WHY IS IT THAT BUILDERS CONTINUE to identify components of regulatory costs as the greatest threats to affordability? While I think it is extremely unfair for cities to charge impact fees in excess of the actual costs that the new-home impact will bring to the community, this is not the real issue in affordability. When there is a shortage of supply relative to demand, that is the greatest threat to affordability. If we truly want to keep new homes affordable, then we need to plan for an excess supply of land, which is the most critical raw material in the construction of a new home.
In some cases, shortages are completely caused by the regulators/bureaucrats through the restricting of permits, the slowing of the entitlement process, or the unwillingness to part with government land. However, those who have the most to lose, those who already live in an area of short supply, will never truly address affordability, as they are the beneficiaries of the effects of entitled-land shortages. These people gain unreasonable equity in their homes and real estate investments, and while they will give lip service to affordable housing, there are too many people benefiting from a restricted supply of land available for residential construction to ever have a true addressing of the supply shortage.
Phoenix is a classic example: In this market there has always been an excess of supply over demand, and so Phoenix has been one of the most affordable major metropolitan markets. However, because of a flood of investor demand over the past year by people who gained riches through a sudden shortage in Las Vegas, we have now experienced a shortage of supply relative to demand—and lo and behold, we have 35 percent annual appreciation. This is obviously not due to impact fees or costs, just a result of an imbalance in supply and demand. Now the landowners are moving quickly to gain the benefit of the increase in prices, and the builders are experiencing a short-term windfall from the increases in sales prices relative to the land purchased in the past, when the market was in balance.
However, no one wants a complete demand-supply balance, as they have now realized the inordinate profits and appreciation related to a shortage of supply.
PRESIDENT TALAS HOMES MESA, ARIZ. VIA E-MAIL
Learn more about markets featured in this article: Phoenix, AZ.