Colorado Springs Housing Affordability Report

FULL REPORT

February 2023

2023 LOCAL ELECTIONS
In 2023, Coloradans will have municipal elections in our most populated cities. To inform these debates CSI will produce reports on the most pressing issues facing Colorado cities: crime, housing, and homelessness for Fort Collins, Denver, Grand Junction, Pueblo Colorado Springs, and Aurora.

ABOUT THE AUTHOR
Steven L. Byers, Ph.D. is the senior economist with the Common Sense Institute. Steven’s Experience as an economist spans twenty-three years, including work at federal regulatory agencies (SEC, CFTC, PCAOB) and quantitative economic analysis supporting international trade litigation cases brought before the U.S. International Trade Commission.

ABOUT COMMON SENSE INSTITUTE
Common Sense Institute is a non-partisan research organization dedicated to the protection and promotion of Colorado’s and Arizona’s economies. CSI is at the forefront of important discussions concerning the future of free enterprise in Colorado and Arizona and aims to have an impact on the issues that matter most to Coloradans and Arizonans.
CSI’s mission is to examine the fiscal impacts of policies, initiatives, and proposed laws so that Coloradans and Arizonans are educated and informed on issues impacting their lives. CSI employs rigorous research techniques and dynamic modeling to evaluate the potential impact of these measures on the Colorado and Arizona economies and individual opportunity.
Common Sense Institute was founded in 2010 originally as Common Sense Policy Roundtable. CSI’s founders were a concerned group of business and community leaders who observed that divisive partisanship was overwhelming policymaking and believed that sound economic analysis could help Coloradans make fact-based and common sense decisions.

TEAMS & FELLOWS STATEMENT
CSI is committed to independent, in-depth research that examines the impacts of policies, initiatives, and proposed laws so Coloradans and Arizonans are educated and informed on issues impacting their lives. CSI’s commitment to institutional independence is rooted in the individual independence of our researchers, economists, and fellows.
At the core of CSI’s mission is belief in the power of the free enterprise system.  Our work explores ideas that protect and promote jobs and the economy, and the CSI team and fellows take part in this pursuit with academic freedom. Our team’s work is guided by data-driven research and evidence.

Table of Contents
ABOUT THE AUTHOR 2
ABOUT COMMON SENSE INSTITUTE 2
TEAMS & FELLOWS STATEMENT 2
KEY FINDINGS 4
AFFORDABILITY AS MEASURED BY THE HOMEBUYER MISERY INDEX 5
HOME PRICES 9
HOURS OF WORK NEEDED TO AFFORD A HOME MORTGAGE 9
COLORADO SPRINGS HOUSING SUPPLY SHORTAGE 11
BUILDING PERMITS AND THE HOUSING SUPPLY DEFICIT 12
TYPES OF PERMITS ISSUED 15
HIGHER MORTGAGE RATES AND HOMEBUILDER CONFIDENCE 16
COST OF PROPOSED ELECTRIFICATION OF HOMES AND BUSINESSES 17
GOING FORWARD 19

Colorado Springs Housing Affordability Study
Since 2005, an estimated 105,000 new residents have come to the city of Colorado Springs. Over the same period, the average priced home has risen 119% from $218,707 to $479,043, as of December 2022. Increased demand and lagging development have created a shortage of housing and a tight housing market. Recent increases in mortgage rates have reduced affordability for those looking to purchase a home. Although higher mortgage rates tend to reduce demand for homes and provide some relief in terms of availability, permitting for new housing units is tapering off and actual home completions are likely to decline as builders respond to a slowing economy. Without an increase in construction of new housing at all price levels, Colorado Springs will continue to have a housing supply shortage.
This report analyzes housing affordability trends and estimates whether there is a deficit or surplus of housing units in Colorado Springs as defined by the area within the city limits. It does not include surrounding cities or towns that are in El Paso County. The study encompasses the period from 2000 through 2022. The data sources used in this report and its most recent availability include: the American Community Survey (2021), the National Association of Homebuilders (2020), U.S. Department of Housing and Urban Development (January 2023), S&P CoreLogic Case-Shiller Home Price Indices (3rd Quarter 2022), Zillow (November 2022), and the Colorado State Demography Office (2022). The housing deficit/surplus in 2022 is estimated using forecasts of population and average household sizes. It is important to note that the housing deficit/surplus estimates may change with each new U.S. Census data release.

KEY FINDINGS
• The housing deficit in 2022 in Colorado Springs is in the range of 10,614 to 21,150 units. To meet population growth by 2028 and close the housing deficit, between 28,000 and 39,000 housing units will need to be built.
• Due to elevated housing prices and rising interest rates, the affordability of purchasing a home in Colorado Springs is at an all-time low. In just the past 8 years, the cost (purchase price plus mortgage interest) of purchasing a home has increased by 101%. A large part of that increase has occurred over the last three years.
• Household incomes have not kept pace with rising housing costs. Between November 2015 and December 2022, the average hourly wage increased by 36% from $22.63 to $30.75. However, due to the rapidly increasing cost of housing, the number of hours of work required to cover the monthly mortgage payment on an average priced house increased from 49 hours to 102 hours, a 107% increase, as seen in Table 4.
• Between 4,730 and 6,485 permits are needed annually through 2028 to close the housing supply deficit in Colorado Springs and meet the demands of future population growth. Projected permitting for new housing in 2022 started off strong but has tapered off as home builders reassess the demand for housing in a higher interest rate environment. Over the period from 2006 through 2021, the average annual number of permitted units issued was 2,706. This historical average is 42% to 57% of the number of permits necessary to close the deficit and meet new housing demand by 2028.
• Current levels of permitting for new housing may not be enough. Based on permit data through November 2022, Colorado Springs has issued 5,421 permits through the end of the year. If this annual level is sustained, it is enough to close the deficit plus new housing demand by 2028 under the low estimate of needed permits but is insufficient under the high estimate. Recent reports indicate that the homebuilding market may be contracting. To avoid a collapse of new home building similar to the one that followed the last recession, permitting must remain at elevated levels for the next several years.
• The passage of HB 22-1362 and mandating electrification of homes and businesses will reduce affordability. Based on a study of the cost of residential electrification done by Black Hills Energy, the public utility for Rocky Ford, CO, the combined cost of “behind-the-meter” expenses and new electric utility infrastructure needed to fully electrify all residential housing in Colorado Springs would range between $37,000 and $44,000 per existing unit, for a total estimated cost to all current Colorado Springs residents in the range of $5.4 billion to $6.3 billion.
• The total cost per existing unit of full of full electrification of Colorado Springs homes would cost between 50% to 58% of median household income ($75,579).
• Homebuilder confidence has declined by 75% since a recent high in November 2020. The National Association of Home Builders/Wells Fargo Housing Market Index for the Western region has fallen for nine straight months, indicating a possible decrease in the rate of new housing creation going forward.

AFFORDABILITY AS MEASURED BY THE HOMEBUYER MISERY INDEX
The “Colorado Springs Homebuyer Misery Index,” developed by Common Sense Institute , captures the impact of housing prices and mortgage rates on the affordability of purchasing a new home. The Colorado Springs, Colorado, and U.S. Homebuyer Misery Indices are based on 30-year mortgage rates and Zillow home prices.
The Homebuyer Misery Index converts mortgage rates into an indexed value with 2000 as its base year. The mortgage rate index is then added to the Zillow price index and normalized. The following graph shows the Colorado Springs Homebuyer Misery Index, the Colorado Homebuyer Misery Index, and the U.S. Homebuyer Misery Index. The Colorado Springs Index is below the Colorado Index after 2013 and above the U.S. Index after 2019. The substantial increase from 2012 to the end of 2020 was primarily a function of home prices increasing. Beginning in 2021, home prices in Colorado Springs rose dramatically and mortgage rates more than doubled by November 2022; consequently, the cost to purchase an average-price home in Colorado Springs went up by 121% from 2012 to 2022. In the last two months of 2022, the misery indices declined as home prices and mortgage rates fell. The graph of the Homeowner Misery Index is useful for evaluating and comparing trends to the Colorado and U.S. Homebuyer Index, but to determine the degree to which a region became more or less affordable relative to others, the change in the indices must be calculated between two points in time as is shown in in Table 1.

The Wall Street Journal and Realtor.com began producing their Emerging Housing Markets Index in spring 2021 and have now published six quarterly estimates. The index identifies the top metro areas for home buyers seeking an appreciating housing market, strong local economies, and appealing lifestyle amenities. Three hundred of the most populous core-based statistical areas as measured by the U.S. Census Bureau are evaluated on two criteria: real-estate markets (50%), and economic health (50%). It utilizes 11 key indicators that are weighted and summed to create a single measure: real-estate supply (16.6%), real-estate demand (16.6%), medium home listing price trend (16.6%), unemployment (6.25%), wages (6.25%), regional price parities (6.25%), amenities (6.25%), small businesses (6.25%), and property taxes (6.25%).

Table 2 shows the rankings of Colorado Springs’ core-based statistical area relative to all three hundred most populous areas included in the index. The Colorado Springs MSA is in the top 10% (ranked 30 or higher) of all metro areas in terms of future home price appreciation. This index provides perspective that, though housing affordability in the city is near record lows according to latest data,  Colorado Springs is generally ranked in the top 10% of MSAs in the Emerging Housing Market Index and is viewed as relatively attractive given the potential for prices to continue to rise, in addition to  other quality of life and economic factors.

Table 3 shows the relative rank of other major MSAs in Colorado. Though prices in Colorado Springs are historically high, among the other MSAs in Colorado, the city is considered one of Colorado’s highest-ranking in terms of future home price appreciation.

HOME PRICES

The following graph shows home price indices for Colorado Springs, Colorado, and the United States. Home prices in Colorado Springs have increased by 140% since 2012 and 49% from the beginning of the COVID-19 pandemic through June 2022. Since then, home prices in Colorado Springs have begun to taper off, falling 3% since June. Nationally, home prices increased by 44% from the beginning of the COVID-19 pandemic through October 2022 and have declined by 0.3% since May 2022.

HOURS OF WORK NEEDED TO AFFORD A HOME MORTGAGE
To measure the impact on the average homeowner in Colorado Springs, Common Sense Institute calculated the number of hours that one would have to work while earning the average hourly wage in Colorado Springs in November of each year from 2013 to 2022 to cover the monthly mortgage payments shown in Table 4. Over just the last 12 months, driven primarily by the increase in mortgage rates, an additional 37 hours of work has become necessary to cover the monthly mortgage payment on a newly purchased average-price home.

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US,Colorado – May 2021 OEWS State Occupational Employment and Wage Estimates (bls.gov).

The graph below shows the evolution of monthly mortgage payments on an average-price home in Colorado Springs and the required hours of work necessary to cover each payment. Required hours fluctuated around forty from January 2007 until the summer of 2020, after which it increased dramatically as home prices rose. Beginning in the spring of 2022, mortgage rates increased as the Federal Reserve began raise interest rates to address inflation.

Since the start of the pandemic, the hours of work required to afford a monthly mortgage payment on an average-price home increased by 76% from 58 hours to 102.

COLORADO SPRINGS HOUSING SUPPLY SHORTAGE
Colorado Springs has failed to build enough housing to keep pace with demand. Standard housing market reports like those developed by the National Association of REALTORS® track inventory based on homes listed for sale. What those reports do not capture is the total stock of homes needed to maintain a healthy housing market.

CSI estimated the number of homes needed in Colorado Springs to achieve a healthy housing market under two scenarios. Each scenario is intended to measure the difference between the actual number of homes in the city relative to the number of homes needed to maintain a stable market for the local population. The first scenario models a housing deficit or surplus based on a low estimate of homes held off the market for purchase by the local population. The second scenario models the values of a housing deficit or surplus based on a high estimate of homes held off the market for purchase by the local population.

Housing units and households – Each scenario uses estimations of housing units and households from the U.S. Census Bureau’s American Community Survey (ACS) and the Colorado State Demography Office. The number of housing units is adjusted by removing those that are considered uninhabitable by virtue of having no kitchen or no plumbing.

Homes held off the market – Homes held off the market are existing housing units not available for purchase. The estimate of the total number of such homes includes a range of second homes at the county level released by the National Association of Homebuilders along with an estimate of uninhabitable homes from ACS. Colorado Springs has between 0% and 4.99% of the housing stock allocated to second homes.

Desired ratio of total units to local population – To estimate the target number of housing units, the value of 1.1 housing units per household was used to represent a healthy market. This value is derived from the historic average vacancy rates in the U.S. which was used in a housing supply report done for the state of Oregon. Table 5 shows the forecasted change in population and the projected numbers of households in 2028 and 2033.

Using the scenarios discussed above, the housing unit deficit in 2022 is estimated to have been between 10,614 and 21,150 units. These deficits represent 5.03% and 10.02% of the existing housing stock in Colorado Springs. Table 6 presents summary results for Colorado Springs housing supply deficit. CSI will continue to monitor new data as it becomes available and will amend the estimates and methodology as required.

BUILDING PERMITS AND THE HOUSING SUPPLY DEFICIT
As shown in the following graph, new residents continued to arrive in Colorado Springs and the housing supply deficit grew from 2006 through 2021, before falling slightly in 2022. Annual permitting steadily rose after 2009, but not enough to reduce the supply deficit.