Zeitgeist – Sign of the Times
Development Costs Soar across the U.S. Stifling New Home Construction
A recent study conducted by leading real estate gurus John Burns Real Estate Consulting (“JBREC”) reveals that increased environmental regulations and rising development costs are making it increasingly difficult for developers to build affordable homes. The study surveyed more than 100 U.S. home building executives who gave specific examples of new home construction costs and delays that didn’t exist a decade ago. A few:
- Stormwater Pollution Prevention Plan compliance costs have skyrocketed and can now total $5,000+ per home.
- In at least seven markets surveyed, builders mentioned that fire sprinkler installation in both townhomes and single-family homes now adds between $5,000-$10,000 per home.
- In California, building and impact fees now exceed $120,000 per home in some Bay Area municipalities and builders have reported $4,000-$8,000 per house in additional City fees over the past decade, with studies underway to raise them to $20,000+ per house.
- Most planning and permitting offices are considerably understaffed, causing costly delays in the planning, permitting and inspection processes.
- Builders everywhere report much longer delays and escalating costs associated with hooking up utilities for their new communities.
- Energy code costs – a relatively new category – were reported as $2,500+ per home with several builders in various states reporting $8,000+ per home.
Data from this survey provides a frightening perspective behind the cost overruns and delays that are being experienced at new home projects across the U.S. Additionally, these findings imply that the ever-growing demand for affordable, entry-level housing will need to be met by the resale market or won’t be met at all.
Love the One You’re With
Home Improvement Spending Hits Record Levels
In a recent forecast from the Harvard Joint Center for Housing Studies and real estate consultants John Burns Real Estate Consulting (JBREC), spending on home repairs and remodeling is expected to exceed $300 billion in 2016, surpassing the record of $285 billion set in 2007 during the housing boom.
An unusual housing recovery characterized by extremely low for-sale inventory (often leading to price appreciation and bidding wars) is the biggest factor driving this trend, as the number of for-sale listings as a percentage of occupied households in the U.S. has hit a record low this year. Other factors include a more arduous home buying process – in terms of loan approvals, credit checks and other formalities – and the fact that U.S. homes are simply getting older. According to census data analyzed by JBREC, homes built more than 30 years ago currently make up 65% of the nation’s housing stock, a significant uptick from 47% in 1995.
JBREC predicts that this trend will continue and spending on home repairs and remodeling will grow faster than new residential construction through 2019.
(Editor’s Note: Home improvement retailers Home Depot (NYSE: HDT) and Lowe’s (NYSE: LOW) are benefitting tremendously. The companies’ stock prices are up 11% to 15% in the past year and more than 300%over the past five years. Also, increased environmental regulations and rising development costs likely contribute to the increased home remodeling activity. If fewer new homes are being built, you may have to just “love the one you’re with.”)
Homeownership Rates Dip but Household Formations on the Rise
Recent data released by the Census Bureau revealed that the homeownership rate in the U.S. has fallen to 62.9%, the lowest figure since 1965. The Wall Street Journal described this dip as “a reflection of the lingering effects of the housing bust, financial hurdles to buying and shifting demographics across the country”.
However, an overall growth in household formation suggests that more Americans are moving out of mom and dad’s house and moving into rental housing. Since the beginning of the 2008 recession, this ever-growing pool of renters has driven a steady increase in household formation in the U.S. In just the last year, renter-occupied housing units increased by a robust 967,000 (~2.2%). A chief economist at Trulia commented, “Household formation numbers suggest that if the decline [in ownership] is real, it is more likely due to a large increase in the number of renter households than any real decline in the number of homeowner households.”
A growth in household formation suggests that more Americans have the confidence to strike out on their own, buy furniture and start families. At some point, many of these renters may want to become buyers, further exacerbating the shortage of affordable entry-level housing.