportionately targets those in the higher income brackets, leaving lower-income households with few options, Newcomer adds.
Related Articles
-
Sponsored: Limited housing inventory and rising mortgage rates accelerate September slowdown
-
Denver looks to lease, potentially buy, another hotel for homeless shelter
-
Ex-Burger King in Five Points available again as barbecue chain backs out
-
Metro Denver apartment market maintains its balance in third quarter
-
Inflation slowing investment in Denver-Boulder’s commercial real estate market
That has resulted in a large number of families on the lower end of the income scale doubling up with others. Doubled-up households in Colorado have gone from one in five in 2006 to three out of every 10 households in 2019, according to the Colorado Futures Center study.
That represents approximately 680,000 potential households that are “hidden” inside of existing households, a huge source of unmet demand not counted in studies like the one Up for Growth conducted.
Resnick said the conundrum is that the supply situation is improving. Some of the constraints on land development have eased and more communities are open to adding density. When it comes to apartments, metro Denver has 120,000 units under construction or in the planning stages, which could make a serious dent in the housing shortfall, according to Apartment Insight.
And yet there hasn’t been a noticeable improvement in affordability even though Colorado was a leader between 2019 and 2021 in tackling underproduction, even though the state saw a big slowdown in population gains in that period.
Colorado remains a state where half the population can only afford a fifth of the housing stock, and housing options remain severely limited.
“My sense when we look deeper into the factors, they are normalizing and things should be adjusting,” Resnick said. “We are scratching our heads.”
Get more real estate and business news by signing up for our weekly newsletter, On the Block.
