February 17, 2015 11:59 AM UTC

"Condo Construction Crisis?" Don't Believe The Hype

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• by: Colorado Pols

Quite a bit of coverage last week of the introduction of legislation restricting the rights of homeowners to sue over faulty construction. As the Denver Business Journal's Ed Sealover reported:

A bipartisan pair of senators introduced a long-awaited construction-defects reform bill in the Colorado Legislature Tuesday, starting the clock on an 85-day effort to try to win over opponents who have killed similar efforts in each of the past two sessions.

Supporters of Senate Bill 177, sponsored by Senate Majority Leader Mark Scheffel, R-Parker, and Sen. Jessie Ulibarri, D-Commerce City, unveiled a wide-ranging coalition of backers that includes municipal leaders, builders, economic developers and affordable-housing advocates…

But that coalition did not include any of the groups that opposed Ulibarri's 2014 bill, supporters acknowledged, leaving legislative sponsors needing to find a way to convince homeowners and trial lawyers that they should accept having a tougher path to file a lawsuit in exchange for a solution that many say will do little to spur the building of new condos. [Pols emphasis]

The push to "reform" Colorado's multifamily residential construction defects law has been widely forecast to become one of the most contentious issues the General Assembly will debate this year. Proponents argue that the current state of Colorado law creates a legal disincentive for developers to undertake these kinds of construction projects. The Denver Post's John Aguilar:

Reform advocates contend that the condo market has dried up in Colorado because construction-defects law has increased the liability — along with insurance premiums — for builders to the point where owner-occupied multifamily projects are not viable.

According to the market research firm Metrostudy, condos accounted for more than 20 percent of all housing starts (more than 4,000 units) in late 2005 but only 3 percent through most of 2014.

In short, lobbyists for developers say that Colorado law exposes builders to unacceptable liability for construction defects, and that's why there aren't enough condos available in Denver's red-hot housing market.

But is that really what's going on? A group representing homeowners in Colorado says the situation is much more complicated than risk of lawsuits over defects–and has data to back it up. The DBJ reported in January:

Economic conditions following the recession have contributed to a market in which buying a home is more difficult and expensive than it used to be, the study says.

Higher fees, required credit scores and home prices, as well as wage stagnation, unemployment and lower marriage rates have all kept potential buyers out of the market, said Pat Pacey, principal at Pacey Economics, during a conference call Tuesday.

Higher student-debt loads have also contributed to the younger generation holding off on buying a home, she said…

The findings are in direct opposition to the narrative put forward by developers, brokers and politicians in recent months, who say that the state's construction defects law is to blame for the lack of condo development, which many say has put a chokehold on the lower end of the home buying market across the metro area. [Pols emphasis]

But perhaps the best argument against weakening the rights of homeowners to "spur" condo construction is this: Colorado's slump in multifamily construction is not unique to Colorado.

The Colorado builders complain that “condos accounted for more than 20 percent of all housing starts (more than 4,000 units) in late 2005 but only 3 percent through most of 2014.” And, “in 2014, 5 percent of all new housing stock in Colorado was condominiums.”  Yeah, well, take a number.  Nationally, in November 2014, multi-family starts were down 11% from the same time last year. Moreover, according to the U.S. Department of Housing and Urban Development and the U.S. Census, its August 2014 report showed a “steep 31.7 percent decline in multifamily production.” 

Bottom line: the hurdles faced by the next generation of Colorado homebuyers are more complicated than proponents of this legislation suggest. To buy their argument is to ignore the crushing burden of student debt faced by young people today, stagnation and even decline of real incomes for today's workers, and the tighter lending requirements buyers face today as opposed to before the recession of 2008. Not to mention that this is just the latest attempt by developers to shield themselves from liability, part of a years-long strategy–and at this point, the possibility that political objectives are factoring into business decisions should be considered.

Once you understand that the roots of the problem are much more complex than liability of builders for construction defects, the whole campaign to weaken homeowner's rights to sue over those defects falls apart. The fact is, buying a home is one of the biggest, if not the biggest investment most working families will ever make. To force homeowners into arbitration and hobble HOAs trying to get justice for their members deprives Coloradans of basic and entirely reasonable protections for their most valuable asset.

Honestly, it's hard to imagine a greater disincentive to buying a condo than this bill.