This March The National Association of Home Builders (NAHB) announced Dr. Robert (Rob) Dietz as their new Chief Economist. Dr. Dietz is responsible for NAHB’s forecasts of housing and economic trends, survey research and analysis of the home building industry and consumer preferences as well as microeconomic analysis of government policies that affect housing.
Buzz: Thank you for taking the time to answer some questions for our readers. Before we discuss the state of the home building industry, could you tell our readers a little bit about yourself? I understand you earned your Ph.D from Ohio State University.
Dietz: Thanks for inviting me to speak with you. Yes, I completed a Ph.D. program in Economics at the Ohio State University in 2003. My areas of research were housing economics and tax policy. After graduate school, I spent several years on the staff of the Joint Committee on Taxation, scoring tax legislation for Congress (estimating revenue losses and gains for the federal budget of various proposals). My areas of responsibility were housing, community development and small business proposals. After the stint on the Hill, I joined the Economics and Housing Policy staff of NAHB, working under Chief Economists Dave Seiders and Dave Crowe.
Buzz: The Dodd-Frank Act and the resulting regulations have had a huge impact on the overall economic recovery. What are the regulatory burdens that are impacting homebuilders the most?
Dietz: Many. Besides financial regulatory concerns affecting lending, there are a large number of issues affecting both land development and home construction/remodeling. For example, at the local level, jurisdictions charge permit, hook-up and impact fees. Development and construction standards, such as code and design requirements, increase costs. Inclusionary zoning (requirements to provide below-market rate housing) and exclusionary zoning (such as minimum lot size requirements) also increase cost and reduce supply. Moreover, there is just the general issue of red-tape related delays, and delays increase cost, for example, by increasing interest expenses associated with builder loans.
In terms of regulatory burdens that are the most costly, that list would include stormwater and wetlands permitting and compliance, Endangered Species Act consultation and mitigation, OSHA/safety compliance, and required energy-efficiency upgrades. For instance, the redefinition of the Waters of the United States, issues by the EPA and the U.S. Army Corps of Engineers, expands the definition of affected areas, thus requiring more builders and developers to obtain costly federal permits under the Clean Water Act. These costs must be passed along to the market, raising housing costs and reducing supply.
There are also a number of new or pending labor regulations that would also affect the building market, including the newly finalized overtime wage threshold, which affects more than 97,000 construction supervisors nationwide.
Buzz: I think we all appreciate the impact and stimulus new construction provides to the broader economy. What are some of the economic consequences of these regulatory burdens?
Dietz: Home building does provide an economic boost, with every 100 single-family homes built sustaining approximately 297 jobs, every 100 multifamily apartments yielding 113 jobs, and every $100,000 in remodeling expenditures supporting 89 jobs.
Rising regulatory costs act like a tax housing development. And given rising rent burdens and flat existing home inventories, additional housing supply, particularly in the single-family market, is just what the market needs to ensure housing affordability does not deteriorate.
The total cost of these rules is significant and rising. NAHB Economics surveyed the industry and the results indicate that on average regulatory costs added together, including delay effects, make up 24.3% of the price of a typical new single-family home. And about three-fifths of that total is due to costs incurred during the land development process.
Moreover, comparing these estimates to a similar survey completed in 2011, the cost of these regulatory rules has increased almost 30% over the last five years. The increase in costs prices out home buyers from the market, and has clearly resulted in a shift in the new construction market to larger, more expensive homes. This has reduced the ability of home builders to provide supply to those parts of the market where inventory is tight.
Buzz: Last fall, The National Association of Realtors® (NAR) released a study that new home construction is trailing job growth in a majority of metro areas. NAR was concerned that the lagging new construction would contribute to stronger price appreciation and erode affordability. What is NAHB’s perspective on this study?
Dietz: Single-family new home construction is recovering from the Great Recession, but slowly and modestly. For example, currently we estimate that single-family housing starts are running at a pace equal to about 60% of baseline levels (roughly equal to the average rate of construction during 2000 to 2003). While we forecast more growth occurring in the coming years, we expect that single-family housing starts will reach just 76% of baseline levels of production by the end of 2017.
The question is why, given strong demand and favorable demographics. The answer is that there are limits to how fast the home building industry can grow. These limits include rising regulatory costs detailed above, as well as what I have called the 3 L’s: lots, labor and lending (AD&C loans). More builders are reporting low or very building lot supplies than at any time in the last two decades. The overall construction sector has been dealing with tight access to workers over the past few years, with the current rate of unfilled construction sector jobs at 2006 levels (but not at 2006 levels of production). And while the stock of builder loans (AD&C loans) is growing (nearly 18% year-over-year as of the start of 2016), a lending gap for builders persists that requires non-traditional sources of financing.
Taken together, these supply-side headwinds form economic constraints on how fast building can expand, even with positive demand-side market conditions.
Buzz: There has been a lot of buzz in recent years about how the millennial generation will impact where we live and the types of homes homebuilders will need to build. What is your research showing you and how is it impacting your members?
Dietz: First, our research shows that the millennials are not much different than Generation X and the Baby Boomers. They mostly want to own single-family homes in the suburbs. Now, they are going to enter the for-sale market later in life (just as they are going to school longer and get married and have children later). So it will take some time, but the demographics are extremely favorable for home building over the next five to ten years.
That said, there are some housing preferences that are different, and builders should be prepared for a changing marketplace. For example, it does appear that younger, prospective home buyers are more sensitive to commuting costs. For this reason, we believe demand is growing for medium density, walkable neighborhoods. And while the entry-level market is currently weak in terms of new construction, townhouse construction is growing strongly, up almost 30% on a year-over-year basis at the start of 2016. This is a sign that medium-density, but single-family and mostly owner-occupied housing, is a rising trend.
Buzz: While the millennial’s have captured a lot of attention we can’t forget the baby boomers that are rapidly heading towards retirement. How will the 55+ markets be impacted?
Dietz: The demographics again are favorable for building for senior housing. There are more than 48 million households headed by an individual 55 or older, 42% of all households. In fact, every state in the U.S. has at least one-third of its households headed by someone 55 or older. Consequently, builder confidence for this market is high. The NAHB 55+ Housing Market Index, a quarterly market confidence measure of new construction, has been in positive territory (indicating expansion) for most of the last two years. Moreover, with aging-in-place and energy efficient remodeling on the rise, these trends will provide a boost to the home improvement sector.
Buzz: NAHB has been supportive of the appraisal industry for many years including co-developing an CE approved new construction course with our sister organization AllterraOnline. Is there anything else you would like to touch on with the appraiser community?
Dietz: NAHB continues to work with the appraisal industry to improve the valuation process, particularly for new construction. Using appropriate information to analyze the value of new homes is critical, particularly due to rising costs of construction noted above. Communication between builders and appraisers during the appraisal process can help improve the flow of information In addition, NAHB is working with federal regulators to improve the Reconsideration of Value process that would allow builders to provide information, such as additional comps, to the appraiser to facilitate a more thorough analysis.
Buzz: Thank you again for taking the time to talk with us today. We appreciate the information you have to share and we wish you the best in your new position!
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