Regulatory costs such as local impact fees, storm-water discharge permits and new construction codes, which have risen at roughly the same rate as the average price for new homes, make it increasingly difficult for builders to pursue affordable single-family construction projects, the group argues.That average cost is much higher than I would have expected. This is a good example of how the widely held notion that regulations are somehow a way to rein in large corporations and level the playing field ends up, instead, doing the opposite - increasing the costs for low income consumers.
“It really makes it hard to satisfy the lower end of the market, which is a lot of first-time buyers,” said Paul Emrath, vice president for survey and housing policy research at the NAHB, who conducted the survey of about 400 builders across the country.
The cost of regulation imposed during the land development and construction process on average represented $84,671 of the cost of the average new single-family home in March. That is up from $65,224 in 2011, the last time the home-building industry group conducted a similar survey on regulatory costs.
But, I am actually going to push back a little bit on the idea that this is making it hard to expand new housing for lower income households. The idea that new housing should be focused toward first-time buyers and low income households is a side effect of our housing problem. There are whole markets in places like inland California, Lad Vegas, and Phoenix, that are focused on serving the low income refugees of the high cost cities in places like coastal California. This is not the shape of a natural or healthy housing market. This is the product of a Closed Access problem. These middle class neighborhoods and middle class metropolitan areas only look the way they do because places like Los Angeles and San Francisco won't accommodate the housing stock required to populate their labor markets, which creates a bidding war for housing in those cities, leaving lower income households as refugees.
In a functional market, instead of buying starter homes in Phoenix, lower income households would be buying aging homes in established neighborhoods in San Francisco. In a functional market, the new generation of homeowners would naturally want homes built with more valuable amenities and higher quality standards. Some of those standards will inevitably be reflected in building codes and local compliance standards. In a functional market, the new housing stock should be filling in the top end of market demand. Housing activists who insist that new stock must meet demand at the "affordable" end of the market, especially in Closed Access cities where obstacles to new supply are already a problem, are missing the forest for the trees. If that proposed solution seems necessary, then the local housing market is broken. There is no way that a city can meet the expectations of the next generation's households by building it's housing stock up at the bottom of the market.
Looking at zip code level data has really brought home this point to me. Here is a plot of St. Louis, with each zip code arranged by the median home price and the median Price/Rent level. All cities have the same pattern.
What we see is that, as homes rise in value (in terms of rent), their prices rise at a ratio of about 3:2 with rent. I think most of the reason for this is that as the value of the home grows, the value of tax benefits grow (nontaxability of imputed rent to owners, mortgage interest deduction, capital gains exemptions). Much of this is because as the incomes of the owners rise, they are more able to capture the tax benefits. For instance, low income households don't tend to capture the mortgage interest tax deduction, even where it is available to them, because it doesn't pay for them to itemize their deductions, and they probably don't pay much income tax anyway.
Initially, this should lead us to expect an extreme level of over-consumption of housing among higher income households. This probably is the case, to an extent. This is mitigated by income effects, since housing is such a large portion of the typical household budget. Shelter composes about 1/3 of the consumer price index, for instance. So, housing supply is induced at the high end, and these tax benefits shift the demand curve to the right until higher income households reach that comfortable level of spending on housing. These tax benefits increase the amount of home that households tend to live in.
But, I think this effect isn't as strong as this graph might suggest that it is. As we see in this graph, Price/Rent ratios in lower income zip codes tend to be lower than median Price/Rent. In the lowest income zip codes, they tend to be in the 5x to 8x range. (They are higher than that in the Closed Access cities, but the pattern is similar.) A Price/Rent ratio of 8 translates to a real return on capital of more than 6%, even after costs and depreciation. This is on par with the highest returning asset classes, like equities, yet for a long term owner-occupier, this comes with no cash flow variance like what would come with equities. There are risks to homeownership - it has long term exposure to local real estate value trends, and transaction costs are high for short term owners. But, even with those costs and without the tax benefits, this seems like a good deal.
It also seems like market prices in those zip codes are almost certainly below replacement cost. And, this is the benefit low income households get from a healthy, normal housing market where new homes are being built at the top end. If those homes at the top end are being sold at near replacement cost, the old neighborhoods full of homes from the last generation of new builds are being sold at below replacement cost. A functioning housing market provides a natural subsidy to low income households.
So, these rising compliance costs are a part of the broader problem of putting up obstacles to expanding housing supply. But, I'm not sure they would be that much of a problem if the rest of the housing market was functioning - if mortgage markets were accessible and if local geographic regions were capable of expanding housing to match demand for housing. That is because the homes that should be addressing demand from lower income groups shouldn't need to meet these new building standards. If the housing stock was expanding like it should be, low income households would be buying homes at prices unaffected by those standards.