The Impact of Regulations on Home Building

The longer it takes to get a project through the approval process, the higher the price of the homes

May 1, 2017
illustrated aerial view of a home building maze
Navigating the maze of regulations required to build a home has significant cost implications for builders. (Illustration: Adam Simpson)

While reading the May 2017 issue, you may notice that one topic comes up in several of the articles: the significant impact of government regulations on home building. It’s not a coincidence; it is one of the most important factors in determining the course of the industry.

Our analysis of this year’s Housing Giants survey notes that rising home prices moved up to No. 3 on the list of challenges that respondents mentioned this year, and that government regulations fell from last year’s No. 5 to off the list at No. 6. But in reality, those two items are joined at the hip. 

It’s easy to calculate the relationship of sales prices to direct regulatory costs such as impact fees and local add-ons like tree ordinances and ecological surveys. According to the NAHB, such costs make up nearly 25 percent of the price of a new home and rose from an average of $65,224 in 2011 to $84,671 in 2016, an increase of 29.8 percent. Less obvious is the impact of the time it takes to get projects approved. Last year, real estate data company Trulia analyzed the effect of the building permit process on home prices and found a direct correlation between permit delays and housing supply and housing prices. Simply put, the longer it takes to get a project through the approval process, the higher the price of the homes. 

During those same years of 2011 to 2016, new-home prices grew by 33.8 percent. Taken together with the increase in regulatory costs, the data offer a pretty clear explanation for why there are fewer affordable homes being built. In 2011, homes sold for under $200,000 comprised 38.6 percent of the market; in 2016, less than half of that number—17 percent—were sold for $200,000 or less.

With numbers like these, one might think that accessory dwelling units (ADUs) would be encouraged, or at least tolerated, by municipalities. But that isn’t the case in most areas around the country. As senior editor Sue Bady points out in her article “Much Ado About ADUs,” local ordinances and guidelines can put the construction of ADUs out of reach for those with moderate incomes—even in places where local codes allow them.

Senior editor Mike Beirne’s story, “Jurisdiction Jujitsu,” addresses the approval issue head-on using examples of builders employing an array of tactics to try to keep their projects moving forward when faced with opposition from local officials or residents. Some companies have gotten quite adept at figuring out ways to address issues even before their initial plan goes public, conducting strategic research of the neighborhood, holding neighborhood meetings, and having alternate plans in their back pockets—all of them excellent ways of ensuring success and continuing good relationships with the communities in which they operate.

In some places, however, even the best of intentions and strategies won’t help get homes built. California, the poster child state for housing over-regulation, has a genuine housing crisis on its hands and there appears to be little chance of a solution on the horizon. Last year, California Gov. Jerry Brown’s proposed legislation to streamline housing approval processes went nowhere. This year, his proposed budget clearly asserts that there will be no state help for affordable housing unless local laws address some of those reforms, including reducing local barriers to housing construction, implementing density bonuses, and facilitating the development of ADUs. 

It’s something of a strong-arm tactic, but one that may be necessary at this point. The budget is under review by the legislature through May—it will be interesting to see what transpires and what effect the result may have on other states facing similar challenges.

editorial director

Denise Dersin, editorial director of Professional Builder, Custom Builder, PRODUCTS, NKBA Innovation+Inspiration, and co-editor of Multifamily Design+Construction, has been in publishing as an editor and writer for 30 years and has worked in the housing industry for much of that time.