Regulations Account for 25% of Typical New Home Cost

What's Happening in Housing?
What's Happening in Housing?

Although we often hear about the sale prices and appraised values of existing homes being driven down by market forces, there are still many factors in place that continue to increase the cost of building a new home. We know from a recent study conducted by the NAHB’s Economics and Housing Policy Group that, on average, regulations imposed by governments at all levels account for 25% of the final price of a new single-family home built for sale.

Nearly two-thirds of this regulatory burden – 16.4% of the final price of the house – is imposed during the development of the land, resulting in a higher-priced finished lot. About one-third – 8.6% of the house price – is the result of the construction costs incurred by the builder after purchasing the finished lot. On a daily basis, your HBA is working to monitor and address emerging regulatory costs because the net result of their consistent upward creep is a decrease in overall affordability and new-home ownership.

It is important for officials to understand that even a small cost increase can make a huge difference in whether or not a family can afford to purchase a new home. That’s because in Missouri, just adding $500 to the average priced home – $214,968 – will knock out more than 2,500 households from being able to afford that home based on current mortgage qualification standards.

Adding $1,000 to the cost of that home means another 5,000+ households can no longer qualify to purchase that home. But here’s the real kicker – more than half of Missouri’s households already cannot even qualify to purchase the median-priced home. That’s right – based on recent Census data, the vast majority of Missourians are already priced out of the average priced home.

While we may think of our state as a far more affordable place to live than California or New York, we still confront an affordability challenge here when it comes to home ownership. Of Missouri’s 2.3 million households, only about 40% of them earn enough income to qualify for that average-priced home.

Looking at a local example, if you were building a 1700 square foot home in Ozark last year, you would have approximately $2,596.50 due in fees when pulling the building permit:

  • Building Permit Fee: $425.00
  • Water Impact Fee: $100.00
  • Sewer Connection Fee: $1,781.50
  • Water Meter Fee: $240.00
  • Plan Review Fee: $50.00

Based on the assumption that this home would be priced at the median and using the priced-out equation for Missouri – that each $1,000 increase above the median price eliminates about 5,000 households – these combined fees already price out about 12,500 households from being able to afford the home.

So what’s the lesson for local governments? While it may feel “right” to officials to assess the cost of growth from new development, Economist Elliot Eisenberg recently pointed out in his localized study of residential building in our region, NEW HOUSING DEVELOPMENT ALREADY PAYS FOR ITSELF. By the end of the second year, our housing industry’s local economic impacts more than offset the fiscal costs resulting in a fiscal surplus to local governments to pay for additional government services.

If fees and regulatory costs are prohibitive, builders and consumers will quickly look elsewhere so they can either afford to build because it shaves several thousand dollars off the cost or because they want to spend that additional $2,500 or $3,000 they would have paid in fees, on custom cabinets or upgraded appliances. Who wouldn’t?