Regulatory Costs For New Homes

by Joel Barkman

The summer heat is undeniably upon us and the debate over the costs of housing regulations is just as hot as ever.

A new paper from the National Association of Home Builders' (NAHB) Economics and Housing Policy Group finds that the hefty price home buyers are paying for government regulations represents just one more obstacle that home builders need to overcome in restoring the marketplace to normal conditions.

On average, regulations imposed by governments at all levels account for 25 percent of the final price of a new single-family home built for sale, the study finds.

As many laws are aimed at land developers, nearly two-thirds of this regulatory burden - 16.4 percent of the final price of the house - is imposed during the development of the land, resulting in a higher-priced finished lot.

But still about one-third - 8.6 percent of the house price - is the result of the construction costs incurred by the builder after purchasing the finished lot.

"Housing has run into enough stumbling blocks on the road to recovery - including consumer worries over jobs and the economy and tighter mortgage lending standards," said Bob Nielsen, chairman of NAHB.

Government regulation can be added to that list. In many housing markets, appraisals are still coming in below the cost of building the home. The industry is also experience rising material costs, which are difficult to pass through to price-conscious home buyers. The addition of the high cost of government regulations pushes the selling price even higher.

Nielsen noted that some jurisdictions have been easing up on their various impact and permitting fees in response to today's lean times, and he said that more need to review the impact of their regulations on the new residential construction that is pivotal to restoring local jobs and tax revenue.

Employment in residential construction is down almost 1.5 million from its peak, and about an equal number of jobs have been lost in related industries - such as manufacturing, trade and professional services - because of the sharp downturn in home building.

Higher regulatory costs are "particularly significant in the current environment," the study says, "when there is a low level of developed land in the pipeline, as many builders have stopped acquiring single-family lots and developers have stopped developing them."

The NAHB study says that development and construction standards are also having an adverse impact on builders and developers, either by directly raising their costs or slowing the process down, which is just as costly if not more so.

I know from experience that delays in the permitting and review process not only cost my company, but my homeowners as well. Most lenders finance based upon a certain time criteria, that when not met can cost my clients valuable interest points.

States play a role in their adoption of building codes and by passing laws that enable local governments to impose impact fees, the study says, and "the federal government can also affect the cost of a home - for example, by requiring permits for stormwater discharge on construction sites, which may lead to delays in addition to the hard cost of filing for a permit."

Of the 8.6 percent of the final house price attributable to regulatory costs paid by a builder after purchasing a lot, 3.6 percent comes from the cost of actual fees, and the rest is the result of the cost of changes to construction codes and standards over the past 10 years, the study finds.

Regionally, the impact of code changes on construction costs is higher in the Northeast and West than in the Midwest and South.

The construction fees paid by builders are highest in the West, which includes California, where certain types of fees are especially expensive.

In a 2010 survey of impact fees conducted by Duncan Associates, for example, California's average impact fee for a standard single-family home was nearly $32,000 - more than twice the average fee in Oregon, the state with the next most expensive fees.

My fear is that higher fees being adopted by some states will have a trickle affect that will eventually hit closer to home. My hope is that legislators do not take a one-size-fits-all approach.

Right or wrong, when adopting legislation large builders and developers have been the target, leaving smaller builders vulnerable to regulatory fees that often do not make sense for small businesses to bear. Especially glaring now that big builders and land developers have all but left town.

Together, I think our local government and small businesses can stand together to improve the housing market while maintaining some semblance of affordable housing in our area.

Please contact me if you wish to read the report, "How Government Regulation Affects the Price of a New Home." The report includes a breakdown of cost impacts from different categories of regulation, which may be useful for local jurisdictions trying to assess how they can improve the affordability of new homes.

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

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