NWReporter logo
Serving More Than 25,000 Real Estate Professionals in the

June 2016

"Extraordinary" fees hindering builders' ability to create entry-level housing

New homes have become permanently more expensive to build, declared Jody Kahn of John Burns Real Estate Consulting upon analyzing responses to a recent survey. As a consequence of new regulations and fees imposed on home builders, researchers concluded the resale market will need to meet the demand for affordable entry-level housing.

"Extraordinary development and compliance costs" are not only stifling the construction of new homes and frustrating builders, they're also driving up costs, the consultants reported.

The Burns firm surveyed more than 100 home building executives across the country to uncover specific examples of new home construction costs that did not exist a decade ago. "We were overwhelmed by the reply," reported Kahn, adding, "Many of our private equity clients who work with builders all over the country tell us that every project has experienced cost overruns!"

Among the expenses builders around the country mentioned most frequently were:

  • Erosion control costs, pegged at $5,000+ per house, "even in areas that rarely get rain."
  • Energy code costs, estimated at $2,500+, with builders in California, Florida, Illinois, Minnesota and Pennsylvania saying energy code costs exceed $8,000 or more per home.
  • Mortgage documentation and closing costs, particularly for the new TRID rules, are adding at least $750 per house.
  • Fire sprinkler costs add from $5,000 to $10,000 in expenses.
  • Understaffed jurisdiction offices result in costly delays in plan approvals, building permits, and inspections.
  •  Unusually long utility company delays that stall construction, causing prices to escalate as new communities await connections for electric, gas, phone and cable service.

Kahn, a senior VP with Burns, said they also identified several local or regional issues that impeded builders. These included items such as school fees, infrastructure upgrades, "beautification" requirements, tree ordinances, park fees, firewall treatments, storm-water discharge permits and greenhouse gas fees.

To illustrate examples of recently imposed requirements for new homes, the firm created an infographic titled "Development Dash: A Game of Skill and Chance."

Among examples cited by builders in Washington state were a 24-month delay due to a new design-review process, and "substantial additional" masonry requirements that were imposed after a project's approval, adding several thousand dollars to the cost of each home.

Research from the National Association of Home Builders indicates the average cost to comply with regulations for new home construction is up nearly 30 percent over the last five years, rising from just over $65,000 in 2011 to more than $84,600 now. During the same period, new home prices rose 33.8 percent.

Another study from Zelman & Associates, a housing research firm, found that local infrastructure "impact fees" in 37 key home building markets across the country surged 45% on average since 2005, adding about $21,000 to the cost of a newly-built home.

Commenting on the added development/compliance costs, Kahn said virtually all of them "appear to come with positive consequences for the environment, neighborhoods, or city finances," but "they also make it quite difficult for builders to build entry-level homes.  That makes it tough for the home construction market to recover to normal volume levels, she stated. With rising construction costs pushing home prices out of reach for many prospective buyers, Kahn said home builders "have been forced to serve only the more affluent home buyers."