Colorado Takes New, and Arguably More Effective, Approach to Housing Crisis

In recent years, Colorado has been an example of the United States’ housing crisis. It was previously a relatively affordable state, but home prices have increased nearly sixfold in the past three decades, surpassing even Florida and California.

Unaffordable housing, once a problem limited to coastal cities, has increasingly become an issue in the heartland.

As elsewhere, there is no single reason why real estate has become so expensive in Colorado. Instead, there are several: demand is increasing among millennials, seniors are staying in their homes longer, investors are buying second homes and short-term rentals, and home construction has failed to keep pace. Then there are supply chain disruptions and labor shortages.

The result? Colorado has been experiencing declining population growth, an increase in homelessness, and hiring challenges for employers.

But new legislation may change that.

This year, the Colorado General Assembly passed several laws that, from my perspective as a real estate and land use expert, will make Colorado a national leader in expanding housing affordability.

On May 13, 2024, Colorado Governor Jared Polis signed a bill requiring local governments to plan and zone more apartments and condominiums near transit stations. The same day, the governor signed a law allowing the construction of accessory dwelling units (small apartments located on the same lot as a single-family home) in large cities and towns. These bills followed others that eliminated minimum vehicle parking requirements for apartments and preempted local rules prohibiting people from living with roommates. These changes will make housing more affordable by allowing developers to build more (and more diverse) housing at a lower cost.

Even more legislation will soon arrive on the governor’s desk, including a bill that would give local governments the right to purchase existing housing to preserve affordability. Each of these actions aims to keep housing costs low for developers and home seekers.

Restriction of new housing causes problems

To end the housing crisis, governments must get rid of rules that prevent developers from building new homes.

For decades, economists have noted that restrictive zoning laws in some of the country’s wealthiest cities are a major factor blocking new development.

According to the law of supply and demand, limiting the supply of housing increases housing prices.

That doesn’t just mean it’s difficult to buy a home in Boulder or Vail. Unaffordable housing in America’s prosperous cities has far-reaching effects. The household wealth gap between existing, higher-income homeowners and renters increases. It reduces the dynamism of the workforce, as workers cannot afford to move to places where they could find more productive and better-paying jobs. This, in turn, harms national economic growth. Unaffordable housing also exacerbates racial inequality and accelerates gentrification and displacement in low-income neighborhoods.

The housing affordability crisis even makes climate change worse. As people look for cheaper housing further away from employment centers, their trips produce more greenhouse gas emissions.

Colorado is tackling problems head-on

Colorado’s transit-oriented housing law aims to address these issues. And, as my upcoming research suggests, it may prove more effective than other states’ interventions in making housing more affordable.

Starting with Oregon in 2019, several states attacked single-family zoning by overriding local zoning laws that only allow one detached home per parcel. Many cities have gone through similar changes.

Advocates trumpet these reforms, but the elimination of single-family zoning has produced few new homes.

Bolstered by my experience as a land use attorney, my research demonstrates some of the problems with well-intentioned single-family zoning reforms: It is too expensive and difficult to finance projects that add just one or two additional units to properties sporadically. What’s more, small projects like these don’t attract experienced developers.

My research shows that allowing higher density housing, reducing development fees, and speeding up permitting timelines will result in more housing being built faster.

Colorado legislation does a better job of harnessing market forces. The state’s new transit-oriented development law requires 31 cities to plan and zone housing with an average density of 40 housing units per acre within a half-mile of a fixed rail transit station or high-frequency bus corridor. That’s roughly equivalent to a three- or four-story apartment building.

It is impossible to predict exactly how many new housing units this law will create. But the Denver region’s transportation agency has 77 light rail stations, and the law will require local governments to plan and zone approximately 60,000 housing units around those stations alone. That number of units would help close Colorado’s 101,000-unit housing shortage. And that’s not counting the units that will be allowed to be built along the bus lines.

The new law is based on experiments in Massachusetts and California, where state governments have begun requiring cities to rezone and eliminate red tape for moderate-density housing near transit. However, Colorado’s law goes further by allowing much denser development, mirroring the locally adopted and highly effective transit-oriented development laws in Minneapolis and Los Angeles.

Colorado law hits a sweet spot for developers. Mid-rise projects are the most profitable type of new multifamily housing construction, according to the Terner Center for Housing Innovation at the University of California Berkeley. This is because they can be built from inexpensive materials such as wood and do not require specialized safety components like those used in skyscraper construction.

Developers can spread the costs on these projects over more units than, for example, a duplex or triplex. Under adequate market conditions or with modest incentives, larger projects make it more feasible for developers to reserve affordable units at below-market affordable prices if local governments require it.

By design, residents of these new homes will have easy access to public transportation, which should alleviate Colorado’s air quality problems and reduce its carbon footprint. As a result, a broad coalition of housing, transportation, and environmental advocates supported the bill.

Colorado’s transit-oriented law also addresses a common argument against state intervention in land use regulation. Opponents argue that state laws governing land use undermine the right of local communities to govern themselves.

Local control is a political, if not legal, dogma in many states. Honoring Colorado’s strong tradition of home rule, the transit-oriented development bill allows cities to determine where in their transit areas multifamily housing will be permitted. A city could distribute the necessary units in its transit zones, for example, or concentrate them in a certain location. But they can’t choose not to build them in the first place.

Brian J. Connolly is an assistant professor of business law at the Ross School of Business at the University of Michigan.

This article is republished from The Conversation under a Creative Commons license. Read the original article.