Government Regulations: 25% Cost of a New Home

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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.

Regulatory Costs in the Price of a New Home
Low Average High
Regulatory Costs incurred during development 6.6% 16.4% 26.2%
Regulatory Costs incurred during construction 2.0% 8.6% 15.3%
Total 14.1% 25.0% 35.9%

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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