Colorado takes a new—and likely more effective—approach to the housing crisis

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

In recent years, Colorado has been a poster child for the U.S. housing crisis. Previously a relatively affordable state, it has seen home prices increase nearly sixfold over the past three decades, outstripping even Florida and California.

Once a problem confined to coastal cities, unaffordable housing has increasingly become an issue in the nation’s heartland.

Like elsewhere, there’s no single reason why real estate has become so expensive in Colorado. Instead, there are several: Demand is rising among millennials, seniors are remaining in their houses longer, investors are buying second homes and short-term rentals, and housing construction has failed to keep up. Then there are supply-chain disruptions and labor shortages.

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

But new legislation may change that.

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

On May 13, 2024, Colorado Gov. Jared Polis signed a bill requiring local governments to plan and zone for more apartments and condominiums near transit stations. On the same day, the governor signed a law allowing accessory dwelling units – small apartments located on the same lot as a single-family house – to be constructed 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, including a bill that would give local governments a right to purchase existing homes in order to preserve affordability, will soon reach the governor’s desk. Each of these actions aims to hold down housing costs for developers and home seekers.

Restricting New Housing Causes Problems

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

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

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

That doesn’t just mean it’s hard to buy a home in Boulder or Vail. Unaffordable housing in prosperous U.S. cities has far-reaching effects. It increases the household wealth gap between existing, higher-income homeowners and renters. It reduces workforce dynamism, as workers can’t afford to move to places where they might find better-paying, more productive jobs. This, in turn, hurts national economic growth. Unaffordable housing also aggravates racial inequity and accelerates gentrification and displacement in lower-income neighborhoods.

The housing affordability crisis even makes climate change worse. As people seek cheaper housing farther from employment centers, their commutes produce more greenhouse gas emissions.

Colorado is Addressing Issues Head-on

Colorado’s transit-oriented housing law is intended to address these issues. And, as my forthcoming research suggests, it may prove more effective than other states’ interventions to make housing more affordable.

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

Advocates herald these reforms, but eliminating single-family zoning has produced little new housing.

Bolstered by my experience as a land-use lawyer, my research demonstrates some of the issues 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.

Allowing higher-density housing, reducing development fees and speeding up permitting time frames will result in more homes being built more quickly, my research shows.

Colorado’s legislation does a better job of harnessing market forces. The state’s new transit-oriented development law requires 31 cities to plan and zone for housing at an average density of 40 dwelling 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’s impossible to predict exactly how many new housing units this law will create. But the Denver region’s transit agency has 77 light-rail stations, and the law will force local governments to plan and zone for approximately 60,000 housing units around those stations alone. That number of units would help to close Colorado’s 101,000-unit housing shortage. And that’s not counting the units that will be allowed to be built along bus lines.

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

Colorado’s law hits a sweet spot for developers. Mid-rise projects are the most profitable type of new multi-family housing construction, according to the University of California Berkeley’s Terner Center for Housing Innovation. That’s because they can be built with inexpensive materials such as wood and don’t require specialized building-safety components that go into high-rise construction.

Developers can spread costs in these projects across more units than in, say, a duplex or triplex. Under proper market conditions or with modest incentives, larger projects make it more feasible for developers to set aside affordable units for below-market-rate affordable prices if local governments require it.

By design, residents of these new homes will have easy access to public transit, which should ease Colorado’s air-quality issues 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 eat away at local communities’ right to govern themselves.

Local control is political, if not legal, dogma in many states. Honoring Colorado’s strong home rule tradition, the transit-oriented development bill allows cities to determine where in their transit areas to permit multi-family housing. A town could spread the required units throughout its transit areas, for example, or concentrate them in a particular location. But they can’t opt out from building them in the first place.

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