Housing, the economic sector that started its crash in late 2005, and which is often cited as the driver of the financial market collapse that followed, has seen a steady if unspectacular recovery. The pace of housing starts, as well as sales of new and existing homes, continue to climb higher. It's had to, because the US needs new homes, and employment growth and income gains have continued while household financial obligations (recurring monthly payments as a percent of after-tax income) remain near multi-decade lows. However, tight lending markets have held back the pace of recovery. So have low inventories of houses available for sale. But there is another, often overlooked factor – rising regulatory costs.
According to the National Association of Home Builders (NAHB), the average cost of regulatory compliance to home builders for new construction has increased a staggering 30% since 2011. This closely mirrors an increase of 34% over the same time period in the average cost of a new home. In fact, the cost of regulation per home now stands at roughly $85,000 or about 24% of the final sticker price of an average new single-family home. Examples of typical regulations include local impact fees, environmental mitigation, storm-water discharge permits and ever changing construction codes that, on average, builders say add 6.6 months to the development process. This squeezes builders at the margin, and is a driving factor in the movement away from the construction of cheaper starter homes in favor of premium models.
This lack of supply to the lower end of the market has hit first-time buyers the hardest, effectively pricing many people out of the opportunity to own a home. In a recent blog post, Trulia.com's Chief Economist reported that the inventory of "starter" homes (defined as homes with values in the lower third nationally) has fallen 44% since 2012, and median prices in that segment of the market have risen by 32%. The result is that the share of first-time buyers in the market dropped to a nearly three decade low in 2015, according to the National Association of Realtors®. This has been part of the reason the housing market has been held back post-recovery, people aren't able to get their foot in the door. Once someone owns a home, even at the lower end of the market, they begin to build equity and are able to eventually trade up. Not only does this stimulate sales for more expensive homes, it puts an existing home on the market and helps alleviate the inventory issue as well.
This is an example of the kind of damage over-the-top regulations can cause to an economy. However, don't expect the government to address these problems at the source. More likely they will continue to raise regulatory costs through micromanagement and respond with government programs that make loans easier to obtain. After all, what could go wrong?
Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist