Colorado Rural Affordable Housing Report
Executive Summary
Published February 2024
The dream of affordable housing in rural Colorado is fading fast, replaced by a stark reality: soaring construction and lending costs are eroding the financial viability and velocity of home construction. State incentives and market forces are no longer sufficient to close the housing gap in rural Colorado. In parallel, existing affordable housing inventory continues to disappear, pressuring the economic sustainability of rural communities by eliminating housing for critical parts of the workforce such as school district employees, healthcare workers, and first responders.
We need a paradigm shift.
One that leverages innovation, collaboration, and cost-efficiency to bridge the affordability gap within the boundaries of current law. Prosono prepared this report, drawing on the insights of the three pilots of the Rural Homes Project, to propose a roadmap for achieving an improved model that meets the needs for affordable housing in rural communities throughout Colorado.
Challenges of the Current Model
The analysis shed light on many challenges, including these prevalent themes:
Data Deficiencies: Current demand projection methods rely heavily on outdated census data, failing to accurately capture the housing requirements, true construction costs, and demographics of rural communities. This results in a significant information gap, hindering developers' ability to effectively target projects. Additionally, resource-constrained communities often lack the capacity to attract or engage qualified development partners, which may be non-existent in many areas.
Inefficient Construction: Traditional onsite construction is locked in a cycle of rising costs, while off-site affordable housing has not gained traction due to architect, engineer, and developer hesitation combined with regulatory inefficiencies. Existing off-site factories focused on residential products have pivoted or moved upmarket to maintain financial viability. Skilled trade labor is not available to build at the velocity required to close the housing gap in rural Colorado.
Financing Barriers: Rural communities face a daunting task in navigating a patchwork of funding sources on a project-by-project basis. This time-consuming process adds administrative costs, slows development, and creates an exclusionary system, particularly for resource-constrained and underserved communities. The Division of Housing (DOH) funding administered to rural homeownership is disproportionately low versus the percentage of owned homes in rural counties. Current construction timelines and community-driven applications hamper the impact of the funding in closing the housing gap quickly: the DOH partially funded 279 new rural units for homeownership in 2023, but only 21 of those will be delivered in 2024 and an additional 84 by 2026.
Obstacles to Affordability: On top of skyrocketing home costs, buyers face higher mortgage rates that have increased monthly payments by over 30% since 2022. Energy affordability is also at risk. Today’s affordable housing projects are often built to the lowest possible energy codes, leaving owners with huge fluctuations in monthly utility costs ($200-$500), placing further stress on families to cover monthly mortgage payments, leading to negative impacts on financial wellbeing and health.
Solutions Identified
This report proposes a four-pronged approach to overcome these obstacles and accelerate the delivery of affordable housing in rural Colorado:
Developer-Led Demand Planning: To bridge the information gap and ensure targeted development efforts, we propose a statewide "pre-sales" process. This initiative directly engages key community institutions and stakeholders, including family resource centers and key employers. Their insights, combined with expanded data sources like community resource center participant data, economic development information, and mobility trends, will yield specific housing needs for rural areas across the state with initial sales commitments. In parallel, geographic information systems (GIS) technology can be used to refine site selection, design, and engineering across potential land parcels, optimizing project economics earlier and minimizing risks. Aligning specific local demand with local land will encourage developers to have natural incentives to align resources to the “lane” of rural affordable housing.
Off-site Manufacturing: Bundling multi-year demand across the state is critical to catalyze the off-site affordable housing industry and unlock cost savings realized by other industries. Predictable, long-term demand will enable homes to be value-engineered and therefore “manufactured” instead of “built.” This drives down costs, improves quality, and enhances the velocity at which housing is delivered in rural communities by 2-4 times. Working within existing Department of Local Affairs (DOLA) regulations, energy-efficient and address-independent homes can be built at low costs and velocities not possible with onsite construction in rural Colorado.
Innovative Financing: To overcome the complex access to low-cost capital for both construction and buyer mortgages, we advocate for the creation of dedicated Rural Affordable Housing financing funds and vehicles that combine grants and loans from a variety of sources. These blended financing channels would build upon existing programs like DOLA's Home Ownership Programs, HDGs, and HLF, leveraging state, private, and federal resources like the Community Reinvestment Act (CRA) and Inflation Reduction Act (IRA).
Sustained Affordability: To ensure long-term affordability, we recommend leveraging a variety of solutions to reduce monthly costs and increase community-wide accessibility. Pursuing energy efficient design and onsite solar can achieve fixed low utility rates over the life of a mortgage. Avoiding HOA fees and utilizing high-quality construction will reduce maintenance burdens. Introducing innovative opportunities for income generation such as home-based Early Childhood Education will support sustainable home ownership. Deed restrictions create affordability in perpetuity.
If business as usual continues, the rate of housing being built will slow due to compounding challenges. Each year, an equivalent amount of funding will result in 3-5% less units (versus the 442 units seeded in 2023 by the DOH) each year. Escalating costs and conventional construction timelines will delay the velocity at which units to come to market as well.
Implementation Scenario
Prosono suggests an implementation plan that would cost-efficiently deliver an additional 2,000+ affordable for-sale homes in rural Colorado by 2030 under today’s legislation, fueled by a dedicated $100 million construction loan fund and matching low-cost mortgage options. Recommendations outlined in the report can be implemented through a multi-pronged approach:
Build the financing infrastructure: Partner with mission-aligned investors and the Division of Housing at DOLA to establish tailored financing vehicles for construction and mortgage needs within the Rural Affordable Housing lane. Conventional tools working within current regulations are preferred, such as tax-exempt bonds. Fill each offering with grants and loans blended from the public and private sector, as well as other sources allocated to affordable housing, rural needs, or energy efficiency. Explore CRA rule changes and the potential of offering a CRA-compliant product to incentivize further bank participation.
Proactively build the demand pipeline: Starting with data-driven analysis, prioritize communities with the highest demand and where housing would have the biggest impact. Analyze potential land parcels with affordability, infrastructure, and community needs at the forefront. Engage key community institutions to detail demand type and gain initial sales commitments. Engage local permitting authorities with templatized, complete neighborhood designs compliant to current codes to which they can “opt-in.”
Catalyze factories with a multi-year order: Support factories in developing a value-engineered catalogue of homes, optimized for affordability and sustainability, and approved for use throughout Colorado, streamlining permitting and construction across diverse communities. Place order commitments to keep the factory utilized for a minimum of five years. Fully optimized off-site manufacturing will ensure rapid construction at lower costs, stretching the impact of funding.
Execute and achieve impact: A non-profit development entity could manage the execution process across Colorado. This team would oversee development and sales in prioritized communities, ensuring quality, adherence to affordability restrictions, access to underserved buyers, and a smooth transition to home ownership for residents.
Acknowledgements
The completion of this report on rural affordable housing in Colorado would not have been possible without the invaluable contributions of numerous individuals. We are deeply grateful to:
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For their generous financial support, which enabled Prosono to complete this analysis and present our findings:
The Donnell-Kay Foundation
The Colorado Health Foundation -
For their thought partnership, collaborative spirit, and commitment to accurately describing the process, events, and outcomes of the three pilot projects:
The Rural Homes Project team
The Donnell-Kay Foundation team
The Colorado Health Foundation Team
Barthold Lichtenbelt
Matt Mitchell -
For sharing their expertise in the housing industry:
Colorado Division of Housing
EVStudio
Fading West
Gorman & Company
McStain Neighborhoods
Oakwood Homes
Proset
Simple Homes
Stryker Construction -
For providing insights on the funding landscape:
D.A. Davidson
First Southwest Bank
Impact Development Fund
Michael Llodra -
For sharing their expertise in data-gathering, assessment approaches, and the broader Colorado economy and ecosystem:
Colorado Division of Housing (DOH)
Colorado Department of Local Affairs (DOLA)
Economic and Planning Systems (EPS)
State Demographer's Office
Offices of our Colorado Senators