Why New Homes Are So Darn Expensive

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One of our team members, Jody Kahn, wrote the following analysis, supplemented by a great infographic done by our own Richard Mones.  Both help explain just how challenging it is to build homes these days, and why new homes have become so expensive.  I thought this was worth sharing with a broader audience.

New regulations to protect the environment and to shore up local city finances have made it extremely difficult for home builders to build affordable homes. Now, more than ever, the demand for affordable entry-level housing will need to be met by the resale market, since new homes have become permanently more expensive to build thanks to a whole host of new regulations and costs designed to make less of an impact on the environment and to shore up local city finances.

After hearing many stories of cost increases that were far more than just materials and labor, we formally surveyed more than 100 home building executives across the country for specific examples of new home construction costs that did not exist 10 years ago. We were overwhelmed by the reply as well as the builders’ level of frustration, since most builders would prefer to price their homes (without sacrificing profit) so more people can afford them.  Many of our private equity clients who work with builders all over the country tell us that every project has experienced unexpected cost overruns! Below are some great examples from our survey.

National Issues (mentioned over and over)

• $5,000+ per house erosion control costs. Stormwater Pollution Prevention Plan (SWPPP) compliance costs, even in areas that rarely get rain, can now total $5,000+ per home plus fines for noncompliance. Many builders hire newly formed companies to plan, sandbag, sweep, monitor, photograph, and clean up the entire development every day, regardless of the weather forecast.

• $2,500+ energy code costs. Several builders in Florida, Illinois, Minnesota, Pennsylvania, and California cited $8,000 or more per house in new energy code costs.
• $750+ mortgage documentation and closing costs. While we expect the cost to comply with new mortgage documentation requirements to exceed $750 per home, one builder noted that the new TRID mortgage compliance rules alone have added at least that much.

• $5,000+ fire sprinkler costs. In at least 7 markets that we could identify, builders mentioned new requirements to install sprinklers in townhomes, as well as in single-family homes, at a cost of $5,000–$10,000 per home.  

• Understaffed jurisdiction offices. Many planning and permit offices continue to operate with reduced staffing from the bottom of the housing correction, causing costly delays in plan approvals, building permits, and inspections.

• Utility company delays. Builders across the country complain of much longer than usual delays and rising costs associated with connecting electric, gas, phone, and cable services to new communities.

Builders identified many local issues as well, summarized below by region. We intentionally omitted city names for fear of city retaliation against our survey participants.

Florida

• $5,000+ per house in additional school fees in one city

• $5,000+ per house to raise homes 1 foot above flood elevations per new new FEMA maps

• $5,000+ per house in infrastructure improvements that benefit other areas of the city away from the project.

• $7,000 per house increase in fees, including utility hookups

• $2,000 per house in new “beautification” landscaping requirements

Southeast

• Georgia: $7,500–$15,000 per lot for tree ordinances requiring 80% shade coverage, which many homeowners dislike because it prevents the grass from growing well

• Georgia: 100% cost increase for larger detention ponds and a 50% cost increase for thicker paving in subdivision streets

• North Carolina: $2,500+ per house in additional inspection and other fees

• North Carolina: New warranty exposure of $500 per house because low-e glass reflection can melt vinyl. While no longer required, builders continue to install low-e windows to achieve the required energy score.
• South Carolina: Additional $400 per standard lot for installing barriers to protect curbs and roads from expanding tree roots

• Tennessee: Additional $1,600–$2,500 per lot for traffic impact fees

• Tennessee: A new requirement in one city costs $1,500 per lot to raise the finished floor of a home 16" above the compacted lot, requiring steps and sometimes handrails at the entries.

 Northeast

• Maryland: $17,000 per house for a higher quality septic system and $10,000 more per house in additional wells than what was previously required

• Maryland: The state is transitioning to underground storm water retention ponds, which are expensive to build and costly to maintain.

• Massachusetts: The electric company can now take one year to supply power to a new site from the time the builder submits the design review plan and deposit, with no interim status updates.

• Pennsylvania: Additional $3,000 cost per lot to run telephone lines

• Virginia: Additional $10,000 per house in new proffer or impact fees

 Midwest

• Minnesota: Up to $20,000 per house in new development fees

• Minnesota: New requirement to pay $6,500 per home for park fees, regardless of size or price of home

• Missouri: $15,000, so the U.S. Forest Service can study an endangered bat

• Ohio: $1,200 per house for additional utility trenching to separate water and sewer lines

• Ohio: Expensive firewall treatments for walls within five feet of the house, impacting zero lot line communities

Texas

• $5,000–$25,000 per lot for ordinances involving tree clearing areas, additional storm water retention and rain gardens, and limitations on lot coverage—all of which have reduced buildable area

• One subdivision collected $2,500 in surface drainage fees, and water and sewer tap fees rose to $2,000 in another subdivision

• $1,500 per house for engineered wind shear/framing plans

• In some areas, the power company charges $1,800 per home to run power lines.
• A bird habitat study in one market caused a 7-month delay.

• Suburban cities are revising comprehensive plans to increase lot sizes and reduce density, precluding more affordable housing.

• One city requires builders to video record the sewer lines prior to receiving the Certificate of Occupancy, causing a one-week delay with added costs.

• Cities are budgeting the dollars they will receive through failed inspections and reinspection fees, and appear to not be passing homes for any reason on the first inspection. In one municipality, the costs are 10–15% higher than other cities.

• Cities are requiring that builders meet ADA visitability codes that add substantial costs.

 Southwest

• Arizona: Cities have increased permit fees and will not approve smaller housing designs.

• Colorado: Required studies on potential cultural finds (i.e., Native American artifacts) have significantly delayed many projects with minimal cultural benefits.

• Colorado: Builders will be required to meet Fugitive Dust Control Plan requirements to manage dust disturbed during development.

• Nevada: $3,000 more per lot in new fees to Nevada Energy

• Nevada: $500 per lot in additional land engineering costs

• Utah: Constantly changing architectural standards, varying by jurisdiction or within a jurisdiction, require new plans/spec levels for communities.

• Utah: One city has increased their minimum lot sizes, one to 15,000 square feet and another to a half acre, increasing the land cost per house.

 California

• Building and impact fees now exceed $120,000 per home in some Bay Area municipalities.

• $6,000+ per house in new greenhouse-gas fees and other green requirements

• $1,000–$3,000 per house for drought tolerant landscaping

• $5,000 for on-lot water retention requirements in certain cities.

• $4,000–$8,000 per house in additional city fees over the last 10 years, with studies underway to raise them $20,000+ per house

• Costs have increased due to the installation of reclaimed water lines, even if reclaimed water is not available.

 Northwest

• Oregon: Additional $20,000–$50,000 per house in development charges to fund infrastructure upgrades for water, sewer, traffic, and parks

• Oregon: A growing number of jurisdictions are requiring on-site storm or water retention facilities for each house.

• Washington: One city imposed a new design-review process on a large, new home project in a core market, resulting in a 24-month delay.

• Washington: A city required substantial additional masonry to a building’s exterior after the project was approved, costing several thousand dollars per house.

While virtually all of these costs appear to come with positive consequences for the environment, neighborhoods, or city finances, they also make it quite difficult for builders to build entry-level homes and, consequently, for the home construction market to recover to normal volume levels. Rising construction costs push new home prices higher and out of the reach of many prospective buyers. Increasingly, home builders have been forced to serve only the more affluent home buyers.  A few have been successful building simple homes in areas with few restrictions, but those builders are the exception rather than the rule these days.