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September 2016

Washington among states that impede development of affordable homes

Federal and local agencies can add significant costs or delays to new home construction, leading some builders to abandon plans when their proposed project won't pencil, according to research by John Burns Real Estate Consulting.

That firm concluded there is "a huge correlation between government attitudes and new home construction and prices."

Following a survey of more than 100 builders across the country, that firm found there is plenty of housing demand at lower price points. "Most builders would love to build more affordable homes, yet they cannot do so and make a normal profit margin," concluded company CEO John Burns. 

Researchers at the Burns company attribute much of the slow and uneven growth in new home construction to "unfriendly governments" whose regulations and policies have added significant building costs that didn't exist 15 years ago.

Burns notes many of the added costs are intended to protect the environment and improve an area for existing residents. "While these are noble goals, builders have to charge more for new homes - or simply not build homes in many instances," he reported.

The consulting firm analyzed 33 markets to determine where builders have been successful in growing their businesses and where they have not. The East Bay Area and Fort Lauderdale areas both show year-over-year growth of 33 percent for first quarter 2016 to lead the list. Six other markets (Sacramento, Orange County, Austin, Jacksonville, Miami and Atlanta) also reported double-digit growth.

Nine markets reported negative growth, including both metro Seattle (-6%) and metro Tacoma (-13%).  San Francisco had the worst decline in new construction at minus 22 percent.

Burns said his firm's data for the 33 markets surveyed show the number of new home communities has risen only 4 percent in the last year. At that pace, he said it will take until 2023 to get to 1.1 million single-family homes permitted, the number consistent with historical averages.

Burns believes there are many reasons why the recovery is not stronger. "The primary reason the volume recovery is stronger in some areas than others is local government. The researchers classified government attitudes toward housing into two categories:

  • Friendly and affordable. Texas and Georgia are well known for their business-friendly environments, where builders can get things done quickly to meet demand. Massive investments in freeway infrastructure in Texas the last decade have opened up huge areas of land for development, resulting in the two largest construction markets in the country. Texas has new homes near employment centers that are far cheaper than in most areas, even considering the strong price appreciation in the state the last few years.
  • Unfriendly and unaffordable. Au contraire, Virginia, Illinois, Washington (except for downtown Seattle), New Jersey, and California are well known for throwing hurdle after hurdle at builders. These highly desirable places to live have become extremely expensive, as new construction cannot keep up with demand.

"We strongly believe that the large, affordable markets will grow faster than the other markets," Burns stated, adding his firm has been advising its clients to look at the friendly and affordable markets for volume growth and the unfriendly and unaffordable markets for price appreciation. "We expect 62 percent of new households to move into the Southern states, where 42 percent of US residents currently live, shifting the population further south.

Burns called a recent CNBC report on Sea Summit in San Clemente, Calif. the "poster child for difficult approvals."