Colorado house prices and building costs increase, Thank Breckenridge

Summit County (Breckenridge, Silverthorne, Frisco) is set to adopt a sustainable building code that would require new residential construction in the county to be among the most energy efficient in the nation (Zero Energy Ready). This new building code will increase building costs and Colorado house prices.  What does this mean for affordable housing?  What steps can the county take to mitigate these impacts?

What is in the proposal?

If adopted by the Summit Board of County Commissioners, Summit would be the first county in Colorado to adopt the Zero Energy Ready Home standards for new construction.  These are updated requirements setup by the Department of Energy to be a model for achieving close to net zero home construction.

Here are the new requirements that will increase Colorado house prices and building costs:

1. Increased efficiency for doors and window: triple pane windows
2. Tighter building envelope with air sealing
3. Need for Heat Recovery Ventilation due to tightness of house to ensure clean air (new appliance that brings in fresh air, heats it disburses in the house, and exhausts air to ensure proper ventilation)
4. Increased insulation
5. Increased efficiency for appliances including heating
6. Wired for alternative energy (solar)
7. Independent verification that requirements have been met

What is the impact on building costs?

I would absolutely agree that it is important to increase energy efficiency standards to reduce electricity and increase comfort of the occupants.  However, there is a cost to each item that will add thousands of dollars to each house. Not only will material costs increase (triple pane vs double pane) but also labor costs will increase as the new building methods require higher skillsets.  For example, framing will change to reduce thermal bridging, house wrap will be eliminated for other more efficient systems. These changes will greatly increase the costs of a house especially on the lower end.

When building a million dollar plus house the percentage added to the ultimate price is likely not huge, but when looking at a 300k house, it would increase the costs 30-40% if not more.  Let’s take for example a boiler, a standard one might cost 3.5k for a smaller house, as the efficiency requirements increase the new high efficiency sealed combustion boiler is now 10-12k with cost increases for the boiler and installation.  The new boiler would be about the same for the million dollar house (albeit a bit larger) versus the 300k house.  On the 300k house, the boiler would increase the cost around 2% while for the 1 million house the cost would increase by .7%.

Impossible to build lower cost houses

As costs continue to increase on both materials and labor it is impossible to build lower cost houses.  For example, I have not seen a new single-family home come on in Summit county under 750k.  How can a service worker afford a 750k home; they can’t.  These new requirements further raise the price point that is required to actually make a profit.  A builder is going to focus on a higher margin product that can absorb all the new costs leading to an even higher build cost and entry point into the single-family market.

Further Raise real estate prices

The increased building costs will further raise real estate prices throughout the county.  As building costs increase substantially existing homes will also increase in price as they will cost less than building a new home.  For example, I was looking at a house in Beaver Creek with a 2.5m purchase price on 5k foot house.  To rebuild the house would be close to 1k/foot so the rebuild cost would be around 5m.  This makes the house listed for 500/ft a relative bargain and highly desired compared to trying to build a new home.  This will put further upward pressure on existing Colorado house prices under 1 million dollars.

What is the solution?

There needs to be a tiered approach to building regulations to allow lower cost building.  For example, the county could allow double pane windows in a house under 750k or an 85% efficient boiler as opposed to a 94% boiler to help reduce costs.  The county could also allow more density so a builder might be able to build a triplex on a lot as opposed to a single-family home and disburse the costs over three properties.

Summary

Although it is critical to increase the efficiency of houses, there is a real cost to the community from increasing Colorado house prices, the hollowing out of the middle class. With the large increase in costs on the lower priced house, it will be impossible to build houses under 500k eliminating any chance for the middle class to step into home ownership. Families will be forced to either live in subsidized housing or continue to rent with absolutely no possibility of moving up in the market.  Before Summit County implements the new regulations, hopefully, they will take time to understand the costs to the community and take steps to mitigate the impact on lower priced buildings.

Additional Reading/Resources

• https://www.summitdaily.com/news/summit-county-set-to-adopt-new-sustainable-building-code-to-prepare-for-net-zero-future/
• https://www.energy.gov/eere/buildings/zero-energy-ready-homes

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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