Eye On Housing
A new NAHB study shows that, on average, regulations imposed by government at all levels account for 24.3 percent of the final price of a new single-family home built for sale. Three-fifths of this—14.6 percent of the final house price—is due to a higher price for a finished lot resulting from regulations imposed during the lot’s development. The other two-fifths—9.7 percent of the house price—is the result of costs incurred by the builder after purchasing the finished lot.
NAHB’s previous 2011 estimates were fairly similar, showing that regulation on average accounted for a quarter of a home’s price. However, the price of new homes increased substantially in the interim. Applying percentages from NAHB’s studies to Census data on new home prices produces an estimate that regulatory costs in an average home built for sale went from $65,224 to $84,671—a 29.8 percent increase during the roughly five-year span between NAHB’s 2011 and 2016 estimates.
In comparison, during that time, disposable income per capita in the U.S. increased by 14.4 percent. In other words, the cost of regulation in the price of a new home is rising more than twice as fast as the average American’s ability to pay for it.
The above estimates are based largely on questions included in the survey for the March 2016 NAHB/Wells Fargo Housing Market Index, combined with long-run assumptions about average construction times, interest rates, profit margins, etc. The survey questionnaire and an appendix describing each additional assumption and the data on which it’s based can be found in the full study. The full study also contains substantial additional detail on the different types of regulatory costs and where and how they impact the development-construction process.
I don’t buy this at all. I’m an appraiser, as well as multi-fam landlord. I use Marshall & Swift and Standard & Poors cost manuals. If you look at their research, which is based on actual numbers, not surveys of opinions, it tells a much different story. For an average quality house: plans are 0.6% of cost, plan check and permit is 2.1%, survey is 0.4%. That is the actual national average of an average quality house. If you add up those numbers, from the most widely used cost manuals in the USA it is a mere fraction of these unofficial surveys of NAHB, which are largely based on emotion not actual data. The builders you interviewed are at an extreme competitive disadvantage, because if they are spending 25% of their costs tasseling with local government, they’re doing it wrong! Unless this is a survey of the oil, gas, & coal industries, then the numbers make sense.
Matthew, I don’t necessarily disagree with your figures, but the numbers you present don’t represent the cost of regulation. Regulation affects total cost over three major phases of a residential development project: Entitlement, design, and construction. At each level there are direct and indirect costs of regulation. The direct costs may include fees for annexation, general plan amendments and rezoning, environmental studies, traffic studies, etc. Those studies may generate impact and/or mitigation fees. That might get you through entitlement. Most of the cost in site design is indirect: Filling out forms, generating reports, attending meetings. Of course there are always plan check fees, utility connection fees and the like. The big costs become the implications of those regulations on design. That may mean anything from sound walls, oversized or specialty storm drain systems, pervious concrete, wildlife monitoring, inspection fees… and notice that we haven’t started to talk about design or construction of a single house yet. I couldn’t comment on the methodology of the NAHB survey, but at least where I call home the numbers sound reasonable if not low.
Kevin – thank you, very valid points… and NOT based on emotion, but those who actually WRITE the checks. Too often, folks leave out the entire ‘cost’ of effort. It’s not just a plan check or permit fee. Some builders have teams dedicated to the municipal and regulation approval process at each level. Those costs are real and must be added to cost of sale. Consider the effort and costs currently being expended for GESC/SWMP development, management, and BMPs alone. All is ‘regulatory’. Depending on the size of the project, this can ‘cost’ almost as much in personnel effort as actually building homes… and the costs are not inconsequential. Yes, it’s important to protect the environment, and I’m not claiming otherwise. However the ‘costs’ must be noted and accounted for. When buyers contemplate the price of new homes, we as builders, developers, and responsible professionals must reveal and project that it’s not just builder greed and profit mongering, as many believe.
I suspect the costs of regulation are quite a bit higher. As a specialty subcontractor, it seems like our family business has been inundated over the last few years with added regulation after added regulation.
This year our CFO literally spent somewhere between 40-120 hours of her time–plus the help of expensive consultants–in order to meet the new 1094/1095 filing requirements of the affordable health care act. Our critical financial reports, that we use for decision making ran two months late as she struggled to understand and comply.
Last year, because of employers getting severely penalized for minor errors of any kind on I-9 forms, we had another 60+ hours (as well as more consulting costs) painstakingly reviewing our forms. While we won’t have the start up costs on these new areas of emphasis, the ongoing costs to maintain these are significant.
I just remembered-We were also hit last year with major safety regulation costs that have changed the way we do every single order, regardless of size. I spent over 80 hours of my own time on that plus dozens of meetings with my staff, consultants and customers. Those are the 3 biggest added costs we have had in the last 9 months, each one significantly adding to what it takes to support the builders and remodelers of homes and home-owners who remodel. Unfortunately, these costs are ongoing, not just one-time costs. We have to pass these “savings” onto our customers.
I for one see first hand the cost of added regulation as it drives up the cost of housing. From my perspective, the growth of regulations seems wildly out of control. and has to be making our nation less competitive.
Most of these expenses, studies, attending meetings, annexation etc are business expenses related to commercial development of large scale projects, not a single family home built one at a time. It’s comparing apples to broccoli. A typical builder, not a developer, who buys a developed lot isn’t going to face that much regulation aside from zoning and permitting. Developing a 700 acre parcel and subdividing, changing zoning, intensifying use etc, are mostly local government regulation that varies drastically from state to state. In Texas there is no zoning for example, you can build industrial adjacent to residential without restriction. It doesn’t help the final value of the residence though obviously. Zoning and regulation usually protects value of existing construction, which is the point.
Matthew – you’re missing the economy of scale and the impact of regulation at each level on this. Today, production builders don’t buy ‘a’ developed lot. They buy 100, 200, 300. They buy raw land and self perform. They may buy lots platted and develop them. Even if they buy them all finished… they are most certainly ‘large scale’ projects and the costs of regulation, in ALL it’s forms, not just simple fees, are substantially felt in cost of sale and sales price.
Not one example, not one real world case examined. Opinions of people who chose to respond to a survey + ‘long run assumptions’ does not data make. Those who feel it’s a non issue never responded, first off. Secondly, long run assumptions have been found to be wrong in the past; such as ‘the world is flat’ or ‘the sun revolves around the earth’. People believing things for a long time means nothing to an analyst. Having bought land that ultimately yielded over 35,000 lots and houses during my career, I can tell you my personal experience is it is left than half the number cited in the article, and in some markets does not equal a tenth.
I don’t buy this at all. I’m an appraiser, as well as multi-fam landlord. I use Marshall & Swift and Standard & Poors cost manuals. If you look at their research, which is based on actual numbers, not surveys of opinions, it tells a much different story. For an average quality house: plans are 0.6% of cost, plan check and permit is 2.1%, survey is 0.4%. That is the actual national average of an average quality house. If you add up those numbers, from the most widely used cost manuals in the USA it is a mere fraction of these unofficial surveys of NAHB, which are largely based on emotion not actual data. The builders you interviewed are at an extreme competitive disadvantage, because if they are spending 25% of their costs tasseling with local government, they’re doing it wrong! Unless this is a survey of the oil, gas, & coal industries, then the numbers make sense.