Land Regulations Prevent Builders From Increasing Supply

May 11, 2016

By now, everyone knows the story; housing supply is unable to keep up with demand which is causing prices to soar and keeping many would be buyers out of the market. What might not be so clear is why builders are unable to just build more houses to meet demand. The answer, according to Business Insider, is all about land regulations.

The problem with land regulations can be further broken down into two separate parts. The first is that the cost of land is rapidly increasing. As the cost of land increases, it becomes more difficult for builders to produce affordable homes, which is especially problematic because affordable entry-level homes are what is needed most right now.

The second part of the land regulation problem has to do with the land-entitlement process, which is the process homebuilders need to go through in order to get approval from the government to start construction. Included in the process are steps such as submitting and receiving plan approval from local governments, getting zoning changes, and acquiring a plethora of other permits such as for building near wetlands. The costs for the entire entitlement process add up to a significant portion of the final cost of the home. In fact, land costs typically make up about 23 percent of the final cost of a home, with eight percent of that coming from the entitlement process.

Depending on where a home is being built, the cost of land and the entitlement process can vary widely. For example, states like California, Washington, Maine, New Jersey, and Massachusetts have the most restrictive land entitlement regulations (i.e. the most expensive ones) while Iowa, Alabama, Indiana, Missouri, and Kansas have the least restrictive. Generally, the Midwest and South have less restrictive land entitlement regulations while the West and Northeast have more restrictive processes.

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