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[Pulse] Here’s how higher regulatory costs are impeding housing affordability

Regulatory burdens are driving up costs, and it's a problem for the housing market

Despite recent declines in mortgage interest rates, housing affordability continues to be a key concern for homebuyers. And, rising cost burdens mean a larger share of household budgets are spent on rent.

For example, according to the NAHB/Wells Fargo Housing Opportunity Index, in early 2012 a typical family could afford 77.5% of all new and existing homes that were sold. Today, that share stands near a 10-year low at 61.4%. The percentage would be even lower if not for a recent uptick in income growth.

It is widely understood that a lack of inventory – particularly a dearth of new construction at affordable price points – is the primary cause of today’s housing challenges.

While ongoing (skilled) labor shortages and building material price volatility (made worse by tariffs) are slowing projects and raising construction costs, a fundamental limiting factor on development are the regulatory rules connected to single-family construction and apartment development.

The number of rules associated with developing land and building homes and apartments are immense in scope and involve all layers of government. Too often, these rules are examined in isolation, thus missing the “death by a thousand cuts” process that layers higher costs on the total construction process, holding back supply and contributing to the affordability crisis.

In recent years, the National Association of Home Builders’ economics team undertook two detailed surveys of builders and developers to determine the aggregate effect of regulatory burdens on housing, with the second study co-authored with the National Multi Housing Council.

In 2016, NAHB published a study of the single-family sector that found, on average, approximately 24% of the final price of a single-family home was due to regulatory burdens imposed by all levels of government.

The results were revealing in terms of where these costs arise. Three-fifths of the total impact was due to higher costs associated with finished lots. For example, delays related to land development raise housing costs (recall that most land developed for housing is purchased using debt, which means higher interest expense with time).

In fact, the survey found that the typical lot is subject to a 6.6-month delay. However, in some tightly regulated markets, delays can exceed five years.

There are also costs for applying for zoning or subdivision approval, as well as for land that must be purchased but is required to be left unbuilt. The final estimates found that at the development stage, these costs add 14.6% to the final price of a typical new single-family home, with the top quartile of homes increasing by 18.8%.

Regulatory costs are also added during the construction phase. These costs include elements like permit, hook-up, impact and other fees associated to the builder. And building code requirements further add to the tally, depending on the jurisdiction. These construction-phase rules add, on average, 9.7% to the final price of a new single-family home.

It is not just the level of these burdens that matter, but also the recent trends in cost growth.

In a 2011 survey, NAHB estimated that regulatory burdens added a little more than $65,000 to the price of a typical new home. With respect to the 2016 survey, this average total climbed to almost $85,000.

For local policymakers who wonder where the newly built entry-level housing stock is, this number should give them pause. Excessive regulations often prevent the construction of sorely needed housing at lower price points. Moreover, the 29.8% growth in these regulatory burdens during this five-year period far outpaced the 2011-2016 measures of inflation (6.1%), material pricing (10.3%) and GDP growth (14.9%).

Of course, regulatory cost burdens are not limited to the single-family housing sector. To address this segment of the housing stock, NAHB partnered with the NMHC to conduct a similar survey for apartment development. Again, the results were striking. According to the study, 32.1% of total development costs associated with typical apartment construction are due to regulatory costs.

These burdens came from rules that reflect fees and zoning approval expenses, delay effects, unused land, construction and other impact fees, inclusionary zoning requirements, and fees for required capital expenditures.

The survey did not tally costs associated with local opposition to adding apartment units in an area. In fact, 85% of the developers surveyed reported additional costs due to such NIMBYism-based opposition.

These recent studies of regulatory costs associated with home and apartment construction illustrate the challenge of increasing the production of quality, affordable housing –particularly in highly regulated markets and metro areas with large population and job growth. 

Moreover, the estimates quantify and reinforce the conventional wisdom that if we as a nation want to ease housing affordability barriers, communities should begin by reducing the regulatory burdens associated with developing land and building homes. Communities that fail to do so will find that younger households will continue to vote with their feet and find markets where housing is more affordable.

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