Regulations Greatly Increase Cost of New Home Construction

Sources: & NAHB

The high cost of building is one of the main reasons builders say they are not keeping up with demand for affordable new housing. There’s land, there’s labor and then there are governmental regulations.

According to the National Association of Home Builders (NAHB), regulatory costs account for almost a quarter of the final sale price of a new home. Three-fifths of the regulatory costs, 14.6% of the final house price, is due to a higher price finished lot resulting from regulations imposed during the lot’s development. The other two-fifths, 9.7% 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 regulations on average accounted for a quarter of a home’s price. However, the price of new homes has gone up quite a bit since then.

Applying percentages from NAHB’s studies to Census data on new home prices during this five-year span shows that regulatory costs for an average single-family home went from $65,224 to $84,671, a 29.8% increase.

By comparison, disposable income per capita increased by 14.4% from 2011-2016. In other words, the cost of regulations in the price of a new home is rising more than twice as fast as the average American’s ability to pay for it.

To get an even more detailed look at the regulatory costs, MarketPlace visited a single house in a suburb of Washington DC to add it all up. That house, the Foxglove, is three-story town home in Lanham, Maryland, built by Timberlake Homes who is owned by John Minzer. The Foxglove is the less expensive of two models in this brand new development of 138 homes. It has three bedrooms, a balcony and a big kitchen. Normally it comes with hardwood all the way through and a stainless steel kitchen.

The price starts at $355,000. About $100,000 is for the land. Another $150,000 goes to construction, including labor and materials. And another $85,000 covers business expenses such as insurance, marketing, interest on loans and overhead. That leaves about $20,000, less than 6%, in profit.

Baked into all those expenses is almost $40,000 in government fees. Some fees are pretty straightforward. About $15,000 is for the school district, because more housing means more students. Another $7,400 pays for fire, police and emergency medical services. Then there’s the toilet, which costs about $5,000 for this house. Not the actual toilet, which runs about $130 at Home Depot. But the local water and sewer authority has fees for each fixture hooked up to the system.

On top of the explicit fees are government mandates that help make the subdivision unique, but also drive up the $150,000 construction bill. Like the oddly precise requirement that 64% of the exterior be brick. The rest needs to be a special siding called HardiePlank. Both are more expensive than vinyl siding. Why? County officials “like the way it looks.”

Additionally, the builder had to pay about $2,000 per unit for recreation space, including play areas for kids and a grassy space with benches and a white pergola. Without this cost, the builder figures they could have built another four or five houses and brought the overall costs down.

This is where the developers writing the checks come up against the government employees who write the rules. Officials say fees for things like schools, public safety, the sewer system and other infrastructure are all based on the premise that growth should pay for growth. “New development creates a need for services in the community, and the county has to have a way to pay for those,” said Derick Berlage, a deputy planning director for Price George’s county. As for the pergola, Berlage said yes, it’s about aesthetics. “It’s a balancing act,” he said. “No one wants to put in place requirements that will restrain good development from happening, but on the other hand communities don’t want to see low-quality development, either.”

Minzer, developer of the Foxgrove, understands that desire, but wonders if letting buyers decide would be more cost-effective. “I’m not going to knock government officials completely because I understand what their goal is,” he said. “Their goal is to make livable communities and make it look very good.” But if county leaders want to make housing more affordable, “you could probably eliminate a whole lot of that stuff,” Minzer said. “If I put up a crap box, nobody’s going to buy my house.”

Some relief may be on the way. The county council just passed a new zoning ordinance that opens up more land to building and gives developers more flexibility in where they use, say, HardiPlank or cheaper vinyl.

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