Advocates Say Investor Activity Could Derail Denver’s Affordable Housing Plans

Photo by Andrew Coop/Unsplash

By Robert Davis

Some affordable housing advocates are concerned that a recent surge of investor activity in Denver’s real estate market could derail the city’s plans to curb its appetite for affordable housing.  

According to a report by Redfin, real estate investors in Denver purchased 2,117 properties worth an estimated $1.3 billion during the second quarter of this year. In all, this represents a 109% increase in investor activity.

“This unprecedented influx of investor activity in the housing market significantly compounds existing trends that negatively affect the ability for non-profits and others to create affordable housing, because it increases the cost of acquiring land to develop affordable housing while simultaneously decreasing the supply of any remaining naturally affordable market-rate homes,” Jonathan Cappelli, executive director of the Neighborhood Development Collaborative, told the Denver VOICE in an emailed statement.

Redfin’s report surveyed publicly available transactions in the country’s 50 most populous metropolitan areas, but only included 41 metros because of non-disclosure requirements in some counties. 

Across the country, investor activity returned to its pre-pandemic levels, the report says. Investors purchased 67,943 homes in Q2, which are valued at more than $48.5 billion. This total represents a nearly $10 billion increase since March and a $28 billion increase from June 2020.

When compared to other metro areas included in the survey, Denver ranks in the middle of the pack in categories such as the share of homes bought by investors and the year-over-year change in homes bought. However, the number of properties purchased by investors in Denver and their estimated value rank twelfth-highest in the country. 

"Investors see soaring home prices as an opportunity," Redfin Senior Economist Sheharyar Bokhari said in a statement. "With housing values consistently on the rise, solid returns are pretty much guaranteed – especially when you're an investor who has access to extremely cheap debt."

Denver Has a Lot to Offer Investors

Since the pandemic began in March 2020, Denver’s housing market has been insatiable. According to the latest data from the Denver Metro Association of Realtors (DMAR), the median home sales price has climbed 28% in a year, while the average number of days a home is listed on the multiple listing service has shrunk to just one week.

At the same time, the average sales price of a home is more than $160,000 above the median sales price, meaning buyers are consistently entering bidding wars for properties. 

Both investors and homeowners who decide to let go of their property are seeing stellar returns as well. Since the beginning of the year, homes sold have fetched more than 104% of their list price. This is up nearly 5% from June 2020, according to DMAR. 

Zaynab Sepahi, the principal broker at Z Bell Realty who specializes in working with real estate investors, told the Denver VOICE that mid-market cities like Denver have a lot to offer investors such as a high standard of living, year-round sports events, and stunning scenery. 

“With the high demand and low inventory in Denver, home prices continue to grow year after year at an exceptional rate,” Sepahi said. 

Homeownership Prospects are Dwindling for Many Low-Income Earners

While the market seems eager to reward property owners, Chief Operating Officer of Mercy Housing Dee Walsh told the Denver VOICE that the city’s housing market has left many low-income earners in the dust. 

“When massive investment enters the real estate market and prices surge, housing becomes even less affordable for middle- and lower-income families,” Walsh said. “At times like these, it is critical to invest in public resources to create more housing that has long-term affordability requirements.”

According to RentCafé.com,  a real estate data website, the rate of single-family rentals in Denver has increased by 37% between 2007 and 2018. Currently, single-family rentals make up more than 30% of Denver’s rental market. 

Denver has also seen five consecutive months of rent increases following a slight decline in January of 2021, according to RentCafé’s latest Denver market trends report. The report found that the average rent of all homes in the city has climbed to $1,763 per month and that renters occupy 51% of all housing units in the city.  

While the cost of housing continues to skyrocket, many households are struggling to make ends meet. A study by the Harvard Joint Center for Housing Studies found that more than half of Colorado households are “cost-burdened”  meaning they pay more than 30% of their monthly income on housing. This total ranks Colorado fourth-highest behind only California, Florida, and New York. Another 26% of households are severely cost-burdened, meaning they spend 50% or more of their income on rent or mortgage payments. 

Data from the Department of Local Affairs Division of Housing shows that 85% of cost-burdened households across the state make $50,000 or less per year. 

According to Cappelli, increased investor activity also has a ripple effect on renters in apartments or multifamily units. He argues that increasing land costs make it difficult for property managers to stabilize rents and maintain their properties. The cost increases also hinder the ability of some developers to building affordable units in high-opportunity neighborhoods.  

“The more aggressive the investor activity to snap up potential affordable housing development opportunities, the fewer opportunities there are for nonprofits to help relieve this burden on renters,” Cappelli added. 

Denver’s Affordable Housing Dream

Denver’s efforts to build affordable housing have generated moderate success. According to the Department of Housing Stability’s affordable housing data dashboard, Denver currently has 23,957 income-restricted units in its portfolio with another 1,157 units are currently under construction.   

However, the agency in charge of ensuring Denver’s affordable housing stock lacks the tools to provide units to people most in need. In February, Community Planning and Development told City Council’s Safety Committee that does not have the ability to require development of affordable housing for people earning between 50% and 100% of an area’s median income (AMI) with its current toolbox.

At the time, CPD suggested using market-based tools to leverage the private sector and create housing supply at both ends of the spectrum. They also suggested updating the city’s linkage fee to generate more project funding.

Since then, state lawmakers passed a bill that allows municipalities to set their own affordability standards through land use policies. This technicality skirts state statutes that prohibiting cities and counties from adopting rent control laws.

Following in spirit of the new law, Denver revised the zoning classification for the Golden Triangle to require rental units to be available to people earning 60% AMI and for-sale units to be available to people earning at least 80% AMI.

Meanwhile, city plans such as Housing an Inclusive Denver require the city to build 600 affordable units within the next five years and preserve an additional 310 units within the same timeframe.

A Murky Path Forward

Daryl Fairweather, an economist at Redfin, said there may be a reprieve for potential homebuyers on the horizon. Mortgage purchases have declined by 6% last week, while the average 30-year mortgage interest rate fell to a six-month low of 2.78%. 

"Just as buyers are pulling back, more listings are hitting the market," Fairweather said in a statement. "I'm optimistic this will create conditions for a little bit of rain in this inventory drought. A homeowner who is thinking of selling to buy again is going to have a much easier time now than they would have back in March.”

However, the share of homes purchased with cash hit a seven-year high last quarter. According to the National Association of Realtors, one-in-three homes was purchased with cash offers between January 1 and April 30.  That compares to just 25.3% of homes purchased with cash throughout all of 2020. 

As more prospective homeowners drop out of the rat race, Cappelli says it will only make matters more difficult for people that are already hanging on by a thread. 

 “This lack of affordability sends ripples throughout the economy – dampening the ability of employers to recruit and retain a well-qualified workforce and removing the steppingstone to the middle class that Americans have depended on for generations,” Cappelli said.