Denver faces housing shortage amid high construction costs, mortgage rates

Limited housing continues to increase home prices as homeowners who secured low interest rates are reluctant to move. But building new houses isn’t an easy fix to the problem.

Despite a surge of millennials entering their prime homebuying years, U.S. existing home sales dropped to the lowest level in almost 30 years. The market won’t experience a significant recovery until interest rates start to fall.

“I thought by this time the housing market would be recovering. It has not yet recovered. Home sales are still down from last year,” Lawrence Yun, chief economic with the National Association of Realtors, said in June at the National Association of Real Estate Editors in Austin.

At the same time, metro Denver doesn’t have enough houses to meet buyer demand.

According to an analysis from Zillow, metro Denver has an estimated 70,197 “missing households” in 2022, about 500 more than in the prior year.

Zillow defines missing households as those living with non-relatives and subtracts the number of vacant units to determine the housing deficit. The count may understate the shortfall because it doesn’t include relatives living together, such as adult children with parents.

Builders need to do more than target the number of missing households. They must also create enough places for new people to enter the market and young adults to move into their own homes.

However, high mortgage rates, which hover around 7%, combined with elevated construction costs and high land prices, continue to hamper builder sentiment.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, builder confidence in newly built single-family homes was 43 in June, down two points from May.

“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages and a dearth of buildable lots.”

The June survey shows 29% of builders cut home prices to boost sales in June, while the use of sales incentives ticked up to 61% from 59% in May.

In the Denver metro area, homes under construction are spread across Aurora, Parker, Bennett, Lone Tree, Uptown, and the River North district.

Builders offer incentives such as price reductions, interest rate buydowns, and assistance with closing costs to attract buyers, said Dan Hnatkovskyy, housing expert, CEO, and co-founder at NewHomesMate, a marketplace for new construction homes.

“Despite the index decrease for two consecutive months, the new construction market continues to grow while resales are decreasing,” he said.

“We can expect that as long as mortgage interest rates remain high, builders will offer incentives to win consumers — and that’s good news for homebuyers. The current market conditions present a unique opportunity for those looking to purchase a new construction home, as builders strive to make their offerings more attractive despite the challenging economic landscape.”

Hnatkovskyy said that due to supply chain issues and labor shortages, many builders are constructing spec homes to guarantee timely delivery and expected costs.

The news and editorial staffs of The Denver Post had no role in this post’s preparation.