March 2, 2017
Contact: Cinamon Watson

Construction Defects Laws Have Negative Impact

DENVER – Significant unmet demand in the Denver metro area for affordable entry-level housing has led to a “crowding out” of potential home buyers- particularly first-time buyers – to purchase homes, according to a study commissioned by the Common Sense Policy Roundtable, Colorado Concern, Colorado Association of Realtors and Denver South Economic Development Partnership.

With 68 percent of homes in Denver now priced above $400,000, the lack of new entry-level homes being built has pushed residents into the expensive rental market and could have longterm negative consequences for individuals, families, and for Colorado’s economy as a whole.

“Not being able to buy a home robs people of the chance to obtain tax benefits and build equity, both of which are critical factors towards achieving financial stability,” said Earl Wright, Chairman of the Board of AMG National Trust Bank. “Furthermore, the lack of affordable housing close to employment centers causes people to live further and further from where they work, which increases urban sprawl and creates disincentives for business to move or open offices in the area.”

Over the last five years, home price increases in metro Denver have significantly outpaced rent growth. Condominium prices in particular have skyrocketed: as of February 2017, the average sales price for single-family homes in Denver had risen 5.1% year-over-year to $421,962, while the average price of condos increased 21.3%, according to Metro Denver EDC.

“With one of the tightest housing markets in the nation, Colorado ranks among the worst in the nation for first time homebuyers,” said Tyrone Adams, CEO, Colorado Association of Realtors. “We have to address this issue. Without a solution, first time buyers will be shut out of the market and our economy is going to take a major hit.”

A 2013 study commissioned by DRCOG found that existing Colorado construction defects laws are having adverse effects on the housing market and the supply of condominiums. The study found that current construction defects regulations, and the increased risk of class-action lawsuits created by such regulations, have increased costs for condominium builders by as much as $15,000 per unit, making any condos under $450,000 unfeasible to build.

“There’s a reason the Denver Metro Area’s home prices are at an all-time high: There isn’t the supply we need to meet the growing demand, especially when it comes to condominiums.” said Colorado Concern President and CEO Mike Kopp. “Clearly the situation is unsustainable. Already seniors, young professionals, and public servants like teachers and firefighters are struggling to find homes they can afford.”

According to economic simulations, if a 1% decrease in residential investment in 2017 would occur due to lower priced housing options, this could result in an average of over 2,300 fewer jobs for Coloradans, a decrease in state GDP of $1.06 billion and a drop in state revenue of nearly $32 million over the next five years. A 5% decrease would result in over 11,400 fewer jobs on average over the next five years, a cumulative 5-year decrease of $5.2 billion to state GDP and $156 million in lost revenue.

Some would argue that LESS supply and higher demand is good because it would create even higher prices. However, simulations found that just a 1% increase in housing costs in 2017 would lead to a decrease of $322 million in Coloradans’ real disposable income in the first year as a result of less migration, less employment, and higher inflation. Lack of affordable housing is a losing proposition for Colorado.

The economic simulations use the PI+ and Tax-PI dynamic forecasting models developed by Regional Economic Models Inc. These models simulate the city and state-wide economic impacts of changes to key economic inputs such as residential investment and housing costs.

The full study can be reviewed and downloaded at: