James and Carrie Finan have been house-hunting in the Seattle area for four months in a seemingly futile race against time: They’re living in a room in James’ mother’s house and their first child is due in September.
They’ve seen about 40 starter houses that match their criteria — $350,000 or less, three bedrooms, about 1,200 square feet -- and made four offers ranging from $32,000 to $82,000 above asking price. They’ve lost out each time.
“Every time we hear we’re not getting it, my heart kind of sinks,” James, 29, says. “It’s been insane.”
A big reason the Finans are struggling is the regulatory morass faced by builders like Mike Walsh. On a parcel in Sammamish, Wash., a Seattle suburb, he would like to build 36 relatively affordable houses. But since zoning changes in recent years permit just 25, he’ll have to sell each at $1.2 million to make the project profitable.
An increasingly byzantine maze of zoning, environmental, safety and other requirements partly accounts for housing construction that remains 35% below normal levels across the country, especially for affordable starter houses, builders and economists say. And that building deficit is the chief culprit behind a skimpy supply of both new and existing homes that has driven up prices about 40% the past five years, says Lawrence Yun, chief economist of the National Association of Realtors. Rising prices are good for homeowners but shut out many buyers, especially Millennials shopping for their first house.
There are other reasons single-family home construction is still sluggish: Builders are coping with shortages of lots and construction workers. And many banks have been reluctant to lend since the housing crash in the mid-2000s. Also, many builders have been loath to take on riskier projects since the bust.
But while experts have long suspected that regulations were a deterrent for builders, new studies show more starkly that areas with the most rules – particularly big metro regions on the East and West coasts -- have the least housing construction.Some of the regulations aim to make homes safer or help neighborhoods deal with heavier rainfall and congestion.
A report by the National Association of Home Builders last year found that from 2011 to 2016, regulatory costs to build an average house had increased from about $65,000 to $85,000, or 30%, and continue to make up a quarter of the price of a home.
Jess Zimbabwe, who oversees land-use issues for the National League of Cities, Seattle as an advocacy group for municipalities, argues that regulatory costs make up a relatively small portion of rapidly rising home prices in the largest cities, and labor and land costs are by far the biggest construction expenses nationwide.
A new analysis of 189 metro areas by Federal Reserve economist Raven Molloy finds that, in the top third of most-regulated areas,27% of owner-occupied homes are affordable to low- to moderate-income buyers. In the lowest third of least-regulated areas, 67% are affordable for that group. Regions with the most regulations and fewest starter homes include coastal cities like Baltimore, Seattle as and well as Denver, Fresno, Calif. and Phoenix. Areas in the South and Midwest -- including Fort Wayne, Ind.; Myrtle Beach, S.C.; and Des Moines, Iowa -- have the fewest regulations and the most affordable units.
More regulations, fewer starter homes
Many areas that have greater regulation also have strong job growth, which can push up home prices as well. But economically vibrant cities like Atlanta and Houston have fewer regulations and more affordable homes.
Expenses faced by developers and builders include applying for zoning approval; meeting environmental and energy-efficiency standards; water and sewage hookup fees; and the cost of delay as developers pay property taxes and interest on loans while land sits empty. Many municipalities have increased minimum lot sizes and set aside more land for open space, which means fewer homes. They have also imposed rising “impact fees” on developers to defray the cost of widening roads to handle more traffic, for example.
In the Seattle area, Walsh says, new laws require many homes, such as those that are larger or far from hydrants, to have fire sprinkler systems at a cost of $7,000 to $10,000 per home.
Meanwhile, federal and state rules mandate that builders protect streams, ponds, and wetlands, as well as a growing list of 1,447 endangered or threatened species that may reside on the property. Builders also must install ever more elaborate stormwater retention facilities so as not to overwhelm sewers or pollute rivers.
Walsh, who owns Terrene Ventures, says that about a decade ago he routinely built a retention pond that would occupy three lots at a new housing complex in the Seattle area at a cost of $1,000 per house. Now, he must build a concrete “vault” that takes up eight to 10 lots and costs $10,000 to $15,000 per house.
Zimbabwe says the facilities are needed because climate change has intensified the ferocity of storms, and the spread of developed land increases water runoff.
It takes Walsh about nine months to get local, state and federal approvals for a development, up from three months 15 years ago, he says. Walsh, who builds 30 to 50 homes a year, figures he could put up perhaps twice as many if the time and costs to apply for the government blessings had not mushroomed.
Russell Hokanson, head of Seattle King County Realtors, a trade group, cites other reasons for the region’s housing shortage, including its status as a technology hub and the third-best jobs engine in the country as of April.
But, he adds, “We are feeling the pinch now and all the regulations that slow down (efforts) to get product into the market” are a big factor. The area has the country’s fastest rising home prices. Houses get snapped up, staying on the market less than a month, on average, compared with a 4.2 month average nationwide.
Sammamish Mayor Don Gerend, says that since the early 2000s, the town has lowered the number of homes permitted on a parcel of land, and impact fees have risen to become the highest in the state.
“If we’re going to have more growth here, it shouldn’t be to the detriment of people who live here,” Gerend says. He says the town’s main roads aren’t equipped to handle a large increase in traffic. An area in town, he says, is zoned for denser housing, including townhouses, condos, and apartments, but not single-family homes.
Zimbabwe defended the added requirements across the country "There are dozens of valid public policy goals – environmental sustainability, economic inclusion protecting property values," for existing property owners," she said.
Faced with the higher costs, some builders simply abandon projects or put up pricier homes in order to maintain profit margins. A study of the Boston area in the Journal of Urban Economics concluded that each new rule reduces housing construction the following year by about 10%.
“There are a large number of ways to shut housing down, or to slow the process so that developers just give up,” says Edward Glaeser, a Harvard University economist and co-author of the study. Glaeser has said existing homeowners, the constituents of municipal officials, generally oppose new developments.
In many cases, builders respond by going ahead with a development but constructing more expensive houses, as Walsh is doing, says Robert Dietz, chief economist of the National Association of Home Builders.
Nationally, entry-level homes made up 9.9% of newly constructed houses from 2010 to 2015, down from 16.8% from 1997 to 2016, according to Trulia, a real estate research firm.
Trulia Chief Economist Ralph McLaughlin points out that other factors are likely at work as well. For example, large coastal cities have fewer available lots.
Some developers are undeterred. The ESG Companies has sought for nearly 30 years to put up 1,000 dwellings, including 500 starter houses, on a parcel in Chesapeake, VA. Although the state cleared the firm’s plan to preserve wetlands, the U.S. Army Corps of Engineers disagreed with the wetland delineation, rejected the company’s proposals to further mitigate the impact on wetlands and asked it to consider alternative properties.
After spending $20 million on surveys, tests and other expenses, ESG is still awaiting approval of a scaled-down version of the complex. “It’s very frustrating,” says ESG Vice President Michael Gelardi.
Meanwhile, the Finans have lowered their standards and would now be content to land a two-bedroom house within about 20 miles of the city. But with their new baby on the way, if they don’t close the deal by the end of July, “We’re going to start looking at renting,” James says.