Government Regulations: 25% Cost of a New Home

A new paper by economist Paul Emrath of NAHB’s Economics and Housing Policy Group estimates the share of an average, single-family home’s price that is due to costs associated with government regulations.

Using responses from the NAHB/Wells Fargo Housing Market Index survey and average long-run assumptions about terms on construction loans, profit margins, and time lags between different phases of the home building process, the paper finds that 25% of the price of a built-for-sale single-family home is due to government regulations. Nearly two-thirds of this impact is due to regulations that affect the developer of the lot, with the rest due to regulations that fall on the builder during construction.

 

Costs due to regulations can arise from many sources. At the local level, jurisdictions may charge permit, hook-up, and impact fees and establish development and construction standards that either directly increase costs to builders and developers, or cause delays that translate to higher costs. State governments may be involved in this process directly or indirectly. Several states, for example, have adopted state-wide building codes. And although impact fees are imposed by local governments, such fees typically cannot be imposed without enabling legislation at the state level. The federal government can also affect the price 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. These are only a few examples of regulations that builders and developers encounter in practice.

The estimates show how the burdens of regulation are ultimately paid for by homebuyers. The new research is also useful because it shows an additional challenge (beyond foreclosures, consumer uncertainty, and difficulty in qualifying for mortgages) for home building to recover from its current depressed levels.

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6 Responses to Government Regulations: 25% Cost of a New Home

  1. Will Dunning says:

    Interesting – this 25% estimate is very similar to an estimate for the Greater Toronto Area (Canada) produced by me for a construction association (available here: http://www.rescon.ws/gic/files/RESCON_March2011_FINAL.pdf).)
    While we Canadians may have different systems and values than you, our governments have a similar interest in extracting funds from new residential development and ultimately from consumers.

  2. Freal says:

    I watch development activities in our small town and each and every time the planning board or township supervisors are putting the squeeze on parties bringing a new project to the table. Whether it be a few homes, an entire subdivision, a new retail store or a business office the approval process puts the squeeze on for fees in lieu, off-site improvements, parks, recreation, open space fees, etc. etc. It is community kick-backs in a quasi legal form. Utterly disgusting and the sad part is that it drives up all the prices which then get passed on the consumer.

  3. [...] Government Regulations: 25% Cost of a New Home Government Regulations: 25% Cost of a New Home [...]

  4. Larry Korte says:

    So what is the right amount? I’m glad the county requires a builder to add a septic system versus a pipe out the back of the house. Taking land from people for a residential development may be overstepping, arm twisting for an additional lane is questionable even though the remainder of the county people want it, but why should everyone pay when it’s for one development.

    Tough questions and no easy answers.

  5. [...] Government Regulations: 25% Cost of a New Home " Eye on Housing (tags: numbersandstudies housing governmenteffeciency government weekendreading) [...]

  6. [...] rising construction costs have emerged as a new obstacle, on top of other impediments like regulatory barriers and credit conditions that appear to be stabilizing but remain tight. Like this:LikeBe the first to [...]

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