The Problem

Institutional Portfolio Investors

Prices for single family homes in Colorado have risen rapidly in the last 20 years, in part due to institutional portfolio investors. Portfolio investors are national and international institutions that entered the housing market in the wake of the 2008 financial crisis, less interested in treating tenants fairly than with generating revenue for shareholders. They deliver on their promise of high yield investments by purchasing low-value homes to then offer for rent or resale at inflated rates, resulting in higher housing costs for everyday Coloradans.

These increases in rates result in renters spending a greater share of their income in rent, while prospective homeowners struggle to save for down payments and receive favorable mortgage rates. As a result, Coloradans, especially those of lower incomes, are struggling to save money for everyday expenses as well as long-term investments toward their personal economic stability like homeownership.

Portfolio investors edge other prospective buyers by purchasing houses in cash, above asking price, with inspections waived, which everyday homebuyers, who must be more cautious with their limited financial resources are unable to do. There is currently no legislation on the books that governs portfolio investment in Colorado real estate, making the state especially attractive to potential investors. This proposal provides a legislative foundation protecting Colorado’s working homebuyers.

References:
https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html
https://escholarship.org/uc/item/07d6445s
https://constructioncoverage.com/research/cities-with-highest-home-price-to-income-ratios-2021

The Magnitude

High and rising rents and home prices are hurting the Colorado housing market. A real estate market’s health can be assessed by the home price to income ratio. In a healthy market, the home price to income ratio is 2.6, meaning that the average home costs 2.6 times what the average Colorado household can expect to earn in a year. In 1988, the home price to income ratio in Colorado was a healthy 2.7. According to data from Construction Coverage, today’s number has risen to 7.5, putting homeownership out of reach for working families across the state, and when ranked nationally, Denver is the 14th most expensive city in the country. 

In 2008, average rent was $1,011, or $1,470 when adjusted for inflation (using the US Bureau of Labor Statistics CPI Inflation Calculator), for a 3-bedroom house or apartment and $1,216, or $1,768 in 2023 dollars, for a 4-bedroom unit. In 2023, Colorado renters were paying an average of $2,449 for 3 bedroom units and $2,750 for 4 bedrooms. When adjusted for inflation, the average rent for 3 bedroom units increased by 66% while 4 bedroom units increased by 55%. By comparison, Coloradan’s per capita income during the same time only grew by 18% from $42,953, or $62,477 in inflation-adjusted dollars to $74,167 in 2022.

Home prices in Colorado have followed a similar trend. The housing price index is a metric developed by the Federal Housing Finance Agency to measure changes in single family home prices. From 2008 to 2023, the index rose from 360 to 832, equivalent to a 131% increase in single family home prices. 

References:

https://listwithclever.com/research/home-price-v-income-historical-study/
https://constructioncoverage.com/research/cities-with-highest-home-price-to-income-ratios-2021
https://www.rentdata.org/states/colorado/2021
https://fred.stlouisfed.org/series/COPCPI
https://fred.stlouisfed.org/series/COSTHPI
https://www.washingtonpost.com/business/interactive/2022/housing-market-investors/

Who is impacted?

Minority communities, which already spend the highest proportion of their income on housing, are most affected by portfolio investors, across the country and in Colorado. A 2021 analysis of Denver showed that portfolio investors were more than 10 times as likely to own properties in low-income minority census tracts than high income ones. 

While the housing crisis in the Front Range garners extensive press coverage, mountain communities are also struggling. Due to the small sizes of the rural Colorado housing markets, portfolio investors are able to quickly develop the market power needed to raise housing costs. Investor influence in the single family rental market is already being felt across the state, making this not just an urban issue for the front range. Rural communities all around the state are struggling with rising housing prices. No county in Colorado has a higher rate of cost-burdened renters than Lake County, where 62% of renters pay more than 30% of their income in rent.

References:

https://www.nytimes.com/2023/08/17/business/economy/colorado-rocky-mountain-housing.html
https://www.clearcreekcounty.us/DocumentCenter/View/10405/2018-Housing-Needs-Assessment-Update-and-Feasibility-Study
https://www.wmrhousing.org/_files/ugd/970b0d_bfe9f823ddef42c387368628b5108c80.pdf
https://www.bellpolicy.org/2022/07/26/colorado-housing-primer/

The Solution

Portfolio Investor Affordable Housing Contribution

To disincentivize foreign investment in Colorado’s real estate market, this legislation proposes that all non-US-based investors and all US-based investors with portfolios of more than 100 units contribute 10% of the investment value to support affordable housing, homeownership, and affordable rental housing. The 10% figure is derived from the estimated 11.35% by which investors have raised home prices in the Denver Metro Area. 

The mechanism for determining, collecting, and distributing this contribution will require further investigation. It cannot be collected on the transaction based on the value of the purchase because of TABOR’s prohibition on real estate transfer taxes. Generally a linkage or impact fee, is paid by developers to local governments when developing new property. Any fee collected will need to have a direct nexus to the impact and go to an enterprise fund such as CHFA since it would otherwise be considered a tax and would need to go to the voters as required by TABOR.

Landlord Transparency Database

To correct the information imbalance between landlords and tenants, data about institutions subject to these regulations will be made public. While landlords take tenants under a microscope by scrutinizing their personal and financial history, tenants are unable to conduct similar due diligence on their landlords. Information about landlords subject to these regulations will be made public for tenants to view. Court records, average tenant tenure length, and the identity of the property owners and management companies will be available, allowing tenants to conduct due diligence of their own. 

Conclusion

Despite the complexities of the housing market, this legislation's simplicity allows for future modifications and provides a platform for future legislation. Currently, there are very few regulations specifically targeting large scale portfolio investors in the single family housing market. Therefore, the precise long term effects of this policy on the housing market are speculative. To account for these uncertainties, this legislation is designed to be amended as its effect on markets and buyer behavior becomes clear. Should the contribution fee be too high or low, it can be adjusted in subsequent legislative sessions.