How the Hidden Costs of Housing Affect Affordability

Filed in Housing Affordability by on March 3, 2020 8 Comments

Rising home prices continue to put homeownership out of reach for many Americans. TheHill.TV reported in a recent episode that the median home price has jumped from $220,000 in 2010 to $331,000 in 2020. According to recent economic analysis by NAHB, more than half of U.S. households are unable to afford a $250,000 home, let alone a $331,000 home.

What factors are contributing to these rising prices? The Joint Center for Housing Studies’ “The State of the Nation’s Housing 2019” report points to the shortage of housing as a key factor putting pressure on prices and rents, especially for modest-income Americans. Builders are struggling to meet demand for new housing because of regulatory burdens, land and material costs, and labor shortages.

“Essentially you have three buckets of costs. One is land, one is soft costs, and one is what’s known as hard costs,” explained Andy Winkler, associate director of housing and infrastructure issues at the Bipartisan Policy Center, with hard costs reflecting labor and construction costs, such as the price of materials, and soft costs reflecting components such as fees, taxes, consultants and financing. “All of those things combine together to give you the price of an apartment or a house.”

Impact fees can be particularly cumbersome, observed Peter Van Doren, senior fellow and editor of Regulation journal at the Cato Institute.

“Some jurisdictions have impact fees — literally payments you make to the jurisdiction in return for the right to develop,” he noted. “If you want to build, you not only need the permission of the zoning board, for every unit you build, you need to pay the jurisdiction this much money. And again that raises the price.”

A 2017 Cato Institute study found that rising land-use regulations contributed to increases in home prices in 44 states, and zoning regulations contributed to home price increases in 36 states. NAHB estimates approximately 25% of the cost of a new single-family home and 32% of the cost of a multifamily development are attributed to regulatory costs.

Permits are another regulatory burden that can add to the price of a home. What used to take a few business days can now take weeks, sometimes even months, to obtain, builders noted, and cost up to $60,000 or more, depending on scope and complexity of the project. And that’s before anything has even been done on site.

This has made it harder to bring lower-priced homes to market, and is disproportionally affecting home-price appreciation, noted Frank Nothaft, executive, chief economist at CoreLogic.

“What we’ve seen when we’ve looked at price growth by price tier — comparing lower-priced homes with higher-priced homes — is price growth has actually been slower for the higher-priced homes,” he explained. “Higher-priced homes are seeing slower appreciation than lower-priced homes in part because there is new supply. And we’re seeing very little new construction adding to the supply of lower-priced homes.”

Young prospective home buyers in particular are having a hard time breaking into the market.

“It’s just becoming more and more difficult because, as home prices rise, you’ve got to save up for a downpayment and the closing costs,” he said. “That can easily amount to 10% or more of what the price of the home is. That’s a lot of cash, especially when young families have a lot of other expenses as well, such as student debt and auto debt.”

See more on how these factors compound the housing affordability crisis in the video below.

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Comments (8)

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  1. BILL LAZAR says:

    Your series on What’s Wrong with Housing hit a lot of the points, I think government getting out of providing infrastructure is actually the biggest negative impact. ” Infrastructure would be financed by the community, not individual projects. Growth benefits everyone in a community – not just those in a new house or apartment. When infrastructure is paid out of a general fund, property taxes or other community-wide tools, everyone pays their fair share. When it’s financed by local special tax districts or impact fees, then previous infrastructure is paid for by everyone (including those buying or renting the new units), but that needed for a new project is paid for by only those using it. If you want to burden new projects with paying for 100% of their impacts, wouldn’t logic tell you they should be exempt from paying for the existing infrastructure upkeep and maintenance – paying less base property tax?”

  2. Maria Rosa Carr says:

    I write to you, perhaps in hopes to share a personal observation. A point of view from a resident, a homeowner barely hanging on. A committed community person who has had boots on the grounds in zip 02907, since 1995.

    What is a truly sustainable community? and neighborhood revitalization. Excellent and hope filled concepts. Yet they lack true neighborhood. Responsibility of self , family, children, future homeowners. Now, the other side of the coin; blinded focus. How did the target area become “broken” or deteriorate. Was it lack of help for existing homeowners? Is it now? HUD cannot revitalize a community by building up yet allowing
    and ignoring the ones struggling to hang on. The great unmet need. The future deterioration of the same areas being revitalized. Millions of dollars in block grants set aside without looking at the whole problem. Again patch work.

    Yet most neighborhoods being invested in, are not self sustaining for many reasons a major reason unable to revitalize a neighborhood without inclusion of its residents and unmet needs.
    To affect a true and sustainable neighborhood one must look at the variables that deteriorated the area and how to improve the the overall community.

    Each community has its own set of obstacles and strengths. Each individual community must be addressed as a whole.

    I am NOT an agency; am a resident in one of the areas being “Revitalized” Yet in the not too distant future I will personify the problem and be a mother spoke in the problem cycle. Ignoring the needs of low income homeowners in these, my, neighborhood is not revitalizing its just building, making jobs available. Good things but far from revitalizing! Thank you.

  3. DANIEL GARCIA says:

    Disagree – rising home costs are a result of the bloated soft costs stemming from overburdened construction management and the inefficiencies in unskilled labor, procurement of said labor, and the management of unskilled labor and the mistakes they make. This has a huge impact on the efficiency of the CM contingent of the homebuilding world as well as the actual bottom line of profit. But it’s obviously not what makes for good PR: we admit we’re hamstrung at doing our job because we’ve poached the skilled labor market by hiring cheap unskilled labor to lower pricing and we’ve done it for so long that it’s completely destroyed our labor pipeline.

    Impact fees only make evident the real cost of greenfield development, which has been too cheap for too long. Most impact fees are probably too low. We need to adapt as a society if we care about sustainability: of businesses and people in construction, of the environment, and of the social problems caused by suburban dystopia. We should be infilling urban areas or else figure out a new way to structure the homebuilding deal, such that the addition of business tax income and economic activity offsets the burden of impact fees on residential SFDs.

    • John Bitely says:

      Daniel Garcia
      not sure where you live but you are very off base here in the Grand Rapids, Michigan market. In this market we pay very good wages to skilled trades but the regulations and anti development (NIMBY) kills affordability time and time again.

      • John Green says:

        John Bitney……you are correct. I am a builder/developer here on Bainbridge Island, WA. A relative small community, compared to those being discussed……….the NIMBY’s have a strong hold on any further development. Costs have tripled in the last 20 years, in the time I have been here doing what I do. Regulation has stifled the ability to even consider affordability. I say, affordability, in homes, for the folks that work here in the schools, stores, medical support and young married couples. Average price of homes sold last year was $800,000.00.
        Politicians broadcast about affordable homes, but none of them know what they are talking about……merely lip service to the general public, who are really tired of the spin……….
        John Green.

    • Rocky Dede says:

      Daniel Garcia, are you a builder/contractor? What is the name of your company?

      • DANIEL GARCIA says:

        Rocky yes and my company is Dura Design Build. http://www.duradesignbuild.com

        John Bitely you are right: MI and WA have chimed in. Areas with strong labor. There are pockets all over the US like you guys, but they are just pockets. FL generally stinks. That’s the vantage point from which I speak.

        And I’m not talking about regulation in general – everyone wishes that were less. I’m talking specifically about impact fees. My main point is, impact fees do not adequately reflect the true cost of irresponsible greenfield development on the municipalities which are then burdened with infrastructure development and maintenance as a result. And it overloads other infrastructure points in the area, creating hidden costs for taxpayers. The social costs are perhaps incalculable but some reports but it in the billions: healthcare, stress, commuting and automobile costs, home maintenance, low resilience costs, taxes, consumer goods, etc… The labor cost is calculated: for example in Atlanta, the city loses $7B of GDP yearly while people sit in traffic. The way the US develops is the problem. This has started changing in recent years but biz as usual still reigns.

        Aside from the unicorn markets in the country (islands with limited development area, developed urban centers etc…) the majority of the country is embroiled in business as usual: clear cut an agricultural zone to make way for ticky tacky boxes while giving lip service to environmental, economic and social sustainability. This article unfairly lumps a unicorn market ($60,000 for permits) in with an entry market (young homebuyers) They’re not the same. And the assumption in the article that everyone should have their affordable suburban house is also wrongheaded. An affordable suburban house by Dr Horton is not going to have $60,000 in permits. Ever.

        The greenfield development should be the option of last resort if we as a society and as a profession want to build responsibly.

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