For a growing number of families in metro Denver, buying a new home is slipping out of reach. But more buyers and builders are pursuing townhomes as a way to keep costs attainable.
“Demand remains very strong for housing, but the supply remains constrained. It continues to push prices higher,” said John Covert, director of Metrostudy’s Colorado region. “That’s one of the reasons why more attached product is getting built.”
Unlike detached homes, which stand alone, attached homes share walls. The category includes condominiums, townhomes, duplexes and paired homes. Because more units can be put on the same amount of land, attached homes usually are more economical to build.
Nearly three in 10 of the new homes hitting the market are attached, up from a low of 15.8 percent of the mix in 2012. Attached homes now hold the highest share of new-home activity since 2008, Covert said. What makes the comeback of attached housing noteworthy is that townhomes single-handedly are driving the surge, with a minimal assist from condos.
Condos historically have represented about 11.7 percent of all new-home activity in metro Denver, but they were only 4 percent during the past year. Developers blame that on heavy litigation over construction defects in Colorado, which they say has driven up insurance premiums and deterred projects.
A state law that took effect in May is aimed at reigniting condo construction. It requires a majority of a complex’s unit owners — rather than just its homeowners association board — to consent to legal action against a developer for poor construction.
Most of the new condos going up in metro Denver are luxury, with half carrying a price tag of $700,000 or more, according to Metrostudy. That contradicts the role condos used to play in the market as a lower-cost housing option popular with first-time buyers.
Townhomes have stepped into the gap. Over the past year, about six in 10 of every new home that was started in metro Denver carried a price tag between $400,000 and $600,000. A record low 28 percent were priced under $400,000, the new definition of “attainable,” according to Metrostudy.
Calling a $400,000 home attainable could be a stretch. The annual income needed to quality for a mortgage on a home at that price, assuming a 10 percent down payment and a 4 percent interest rate, would run around $94,000, said Covert.
About half of metro Denver households make less than $71,000 a year, while half make more, according to the U.S. Census Bureau. A typical household would need a home priced around $325,000, assuming they had a 10 percent down payment available, more if not.
Few homes under $350K
The median price of a new home sold in the U.S. was $310,000 in June, according to the U.S. Census Bureau. But in Colorado, homes at that price range are an endangered species. Covert estimates fewer than 3 percent of all homes started in Denver were priced under $300,000, and only 8 percent were in the $300,000 to $350,000 range.
“A year or two from now, it is a segment of the market that will no longer exist,” Covert said of a new Denver home for under $300,000. And new homes for under $350,000 are going down the same path.
But the higher new-home prices go, the smaller the pool of potential buyers gets, and the more risk builders face if there is a downturn. For that reason, Covert predicts more builders will shift to attached housing to meet the point of strongest demand.
Avion at Denver Connections in the Green Valley Ranch area offers a glimpse into what a future filled with more attached homes might look like. William Lyon Homes, a California developer, is packing 694 homes onto 115 acres between Peña Boulevard and Chambers Road on the south side of Green Valley Ranch Boulevard.
“Being able to get the higher density and the larger unit count drove our ability to price the unit at an attainable level,” said Rob Johnson, vice president of land acquisition and development with William Lyon Homes, which acquired Village Homes in late 2012.
The smallest townhomes, at 1,248 square feet, start at $247,500 and include two bedrooms, two baths and a two-car garage. Three-bedroom townhomes run from $256,000 to $285,500, while four-bedroom townhomes top out at $305,000.
“This moves the needle in the market. There is nothing else like it in the Denver metro area. You can’t find anything new under $300,000 — townhome or otherwise,” Johnson said.
William Lyon paid market price for its land, meaning it didn’t have the cost advantage that builders who banked land during the housing crash had. Value engineering, simple designs and a good location helped contribute to a lower sales price, Johnson said.
For example, eliminating extra corners or curves makes it less expensive to frame and pour a foundation. And while Avion buyers can add personalized features, they do so through preset packages, each with three levels of upgrades, which makes it easier to finish homes.
Townhomes, while more affordable to build than single-family homes, aren’t necessarily in the reach of families making the median income. In northwest Denver’s Highland and Sloan’s Lake neighborhoods, where a quarter of new townhomes landed in the past year, the average price was $505,729 for 1,578 feet, according to Metrostudy.
Outside of that area, the average price for a new townhome drops to $423,839 for 1,834 square feet. And Avion, which has sold 50 of its homes before opening its model homes or sales office, looks to push that average lower.
From for-rent to for-sale
Builders closed on 2,765 homes in the second quarter, the most in a three-month period since the fourth quarter of 2007, just ahead of the last recession. The number of closings was up 15 percent from the first quarter and 20 percent from the second quarter of 2016, according to Metrostudy.
Activity was so robust that builders took a breather to catch up in the second quarter, releasing fewer lots for sale and slowing starts, Covert said. The 3,033 starts in the quarter were up only 1 percent from the first quarter and down 2 percent from the same quarter in 2016.
Although the April-June period was metro Denver’s strongest for new construction in nearly a decade, the region remains below historic levels and what needs to be built to keep up with population gains, Covert said.
Over the past two decades, area builders have constructed an average of 15,000 homes a year, with a peak in 2006 of around 20,000. Covert estimates the market needs 17,000 to 18,000 new homes but only received 11,598 over the past 12 months.
“We are still underbuilding relative to where demand is,” said Covert.
Denver’s housing shortfall doesn’t look so severe when apartments are added into the mix. Trulia estimates builders and developers in metro Denver are on track to pull 25,098 permits, which ranks seventh among major metro areas and is 56.2 percent above the average since 1980.
That works out to a new housing unit for every 114 people, among the best showing by any big metro outside of Austin, Texas.
But there are concerns that apartment developers are too narrowly focused on luxury units in downtown areas, and that they would do better to focus on condos, assuming they can get comfortable that under the new law they can get beyond concerns about defects litigation.
Even if a developer decided to move forward, getting a project from the drawing board to move-in can take two years or more, Covert said. But if even only a half-dozen large projects move forward, it would make a big contribution to the supply of new housing and push the market even more in the direction of attached housing.
