A home building executive we were talking with yesterday bristles about how land use restriction and regulation chokes off the development of more affordably-priced homes.
Here's another recent piece drawing from analysis by Bank of America Merrill Lynch analyst John Lovallo II, who actually heat-maps the places where the land-entitlement process and cost is outrunning the ability to bring affordable homes to a growing number of markets.
"You're watching affordability go out the window in the Denver area," this senior-level executive told me. "Even if you got a lot for free, when you put in the impact fees and add in your water and sewer tap fees from Denver water, you've just added $30,000 or more on each home for the tap fees. We don't see that getting better."
In our own conversations yesterday, two staffers inadvertently played out the debate.
One associate noted the valid point that regulations and restrictions--ones that add cost to development--on water use, requiring low-flow systems, etc., and other finite resources are necessary, "or those areas will run out of water, and that won't be good for anybody."
Another colleague said, "true, but another way to look at it is young people who can't afford to live in those places are a vital, finite resource as well, and if you run out of them, that won't be good for anybody, either."
A part of this that clearly rankles would-be residential developers and builders is the disproportionate amount new development needs to bear the brunt of these necessary costs. In the Denver Water district, for instance, if you tear down an existing house and reuse that property for a new home, the water is already "on the land," not just "on the street," so the $25,000 to $30,000 tap fee is avoided.
Awareness of this polarizing issue is broad, and the conversation reaches to the upper-most policy levels, as economists, politicians, and business leaders address the nation's tepid recovery from a disastrous turn of the past decade. Here, the White House Council of Economic Advisors frames the same dynamics we heard in our office debate on regulatory overreach and its role in stifling housing affordability.
Housing and Land-Use Restrictions
There is evidence that land-use regulation may also play a role in the presence of increased economic rents. Such regulation in the housing market can serve legitimate, welfare-enhancing purposes, such as restrictions that prohibit industrial activities from occurring alongside or within residential neighborhoods or limitations on the size of a dwelling due to a fragile local water supply. But when excessive and primarily geared toward protecting the interests of current landowners—including their property values—landuse regulations decrease housing affordability and reduce nationwide productivity and growth. These are impacts detailed in Chapters 2 and 6 of this Report, respectively. The presence of rents in the housing market, moreover, may also restrict labor mobility and exacerbate inequality.
The rub, this report notes, is that real house prices increase at a faster rate than real construction costs, a fact we've been observing. The report notes that, prior to 1970, house price increases generally took place as a result of quality improvements in homes. Now, the curves have criss-crossed and quality improvements are no longer the driver of increasing value, whereas land restrictions are.
As a matter of fact, according to another builder we talked with yesterday, it's not only fees and delays that new home and community builders encounter as they try to bring new neighborhoods online.
"They also want to control what we build, right down to the design and elevations of the homes," the president of a mid-sized multi-market home builder said. "They'll tell you they want your neighborhood to have its homes with a 6/12 roof pitch," he said. "So, fine you have all your homes with a 6/12 roof pitch, and there goes your ability to make a streetscape with porches that people would actually find to be attractive."
The point is restrictions, fees, and the Catch-22 that, for all practical purposes, makes development of affordable new homes in many parts of the country that need them--both to serve the would-be new households currently in those markets, and to attract young adults to those communities--an impossibility.
If something doesn't change.
Now, many builders take what is probably the realistic view that local municipal policy is not going to change to accommodate builders and developers. The likelihood that impact fees, assessments, permit costs, and such will do anything but go up is slim.
"We're doing everything we possibly can to streamline, to take waste out of our process, to reset our purchasing systems, to bring technology to bear on every part of our construction our sourcing and our delivery work flows," one of our sources mentioned yesterday. "We're spending more on construction costs per square foot than we have in years, and our cycle times are up too, what with the labor issues we've been dealing with. We need to improve to get our prices in line with what the markets will bear."
What's your take? Are restrictive and exorbitant land use trends a simple fact to account for, or is there some sort of recourse that could come of a collective push-back? Is the solution all in individual company management of process improvement to counter the impact of impact fees? Go operate somewhere else? Cram down your costs? Thoughts?