Why Housing Costs So Much
Following are remarks by NAHB Vice President/Treasurer Brian Catalde at a PCBC press conference in San Francisco on June 1.
So we’ve just finished lunch at one of those fancy restaurants where they don’t have prices on the menu. And it was good. Now the waiter brings the bill — and we’re shocked. How come this meal is so expensive?
You’re probably wondering what the hell I’m talking about. I’m talking about the high cost of housing. We’ve had a feast, and now the bill has come due.
We’ve all become accustomed to stories about fast-rising home prices in New York, Boston, Seattle, Washington, D.C. What makes this story even more compelling — and the problem more vexing — is that we are seeing millions and millions of middle-income families being priced out of the market for homeownership all across the country.
I’m going to go over the bill with you, and I’m going to explain a few of the reasons housing has become so expensive. I’ll focus on four factors that home builders see as the prime drivers of the cost increase:
- First is the cost of doing business. Among many costs, the one that stands out is the cost of insurance that is being influenced by construction defect litigation. Folks, I’ve been building homes for 30 years, so I have some perspective on this.
Ten years ago I was building the same kind of homes that I’m building today. But I’m paying $10,000 more PER HOME now than I was 10 years ago for general liability insurance. I still pay just as much attention to the quality of the homes I build. But buyers are paying an extra $10,000 per home to cover my insurance costs — simply because of aggressive litigation tactics that have become the norm. I’m hearing concerns about the cost of insurance and litigation from builders all across the country. In fact, nationally, general liability insurance costs increase the cost of each new home by $2,500.
- Second is cost shifting. I’ll give you a couple of examples of how society is shifting the costs of a variety of public needs and services onto the backs of new home buyers.
Exhibit 1 is impact fees. In addition to roads and schools, impact fees are now being used by local governments to pay for public art, recreational facilities, jails. The norm in California now is $35,000-$50,000 per home, and one jurisdiction has fees over $100,000 per home. Nationally, we’re seeing more and more local governments use this regressive funding mechanism.
Exhibit 2 is inclusionary zoning, a favorite of local governments trying to demonstrate that they are doing something about the housing affordability problem. They’re doing something, all right. They’re increasing the cost of housing for the 85% of new home buyers whose homes cost more because they are subsidizing the 15% of homes built under the inclusionary zoning ordinance.
- The third factor — production constraints. Constraints on land supply really drive up the cost of housing: large-lot zoning, setback requirements, urban growth boundaries, stream buffers, habitat areas, open space requirements. When you add them all up, you have taken a tremendous amount of land out of circulation, or, in the case of large-lot zoning, you have a brutally inefficient use of land. It’s simple supply and demand. If you restrict the availability of land — through growth boundaries, conservation areas, large-lot zoning and other regulatory mechanisms — the inevitable result is higher housing costs.
- The fourth issue is the cost of new regulations. As a builder, I can tell you that there are hundreds — literally hundreds — of regulations that increase the cost of every new home built. Escalating permit review fees, new construction code requirements, mandatory donation of land for public amenities — these things add up.
Here’s an example. A proposed change to the International Energy Conservation Code would require an increase in wall insulation for wood-framed construction. This may sound like a fine idea, given the rising cost of energy. But here’s the deal: the extra insulation will require a change from two-by-four to two-by-six construction in framing. That change means an extra $1,000 per home. And, according to a Department of Energy study, it will take between 40 and 90 years, depending on location, to recoup that extra cost.
Adding Up the Bill
These regulations are not put in place in a vacuum. They are layered, one on top of another, and the cumulative cost is tens of thousands of dollars for every new home. In some high-cost areas the regulatory costs are well over $100,000 per home.
When you eat at one of those fancy restaurants with no prices on the menu, you don’t have any idea how much the bill will be until they bring it at the end of the meal. Well, it’s the same thing when you build a home and you’ve got hundreds of regulatory costs and impact fees. There are so many layers of regulations that it’s all pretty fuzzy until you’ve found your way through the maze. Ultimately, it’s the home buyer who gets stuck paying the check.
As a society, we say we want to take meaningful steps to make housing more affordable. As a first step, we must resolve the perceived conflict between the need for housing and the desire to preserve quality of life. Folks, housing affordability and quality of life are not mutually exclusive. In fact, they very much go together.
But for now, the reality is we have a serious affordability problem. And it is no longer a California problem or a West Coast problem. It’s a national problem. I want to suggest four things we can do to reduce some of these costs:
- We’ve got to tackle the litigation crisis. Notice-and-opportunity-to-repair laws are a good start. But we need policy makers to do more to control aggressive litigation tactics that drive up home prices and discourage construction of much-needed multifamily housing.
- We need to come up with a fair and balanced way to pay for local government services that does not leave new home buyers paying most of the bill.
- People need to recognize that land-use policies have a dramatic effect on home prices. If they want to make housing more affordable, zoning and development regulations must change.
- Government at all levels needs to be more disciplined in applying cost-benefit analysis to new regulations. If the cost to society is greater than the benefit, then the government needs to change or reconsider that regulation.
Those are four good places to start. But over the long term, this challenge demands innovative thinking and committed leadership. No other state has a greater housing affordability problem than California. In crisis we also find opportunity. California is known around the world as a leader. Whether it’s fashion, entertainment, technology or a hundred other aspects of life, this state has been the first to find new ways of doing things.
Californians are creative, innovative and entrepreneurial. It’s time for us to put that spirit to work and to make California a leader in innovative land use and affordable housing. If we, as a nation, are going to overcome the housing affordability problem, then the solutions must be found right here.
Now we understand how the bill got so big and we have some idea of how we can address the problem. Perhaps next time, we’ll pick a more reasonable restaurant. Maybe we can even have dessert.