At their September 12, 2023, meeting, Commissioner Yodowitz read a passage from the US Congressional Research report on housing trends. For the excerpt and the full report, and more, see here. The report stated that in 2021 the average cost of regulation for a single-family home amounted to $93,870.
That figure seemed fishy to me. I am not at all faulting Commissioner Yodowitz, and it is perhaps silly of me to be doubting a Congressional Research report. But as the report said, that data was not official government data, but instead came from an industry group, the National Association of Home Builders (NAHB).
Why does this figure of $93,870 — a percentage of 23.8% of the price of a new single-family home — seem suspicious?
Those figures translate to a single-family home cost in 2021 of about $394,000. (These are national figures, not California or Arcata figures.) And we are expected to believe that regulatory costs amount to almost $94,000 of that $394,000 new-house cost?
The Gateway Plan and recent & upcoming State laws all will tremendously help with the regulatory costs of building new housing.
The Terner report:
California has made significant progress over the last several years in opening up more zoned land for higher density housing, holding cities more accountable for effective planning, and providing funds for new affordable housing.
But without meaningfully tackling the “hard cost” expenditure to build housing, lower housing prices are not likely to occur for a long time.
Here in Arcata, the Gateway Area Plan is specifically designed to lower the regulatory and development costs of new construction. Significant cost reductions for developers include:
- The Gateway plan is all under one CEQA approval. Each developer does not have to individually go through the CEQA process. This has the effect of saving the developer potentially hundreds of thousands of dollars on a single project.
- Objective standards from the Form-Based Code and some form of ministerial reviews (how done is yet to be determined) will result in swifter approval of worthy projects that meet the Gateway Code. Recent State laws also provide for reduced delays in the approval process. From my point of view, anyone who refers to the large development costs and time delays of the Village project from 2018-2019 is being disingenuous. What happened then could not happen now — State law would prevent it. See The Village Project: What went wrong?
At the same time, in my view, there are regulations in the Gateway Plan that will likely work against the creation of new housing, including:
- Requirements for privately-owned publicly- accessible open space. See The Myth of “Privately-Owned Publicly-Accessible” Open Spaces.
- A maximum number of parking spaces allowable. See Gateway Parking: 48 Drivers = 6 parking spaces and Parking in the Gateway Area.
- A skewed and meaningless (to the developer) Community Benefits program requirements.
As Community Development Director David Loya has pointed out, our design standards — the Gateway Form-Based Code — and the Gateway Community Benefits program are unlikely to be implemented. Developers are more likely to achieve what they want by bypassing the Gateway Code and instead utilizing the State density bonus laws.
In this article, we’ll look at the real costs of regulation, and how much the Gateway Area Plan helps with lowering those costs.
Contents Use your browser’s back arrow to return here.
- Hard costs and soft costs
- National Association of Home Builders summary
- The Terner Center report on new State legislation to reduce regulatory costs.
To jump directly to the 3-paragraph conclusion, click here.
- The National Association of Home Builders 2021 report: Government Regulation in the Price of a New Home: 2021
- Other articles:
US Congress Research reports: Housing Trends & Policy Considerations
Berkeley modular “village” housing with rooftop garden
Pre-Fab Modular Housing – a dozen articles and more
Hard Costs and Soft Costs
The NAHB report states that the increase in costs of regulation for a new single-family home has gone from $65,224 in 2011 to $93,870 in 2021. That is a 44% increase in 10 years. During the same period of time, the cost of the construction materials in the US increased between 44% to 54% and median house prices in California more than doubled.
In construction there are “hard costs” and “soft costs.” Hard costs generally occur only during construction. These are the physical actions and materials involved in the construction: Materials: concrete, wood, roofing, plumbing and heating, windows, etc.; labor costs, grading, landscaping. Soft costs include regulatory fees, architectural and engineering fees, legal fees, taxes, permits and local development fees, interest prior to the sale/rent, insurance, and so forth.
The cost of the land itself is sometimes considered a soft cost, as acquisition of land occurs before construction takes place. But more accurately it is considered as a separate line item.
Hard costs amount to about 70-80% of the cost of construction, and soft costs are in the vicinity of 20-30%.
The “hard costs” of that construction would be over $275,000. It is extremely doubtful that regulatory costs, at 23.8%, would add almost $94,000 to the final price of the home.
The National Association of Home Builders report
One significant question on cost was:
What is the value of any land that must be dedicated to the local government or otherwise left unbuilt (for parks, open green space, etc.)?
The NAHB report, “Government Regulation in the Price of a New Home: 2021,” is below. It is 9 pages of text plus appendices. The report includes the survey sent out to 2,071 NAHB members. Only 57 responded in full. The NAHB has 140,000 members. Responses from 57, plus the 280 builders who responded to particular questions, may represent the “whiner” component of the large number of builders.
I regard much of the questionnaire as a bit vague and subjective. Questions include: “How much do architectural design standards (requirements for siding materials, windows, landscaping etc.) that go beyond what you would otherwise do (and are not related to building codes) add to your cost, as a percent of total construction costs?” The “regulatory costs” also include such things as complying with OSHA requirements and local development fees.
One significant question on cost was: What is the value of any land that must be dedicated to the local government or otherwise left unbuilt (for parks, open green space, etc.)?
While paying fees, complying with OSHA, and dedicating a certain amount of open space are definitely real costs for the developer, these are costs of living in an open society. In my view, it is wrong to declare these costs as excessive. While certainly some minor parts of OSHA requirements or environmental regulations can be seen a being perhaps unreasonable, overall this results in a better society.
In California now the typical green pressure-treated wood is considered a hazardous waste. Treated wood can contain chemicals risky to human health and the environment, including arsenic, chromium, copper, creosote, and pentachlorophenol. This is a new expense for the builder, and, yes, it is passed on to higher housing prices.
Here is a summary of the National Association of Home Builders report.
Adding up all the figures from all the variety of homebuilders to arrive at the total cost of regulation reminds me of the advertisements for devices for getting 10 or 15 or 20% better miles per gallon for your car, or for losing pounds of weight by using this product or that technique. If this one promises that you’ll lose 10 pounds, and that one promises 5 pounds, and a third promises you’ll lose 12 pounds — what happens when you add them all up? Do you lose 27 pounds? No, hardly.
The Terner Center report
The Terner Center report, below, sees increases in regulatory costs as a minor factor in overall home costs.
“California has made significant progress over the last several years in opening up more zoned land for higher density housing, holding cities more accountable for effective planning, and providing funds for new affordable housing. But without meaningfully tackling the “hard cost” expenditure to build housing, lower housing prices are not likely to occur for a long time.”
That is, the cost of materials is really the issue. In California — and Arcata — we are doing a great deal to help with the creation of housing. And as the Gateway Area Plan gets examined further and honed, regulatory costs will be easier.
As Community Director David Loya has told us:
“Ensure that the developments are being built in a way that, you know, they they look compatible, that you feel like they look compatible with the community, that they reflect our aesthetic. But then remove the constraints to permitting those projects so that they can put money into the project. So they can put money into community amenities. So that they can put money back into the community, as opposed to putting money into a planning process. So the way to do that is to make those projects ministerial as well.” (March 1, 2023 City Council meeting)
“Since they’re saving money on process, we have them put those dollars into the community.” (June 28, 2022 PC meeting) This money would be put into the community through the Community Benefits program.
I don’t believe that logic is valid — not one little bit. Developers have all kinds of costs (and need to make a profit), so to reduce their costs in the regulatory process essentially may allow them to build. Any excess funds they have will to their profits and to reduce the very real risks of development.
Reducing regulatory costs may be a good thing, and it may be a key in seeing developers produce housing — at all. But as the Terner Report concludes, it is nation-wide (and global) material costs and interest costs that are going to affect whether new housing gets built. Developers, like everyone in business, need to make a profit. They are taking a risk in building. If the opportunity for profit is too small or too risky, they won’t build. No one is going to build if they think they will be losing money. And, yes, it is as simple as that.
The Terner Center report on new State legislation to reduce regulatory costs
The Cost to Build New Housing Keeps Rising: State Legislation Aiming to Reverse the Upwards Trend
by Muhammad Alameldin, David Garcia
Published on August 4, 2022
The National Association of Home Builders 2021 report:
Government Regulation in the Price of a New Home: 2021
The complete PDF file is shown below. The original source (the same as what’s here) is at this link.