More than a decade after the Great Recession swept through Colorado and decimated an overbuilt real estate market, metro Denver is now experiencing the other extreme: a chronic tight supply of housing that is sending home prices and apartment rents skyward.
It could take another 10 years or more to correct the imbalance, according to a new report on Denver’s housing crunch that points to a complex set of factors confronting metro-area homebuyers and renters, particularly those on the lower end or entry level of the market.
Those include shortages of available land for residential development and workers in certain trades, a backlash against growth, low productivity in the construction business and evolving consumer preferences toward bigger homes with more amenities combined with builders’ preference for selling higher-end properties.
The deficit of homes and apartments in the region is expected to peak this year at about 32,000 units, and that will put upward pressure on home prices for years to come even as supply rises to levels not seen since the early 2000s, warned Phyllis Resnick, lead economist for the Colorado Futures Center at Colorado State University. That deficit, which has been building since about 2014, represents the difference between demand from households and the supply of available housing.
“The market is not responding to people who have an affordability issue. We need to be more creative in how to bring supply to this market,” urges Resnick, author of the “Factors Impacting Housing Affordability” report, sponsored by Housing Colorado, the Colorado Health Foundation and Piton Foundation’s Shift Research Lab, being released this week.
For years, construction defects litigation was blamed for holding back supply, especially on condominiums. Then builders cited long delays getting plans through local approvals and then construction labor shortages, which they have tried to address through apprenticeship and training programs.
But the shortfall has only grown, and getting to the bottom of why housing supply hasn’t met demand isn’t easy, even if the pain that gap is causing is a constant topic of conversation in many homes.
As this has occurred, wages haven’t kept up. Between 2001 and 2008, income gains kept pace with rises in home prices and rents in metro Denver. But since 2011, wages are up 11.4 percent, while metro Denver rents are up 46.2 percent and home prices are up by half.
A lack of affordable housing has made it harder for service-sector employers to find and retain workers. It contributes to churn at public schools and homelessness and is stressing social services. And it is diverting billions of dollars in spending that could support other parts of the Colorado economy.
Resnick estimates that area households making under $50,000 are spending $2 billion more a year on housing than they would have if supply and demand had stayed in better balance.
Nearly a quarter of metro Denver renters are spending half or more of their incomes just to keep roofs over their heads. And the region risks gaining a reputation of being unaffordable, which could push future growth and economic opportunities elsewhere.
The problem has the attention of policy makers and industry leaders, but the solutions aren’t obvious.
“There is no magic wand or no silver bullet,” said Jeff Whiton, CEO of the Home Builders Association of Denver.
After losing her job in the Great Recession, Lisa Gonzalez, 34, and her four kids spent two years living in a van, until she took on a job as an apartment manager to obtain shelter. Five years ago, she qualified for an income-restricted apartment, where her rent runs $737 a month.
She married Francisco, a mover, who had three children. Their family of eight live in a three-bedroom apartment at Mount Loretto Apartments on South Federal Boulevard.
Cramped conditions and rising crime in the neighborhood pushed the family to look for a larger place to live, one where the kids could play freely outside. But almost none of Denver’s newest apartments were built with families in mind.
The three-bedroom homes Lisa and Francisco ran across rented for around $2,400 a month and up, which would have wiped out much of the $3,500 to $4,000 the pair earn each month in service jobs. The family considered moving outside Denver, but finding something remotely affordable required a two-hour drive.
“We were feeling hopeless. There was nothing that would suffice for us. Nothing at all,” she said.
But the pair didn’t give up. After four failed attempts, the family qualified to purchase a five-bedroom home in Sheridan through Habitat for Humanity. If all goes as planned, they should be in their new home by spring.
“We feel like in Willy Wonka when Charlie won the golden ticket,” she said.
Even as she celebrates her good fortune, she thinks about a desperate co-worker at King Soopers who is paying $1,700 a month for a two-bedroom apartment.
When people ask her about taking her spot at Mount Loretto apartments, she tells them the waiting list is three to five years.
Why there isn’t enough
On the surface, the answer seems simple: Build more apartments and homes at rents or prices that households earning a variety of incomes can afford. The big jump in home prices and rents should have made that easier to pull off.
But the equation is more complicated. Resnick studied everything from material costs and labor supply to land availability and regulatory requirements to understand how metro Denver’s housing market got into such a deep hole.
Take the willingness of builders to go out on a limb to supply the market. Although the buyers are out there, so too are the memories from the housing crash.
Builders oversupplied the market last decade with devastating consequences. After years of easy credit and overbuilding, Resnick estimates metro Denver had 96,541 more homes and apartments than households by 2006.
Vacancy rates shot up, prices dropped, foreclosures soared and residential construction went into a free fall. Residential construction permits fell from more than 30,000 in 2000 to just under 4,300 in 2009. Overextended builders, contractors, suppliers and lenders were wiped out. The conservative ones survived, and they started building more apartments than for-sale homes.
“Builders are cautious. They don’t want to overbuild. They don’t want to lose their business,” said Aaron Terrazas, a senior economist with Zillow, the Seattle-based housing research firm.
Faced with a limited supply of labor and land, builders focused on making the biggest profit, and so far that strategy has kept them plenty busy.
“You can make your 9 percent profit margin on a $300,000 home or a $500,00 house. And the consumer is meeting you there either way,” said Jennifer Newcomer, a researcher with the Piton Foundation’s Shift Research Lab.
Not surprisingly, builders went for the bigger prize. But that caused prices for the lowest tier of housing to rocket higher, putting the squeeze on the most financially vulnerable households.
Labor issue overstated
Because of the housing downturn, many construction workers moved into other careers, relocated or retired. Statewide, residential building construction employment is still 15 percent to 20 percent below its peak a dozen years ago.
The severity of the downturn didn’t inspire confidence in young, career-seeking adults, who were already staying away from vocational training and blue-collar careers in favor of college degrees.
“I think one of the downsides of the extended low unemployment rates is the quality of the workers. Is the current set of construction workers qualified and properly trained and capable of doing the job in an efficient and productive manner?” said Gary Horvath, a Broomfield economist. “I think the answer is likely not.”
Still, in one of the study’s more surprising findings, Resnick said she didn’t find the usual markers of a labor shortage — rising wages, increased productivity and investment in technology. Pay for some categories such as roofers, foundation contractors, painters and drywall installers has risen sharply. But on the whole, wages in the industry have lagged overall wage gains in Colorado during the recovery.
“I don’t think labor shortages are the whole story, the way conventional wisdom has it,” Resnick said.
Aside from spiking wages, labor shortages should have pushed builders to construct homes with fewer workers. But a home built today requires more labor than it did a decade ago, Resnick found.
Some of that reflects larger home sizes and higher-end finishes, but it may also show the expertise lost during the housing crash and an unwillingness or inability to improve efficiency. Go to a home construction site, and in many ways it doesn’t look too much different than it did in the 1950s, Resnick said one builder told her.
Each hour of work performed in construction adds as much value, adjusted for inflation, as it did in 1947, according to the McKinsey Global Institute. Manufacturing productivity, by contrast, has increased more than 800-fold. As for the farmers and ranchers, they have boosted productivity 1,600-fold over that same time frame.
Constructing more components of homes in factories with fewer and higher-paid workers offers one way to get around labor shortages and boost productivity.
“The industry is buzzing about offsite (factory) building and constructing single-family homes for rent. These are much smaller and often eliminate features now considered necessary for for-sale housing like granite countertops, 9-foot or 10-foot ceilings, two-car garages,” said Gene Myers, CEO of Thrive Home Builders.
But shifting to more manufactured parts requires a heavy capital investment that many builders aren’t able or ready to make, given what they endured last decade, Resnick said.
Up next: a land crisis
New supply and demand are finally coming back into balance, and if construction can hold at the higher pace, the housing deficit could be slowly erased.
But that’s a big if. Despite vacant land that stretches for miles, the metro region has zoned very little for residential purposes. “You would chew that up in five years barring no other type of land conversion,” said Piton’s Newcomer.
About 10 years of supply of land zoned residential is more typical and beneficial, said Whiton of the home builders association. When builders from outside the state look at entering the Front Range market, the short runway local governments have provided scares them off.
“I know for a fact if there were more land available there would be more builders,” he said.
Cities with lots of vacant land are jealous at guarding their turf, while a few, like Lakewood, are proposing stritcter limits on permits despite how short the market is on housing, Whiton said. There’s no regional vision for housing that builders say would give them more confidence.
“We have 34 jurisdictions with varying requirements. Standardization is very difficult,” said Whiton. “Slow processing and slow entitlements is the number-one issue that home builders are telling us that they feel right now.”
Resnick forecasts that the deficit between what the region built and what it should have built to accommodate households will peak out this year at 32,120, and by 2025 shrink to 25,214, slightly above where it was in 2016.
While a market can be oversupplied when it comes to housing, leaving it undersupplied for long periods doesn’t work — people have to live somewhere.
“If the housing units don’t exist, it will be hard to form those households,” said state demographer Elizabeth Garner.
Some people cope with high housing costs by doubling or tripling up. That represents pent-up or delayed demand. But others leave for areas with housing that they can afford given their wage. That represents demand destruction.
“People aren’t stupid. If you can get a better deal somewhere else, you will go somewhere else,” Garner said. She said Weld County has provided a safety valve when it comes to housing shortages in metro Denver.
But it appears more people are moving even further away. Net migration in Colorado dropped for the first time in a decade in 2016 due to an increase in people leaving the state. And anecdotally, a lack of affordable housing was a key reason some leaving offered.
Resnick acknowledges several things could derail her forecast of a chronic housing deficit. An economic recession could derail growth. Metro Denver could develop a reputation for unaffordability that keeps people away.
The housing affordability study points to a variety of policy and market-oriented changes that could bring the market into balance faster. Those range from advocating for immigration policy that makes more skilled workers available, unlikely in the current political environment, and employing crews from the correctional system, to adding more factory-built modular housing and changing Colorado tax policy that discourages seniors from selling their homes.
Horvath predicts the market could come into balance sooner than expected. Migration is showing signs of slowing and women are having fewer children.
“Colorado isn’t as cool as people thought,” he said, “particularly for millennials who have multiple roommates and wages that barely cover the rent.”