A new report says that not enough homes are being built to manage the housing deficit plaguing Colorado, including Boulder and Broomfield counties.
The Common Sense Institute released the August 2022 Colorado Housing Affordability Update earlier this month, with early signs in the housing market indicating a shift. Mortgage rates have moderated slightly this month, but many expect that they will continue to rise with inflation.
Higher mortgage rates will raise the cost of new homes, slowing demand and providing some relief. However, the report cautions that there are some indications that despite an increase in recent permitting, actual homes completions will decline as builders navigate housing demand in a slowing economy.
“Even though affordability may have turned a corner, there isn’t as much to celebrate if new housing production slows,” said Chris Brown, Common Sense Institute Vice President of Policy and Research.
Signs indicate the home builders may be re-evaluating their plans for new housing development. The National Association of Homebuilders’ July Housing Market Index, which reflects builder confidence in the market for newly built single-family homes, fell for the seventh straight month — the lowest point since May 2020.
The report found that between 46,600 and 72,600 building permits are needed annually through 2025 to close the statewide housing supply deficit and meet future population growth. Permitting in Colorado for new housing in 2021 was 40% higher than the previous five years and 2022 is on pace to remain within the targeted range, but 35 counties in 2021 failed to issue enough permits.
The Common Sense Institute estimated that Colorado had a deficit of between 92,853 and 216,350 housing units in 2020, which falls within the range of other estimates. For the Denver metro area specifically, that deficit ranges between 64,000 and 129,000 units.
In 2020, Boulder County was short between 5,334 and 12,169 housing units, while Broomfield County was short 1,401 to 2,973.
To cover the population increases projected by the Colorado State Demography Office through 2025, an additional 139,000 housing units need to be built in Colorado. With the new demand and existing deficits, between 227,000 and 353,000 new housing units need to be built by 2025.
“The number to watch will be the monthly permitting levels, and whether we fall outside the range of what is needed to dig the state out of a sizable supply deficit,” Brown said.
Colorado began to accumulate a housing supply deficit in the ‘90s as Colorado experienced a big increase in population, with building permits catching up to the population from 2002-2007. After the 2008 recession, this deficit began increasing again as the number of permitted building units were not keeping pace with population growth.
“New homebuilding fell following the 2008 financial crisis and was a main contributor to declining affordability over the preceding decade,” the report’s outline said. “Concerning signs indicate a similar drop in new home building will re-occur despite the need for it to remain at elevated levels.”
To meet the housing needs of Colorado, an additional 47,000 to 73,000 permitted units are required per year, the report said. It projects that 44 Colorado counties will fall short of issuing the number of permitted units needed to close the deficit and meet new housing demand by 2025.
Boulder County needs between 1,864 and 3,270 permits per year to close this deficit. The county issued 1,237 permits last year and are projected to issue 1,125 this year, creating a 2,000 unit deficit in the worst case scenario.
Broomfield needs to issue roughly 1,257 to 1,562 permits per year to close the deficit, but last year issued 501. Broomfield is projected to issue 699 permits this year, also creating a substantial deficit.
Due to elevated prices and rising interest rates, the affordability of purchasing a home in Colorado is at its lowest in more than 33 years, according to the report. In just the last seven years, the cost of purchasing a home has doubled in the state.
Household incomes are also not keeping pace with these rising costs. Since June 2015, the average hourly wage in Colorado has increased 31% from $26.41 to $34.62, the report said. Due to the rapid increase in cost of housing, the number of hours of work at the average wage to cover a median mortgage payment increased from 43 hours to 80 hours, or 86%, over that same time period.
“If population growth continues, the deficit will grow,” the report concluded. “Developers should transition to building higher density and less expensive housing so that the deficit can be erased even in a falling price environment.”
