An analysis of how 2020 has affected Front Range Colorado's Housing Market & builders.
Published November 18, 2020
The Onset of Radical Change
What a wild ride the 2020 housing market has been for Front Range new home builders. As the year started, I was doing a lot of field research on housing projects in the northern portion of our Front Range housing market. Community sales were booming in places like Berthoud and Erie. Then came the pandemic. Sales offices closed up tight in precaution. “By Appointment Only” signs were hastily taped on the doors as builders hunkered down, trying to figure out how to deal with this challenge. What started as a strong year that exceeded expectations was in serious jeopardy.
COVID-19 Pandemic Stalls the Front Range Housing Market in March and April Then Quickly Rebounds
COVID-19 slowed production of the builders’ backlog. Subcontractors and suppliers struggled with keeping their workers safe. The Home Builders Association scrambled to provide training extending safety practices to manage the pandemic.
With a strange coincidence in market factors, home mortgage interest rates dropped to historic lows. Buyers quickly snapped up the available resale inventory. Housing prices saw healthy increases. Homebuyers needing to relocate from the West Coast started banging on doors of builders’ model home parks to get on waiting lists for available homes. By May, new home sales surged again, making up the lost ground from March and April.
Growth Limitations Suppress Black Home Ownership
The effects of growth limitations stressed the supply of new home developments. Lot shortages became apparent. Builders would see gaps in their ability to meet housing demand smoothly. These growth limitations occur in two significant ways.
First, the entitlement of new home communities through zoning and engineering took longer than ever. Municipalities use this tactic to slow growth.
Secondly, high housing demand municipalities like Lakewood, Lafayette, Louisville and Lakewood have imposed growth limitations. Even in high growth areas such as Erie, the NIMBYs (Not In My Back Yards) make for an arduous process to get any new home community approved. NIMBYism drives up housing costs and is a form of structural racism suppressing Black homeownership. Erie’s African-American population is 0.3%, Lakewood is 1.6%, Lafayette is 1.1%, Louisville is .93%. These rates are well below the 4.0% Black population in Colorado. We need to make the Front Range Housing Market more accessible.
Opportunities Abound as New Issues Challenge Builders
Nationally, the pandemic affected the supply chain, with many housing components delayed in production and in short supply. Cabinets and appliances have been tough to get. While the large national home builders have been able to muscle their way through this, low volume builders have found this particularly challenging.
Homebuilders and other industry participants rolled up their sleeves this summer of 2020 and got to work satisfying the demand for housing all along the Front Range. It is not very often in this industry that you cannot build homes fast enough. Sales offices opened back up. Subdivision streets filled once again with workers, pick-ups and concrete transits.
Who Are the Leading Front Range Builders?
Let’s take a look at the leading builders from Douglas County up through Larimer and Weld Counties. Big homebuilders have dominated Colorado since the 1950s, with companies like Witkin Homes (now Lennar), Wood Bros. Homes (now Richmond American) and Melody Homes (now DR Horton) grabbing the largest chunks of market share. The big builders kept getting bigger. By my guess, these big three will remain the “big three” into the foreseeable future while capturing nearly 40% of the market. Richmond American and Lennar (formerly U.S. Home) have ranked as No.1 and No. 2 since 1981 (I know, I was there). Today, Richmond American is active in 73 communities and Lennar in 53.
Twelve of the large national builders have been attracted to the Front Range of Colorado, establishing thriving divisions here. By my guess, the national builders have garnered over 70% of the production-built market share. Locally-based production builders wield about 20% of the market.
After Richmond American and Lennar, the other behemoths in the market are DR Horton (32 communities), Century Communities (24 projects), Oakwood Homes (25 communities), Meritage Homes (27 communities), K.B. Home (23 communities), and Taylor Morrison (28 communities) and Toll Brothers Homes (14 communities).
Locally-based builders that will construct more than 100 homes this year include Lokal Homes, Hartford Homes, Horizon View Homes, Richfield Homes, Landmark Homes, St. Aubyn Homes, Baessler Homes, Thrive Homebuilders, and Boulder Creek Neighborhoods.
My comments above analyze the production home builders. These are builders that have a larger supply of lots and operate out of model centers. There is another vital component of the industry with custom home builders. I’ll leave an analysis of that thriving sector for another blog.
Issues that will Continue into 2021 in the Best Market in the U.S.
The COVID-19 pandemic has created a tailwind for Front Range home builders. Many believe that the area is the best market for homebuilding in the USA. There has been virtually no competition from the resale market due to the lack of supply and high prices. Labor and supply chain hurdles have jumped in to hinder progress. The lowest mortgage rates (3.05%) in history have been the most significant driver of new home demand.
Now the second wave of the COVID-19 pandemic may slow the commerce down again in home building as the year 2020 finally closes out. Hopefully, construction can catch up with demand. Sorting out the political ramifications of the November election will be a subject for my future blogs.
Major problems exist in dealing with the housing shortage in Colorado and the entire country:
- The pandemic must be controlled so life can return to normal.
- Growth restrictions in cities and counties dribble out approvals for new housing projects far below the existing demand. Homebuilders have not effectively made the political arguments that this form of NIMBYism damages society’s overall well-being and is inherently racist.
- This has been a challenging year for Front Range home buyers searching for entry-level and affordable homes. Rising home prices are offsetting the affordability factor of low interest rates. Affordable housing programs such as inclusionary zoning only provide a minimal amount of affordable housing while raising prices on market-rate housing.
- The Biden administration is likely to create new regulations that will substantially increase land development costs and home construction costs.
- Homebuilders need to become more vigorous advocates for minority homeownership. It is the right thing to do.
Future Outlook: Controlled Modest Growth and Further Consolidation
Homebuilders can look forward to prosperity over the next five years. The risk of over-supply has evaporated. With the advent of the COVID-19 vaccine, commerce, jobs, and income will not only return to normal but grow beyond previous heights by late 2021.
Due to the shortage of housing units in Colorado’s Front Range, demand will be strong for the next five years with modest but steady growth. The controlled modest growth is modified by the slow process of gaining zoning, engineering, and building permit approvals.
I think it is possible we will see further consolidation among home builders. Big builders will find accretive results through mergers and acquisitions. The incredible success of some of Colorado’s Front Range privately-held home builders make them ripe for acquisition.
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About Jeff Whiton
Jeff formerly headed operations for Lennar and KB Home in Colorado building nearly two per cent of the state’s total single-family housing stock. He was honored as Colorado’s Home Builder of the Year in 2001. Whiton also served as the CEO of the Home Builders Association of Metro Denver for eight years reviving the association from near bankruptcy after the Great Recession.