How Government Regulation Affects the Price of a New Home

August 4, 2011

The market for new housing has suffered through a severe slump recently.  Stumbling blocks on the path to recovery include competition from sales of distressed existing properties and uncertainty about the health of the overall economy and labor markets.  Once these obstacles are overcome and normality returns, however, homebuilders and developers will still be contending with markets in which homes cost more to build and sell than would otherwise be the case due to government regulations, says Paul Emrath, vice president for survey and housing policy research for the National Association of Home Builders (NAHB).

Regulations come in many forms and can be imposed by governments at different levels.  

  • 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.
  • The federal government can also impact the price of a home -- for example, by requiring permits for storm water discharge on construction sites.

Emrath's article introduces new NAHB estimates of the impact that regulations have on the price of a home.

  • The estimates show that, on average, regulations imposed by government at all levels account for 25 percent of the final price of a new single-family home built for sale.
  • Nearly two-thirds of this -- 16.4 percent of the final house price -- is due to a higher price for a finished lot resulting from regulations imposed during the lot's development.
  • A little over one third -- 8.6 percent of the house price -- is the result of costs incurred by the builder after purchasing the finished lot.

The relatively high share of regulatory cost affecting a home during development is particularly significant in the current environment, when there is a low level of developed land in the pipeline.  Thus, in most cases the full range of regulatory costs will need to be overcome if production and employment in the housing industry are to get back on track, says Emrath.

Source: Paul Emrath, "How Government Regulation Affects the Price of a New Home," National Association of Home Builders, July 2011.

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