Let the market work in housing – construction defect laws are not the problem!

Let the market work in housing – construction defect laws are not the problem!

by Patricia L. Pacey, president of Pacey Economics, Inc.

PattyMarket forces are the reason for limited condominium construction activity in Colorado – not construction defect laws.Pacey Economics conducted rigorous research into the Denver metro area housing market. This data-intensive – not anecdotal – study showed that classic economic conditions explain the current condo construction situation.

While there are still buyers for condos, a wide range of economic and social factors related to the recent recession, restructuring of the mortgage industry, and the family formation patterns of the Millennials have come together to make apartments the preferred housing choice for many. This preference is reflected in Denver area rents growing at some of the highest rates in the county. And within the last few years, two large condominium projects  – Legends at Lowry and the Pelaton – converted to apartments because there weren’t buyers for these units.

So what are the reasons for higher demand for apartments? More stringent lending requirements, higher down payments, higher purchase fees, lower real income and higher unemployment rates make buying more difficult than renting as compared to pre-recession levels. Among one of the largest groups of condo buyers – first-time Millennial homeowners – later marriage, delayed child rearing and higher college debt also increases the demand for apartments.

And Colorado’s slow condo development is no anomaly – we found that all the western states have similar markets. This is not surprising as the entire country is experiencing the same economic and social conditions that is driving the demand for apartments in Denver.

Most important, our research uncovered no objective evidence that construction defect laws were the reason for the lack of condominium construction. In fact, our research found the construction defect laws in Colorado are generally more favorable to the construction industry than the construction defect laws in other states.

Importantly, there is no foundation in the rhetoric that relaxing construction defect liability will increase opportunities for affordable housing. There are many productive and efficient avenues to increase the availability of affordable housing but decreasing construction defect liability is not a relevant economic avenue.

We expect all industries to be held responsible for the products they produce, whether it’s automobiles, toys or toasters; the construction industry should be no exception. Homeowners must trust construction met reasonable standards for foundation, roof and plumbing because, as laypeople, there’s no other way to assess the product.

Weakening construction defect laws will simply shift the costs of any defects from builders to new homeowners. And in an example of unintended consequences, relaxed construction defect laws could actually create a perverse incentive for builders to reduce quality.  This might be particularly relevant in a period where many contractors/developers are having difficulty finding skilled laborers.

Thankfully, there are clear signs the economy has turned the corner—earnings are increasing, unemployment rates and credit requirements are returning to more normal standards and mortgage interest rates remain at historically low levels so demand for condos is starting to rise and developers are starting to respond with commitments to build them. In fact, there have been announcements of scores of Denver multi-family projects in the works.

Colorado’s condominium market is a textbook example of economics at work – let’s trust in the free market to respond as demand rises.

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