Housing affordability is a pressing concern for state and local policymakers as existing inventory is unable to fulfill historic demand for housing across Georgia. The purpose of this study is to determine one factor contributing to rising home prices: the cost of regulation to build a new single-family home.
This study, like its national counterpart, does not argue that all regulation is bad or should be eliminated. Some costs included in the study would have to be borne by taxpayers who derive no direct benefit, if they were not covered by builders or homeowners. Rather, the goal is to recognize the financial impact for builders when assessing current and proposed public policy. These costs are ultimately passed on to consumers, particularly in the entry-level market.
This study utilizes the methodology by the National Association of Home Builders (NAHB) in “Government Regulation in the Price of a New Home: 2021” to define the cost of regulation to build a new single-family home in Georgia. Two sets of questions were conducted statewide – one of home builders and one of lot developers – to estimate the aggregate cost of regulation and what it means for the price of a new home. Nine distinct regions across the state are represented in this survey and its findings.
On a percentage basis, the statewide estimates show that regulations imposed by government at all levels (federal, state, local) account for 26.9 percent of the final price of a new single-family home built in Georgia. Of this, 11.3 percent of the final house price is attributable to regulation during development of the lot with 15.6 percent due to regulation during construction of the single-family home.
Notably, the aggregate cost of regulation was slightly higher in Georgia than the national survey conducted earlier in 2021 by the NAHB. Nationwide, regulations accounted for 23.8 percent of the final price of a new single-family home built for sale, with 10.5 percent of the final house price attributable to regulation during development of the lot and the other 13.3 percent due to regulation during construction of the single-family structure.
The following sections provide perspective for the housing market in Georgia and describe the methodology and survey results in greater detail. In addition, the survey questions and a detailed list of assumptions used for the calculations are located at the end in a set of appendices. Citations are from the 2021 NAHB study on the cost of regulation unless otherwise indicated.
Introduction
Georgia once boasted one of the nation’s most affordable housing markets. That and other cost-of-living advantages have helped spur population growth of at least 10 percent in every census count since 1950. The state added more than 5.2 million new residents between 1980 and 2020, a 96 percent increase.
In recent years, however, housing affordability has been an increasing concern for state and local policymakers. The surge of new residents alone is not to blame. The number of building permits issued in Georgia, according to Census Bureau data, crashed during the Great Recession and has yet to fully recover despite continued, rapid population growth. As one illustration, the annual number each year from 1995 to 2007 was higher than in any year since then. Put another way, more building permits were issued during the last five years of the 1990s than during the entire decade from 2010 to 2019.
Georgia’s housing affordability problem is first and foremost a problem of too little supply.
Yet, too often, policymakers pay scant attention to the problem of supply and instead focus their energies on the demand side. This takes the form of policies such as rent controls and subsidies for buyers or renters. These policies can dampen the supply of new housing at affordable prices by dis-incentivizing builders. Even those policies ostensibly designed to boost the supply of affordable housing, such as inclusionary zoning, tend to push market prices higher overall because developers seek to recoup some of their forgone revenues from designated “affordable” units with higher revenues from other units.
One exception to this blind spot for policymakers was a 2019 Study Committee on Workforce Housing created by the Georgia House of Representatives. The committee’s report notes, in one pertinent part: “There are existing barriers to the development of attainable workforce housing in Georgia which can be organized by the ‘Four L’s’: LABOR, LAND, LUMBER, & LAWS.”
In setting out to tackle the issue of housing affordability, the Georgia Public Policy Foundation surveyed a number of stakeholders and policymakers in a variety of relevant industries over a period of several months during 2020-2021. The Foundation subsequently determined the greatest need concerned not only the question of supply, but more specifically the fourth of the “Four L’s”—Laws. Many stakeholders interviewed discussed the prevalence of costly regulations across numerous jurisdictions within Georgia, which has 159 counties and more than 500 incorporated municipalities.
Methodology
As noted previously by the NAHB, “a study of housing regulation that seeks to be reasonably comprehensive needs to collect information from builders and developers, as they are the most accurate source that have experience with a broad enough range of regulations to provide information about them.”
To capture the cost of regulation, the Georgia Public Policy Foundation sent the survey electronically to 986 members of the Home Builders Association of Georgia (HBAG) in October 2021. A total of 55 builders and 31 lot developers provided complete and usable responses. Respondents who completed the survey received gift cards for their participation.
To determine the cost during lot development, the Foundation surveyed HBAG members with experience developing single-family lots and selling them to builders. Most of these questions (Appendix II) asked for costs as a fraction of the final lot price. HBAG members with experience building single-family homes completed a survey in which most of the questions (Appendix III) asked for costs as a fraction of the builder’s construction costs.
The surveys ask builders and developers for information they can reasonably be expected to provide. The surveys don’t ask for a breakdown of costs attributable to different levels of government, as this is often difficult to impossible for a builder or developer to determine.
For example, building codes are adopted and enforced at the local level. However, some are adopted at the state level, and states may have varying rules for how much local jurisdictions are or are not allowed to modify the codes. Moreover, several federal agencies (including the Department of Energy, the Federal Emergency Management Agency and the Environmental Protection Agency) actively participate in the development of national model codes, which ultimately form the basis for the locally administered codes. DOE also has a budget to persuade state and local governments to adopt more stringent codes. It is reasonable to ask builders for the cost of moving to a different building code, but not to tease out the contributions different levels of government make to the final code.
Similarly, the surveys cannot capture the cost impacts of some categories of regulation. Although lumber prices affect the cost of new housing, and some federal policies (import duties, amount of timber harvested from federal lands, etc.) undoubtedly have an impact on lumber prices, builders are not expected to quantify the effect those policies.
To convert the average responses from builders and developers to costs as a share of final house prices, the survey results were combined with other information—such as independent construction cost estimates, terms on development and construction loans, how long it takes to build a home and profit margins—completely documented in Appendix I.
Regulation During Development
Table 1 shows estimates of regulation as a percentage of both the lot cost, and the final house price. The table shows the share of developers subject to the regulation, the average cost of the regulation when it exists, and the average cost of the regulation across all homes (i.e., with answers of “zero” included in the average).
Every developer who responded to the survey reported regulatory costs at the zoning approval stage. Regulatory costs imposed at this time can include fees paid directly to a government, as well as requirements for environmental impact, traffic, archeological or other studies. On average, these costs account for 5.2 percent of the price the builder pays for the lot, which translates to 1.3 percent of the final house price.
All developers in the survey also reported incurring regulatory costs after obtaining zoning but sometime later during the development process. This may include costs of complying with, for example, requirements to mitigate environmental impacts, as well as actual fees. Governments impose impact, utility hook-up, and other types of fees when site work begins. On average, these costs account for 13.2 percent of the builder’s lot cost, 3.3 percent of the final house price.
Also common (reported by 86.2 percent of developers) are requirements to dedicate land to the government (e.g., for a park) or otherwise leave a portion of it undeveloped. In these cases the developer must pay for the land but is not allowed to derive revenue from it, driving up costs on the lots that can be developed and sold. Averaged across all lots in the study (including those with zero costs for requirements to leave some land undeveloped), these requirements account for 12.9 percent of the price of the lot, and 3.2 percent of the final house price.
Local governments often require that new development conform to community design standards. These may include specific requirements for lot size and design, sidewalks, landscaping, etc. The survey specifically asks about standards that go beyond the ordinary. For example, in the absence of regulation, the developer is still likely to provide some landscaping. This study assumes a design standard imposes no cost unless it requires the developer to provide landscaping (or something else) that costs more than the developer’s ordinary practice.
A large share of developers (92.9 percent) reported being subject to design standards that go beyond what they would ordinarily do and add to their costs. Averaged across all lots in the study, these requirements account for 10.3 percent of price of the lot, and 2.6 percent of the final house price.
OSHA is responsible for labor safety standards. State or local governments may have safety standards as well. Safety of construction workers is important, and there is a broad level of support for a variety of safety rules. However, NAHB has criticized particular standards for attempting to regulate risks that don’t really exist in residential construction (e.g. beryllium), imposing costs significantly greater than needed to ensure worker safety (e.g. silica) or accomplishing little beyond driving up recordkeeping costs (e.g. Volks rule).
Although reported less often than other regulatory costs incurred during development, 64.0 percent of developers said that complying with OSHA or other labor standards added to their costs. Averaged across all lots in the study, these standards account for 2.3 percent of the price of a lot, and 0.6 percent of the final house price.
Even when regulation imposes no direct costs, it can have a financial impact if it delays the development process. If nothing else, if it takes longer to develop and sell a lot, interest on a development loan will typically accrue.
Every developer in the survey said complying with regulations typically caused a delay. Using the interest rate and other assumptions described in Appendix I, it was calculated that the “pure” cost of this delay (i.e., the cost of the delay even if regulation imposed no other costs) on average accounts for 1.5 percent of the price of a lot, and 0.4 percent of the final house price.
Every developer in the survey reported experiencing some type of regulatory cost. Added together, the development regulatory costs captured by the survey account for 45.2 percent of the price of a lot, and 11.3 percent of the final house price.
Regulation during Construction
Table 1 also shows the impacts of regulation imposed during construction, after a builder has acquired the lot from a developer. Most single-family builders responding to the survey questions (97.9 percent) reported paying fees during this phase of the project. These could be building permit or inspection fees, as well as additional impact or utility hook-up charges not covered by the developer. Across all homes in the survey, fees paid by the builder after acquiring the lot account for 3.7 percent of the builder’s construction costs, and 2.3 percent of the final house price.
The survey also asked builders about the cost implications of changes to building codes over the past 10 years. Most jurisdictions in Georgia have been adopting and enforcing building codes for decades, so the 10-year criterion in general captures changes to codes after they have already been updated and revised many times.
Most builders (97.9 percent) reported that changes to building codes over the past 10 years have added to their costs. Averaged across all homes, the cost increases associated with codes account for 11.2 percent of the builder’s construction costs, and 7.0 percent of the final house price—making this the most costly of the categories of regulation listed in Table 1.
In addition to traditional building codes, jurisdictions have increasingly sought to impose architectural design standards motivated by aesthetics, or possibly even, in some cases, a desire to price less affluent residents out of particular neighborhoods. Prohibition of vinyl siding has become relatively common, for example, but NAHB has also reviewed ordinances that mandate details like the orientation of a garage, material used in fences, window shutters, the square footage of window space, and dimensions of particular features down to a quarter of an inch.
Many builders (71.2 percent) report being subject to architectural design standards of this type that force them to spend more than the otherwise would on particular home features. Averaged across all homes in the survey sample, these standards account for 6.6 percent of the builder’s construction costs, and 4.1 percent of the final house price.
Like developers, builders can also experience costs of complying with labor regulations, as well as delays caused by regulatory requirements. A total of 80.0 percent of builders in the survey reported costs of complying with OSHA or other labor regulations. Averaged across all homes in the survey, these requirements account for 3.0 percent of construction costs, 1.9 percent of the final house price.
In addition, 94.4 percent of builders reported that regulation caused some delay in the construction process. Averaged across all homes in the sample, the “pure” cost of regulatory delays during construction account for 0.6 percent of construction cost, and 0.4 percent of the final house price.
All builders reported experiencing some type of regulatory cost during construction. Added together, the average of these costs across all homes in the sample account for 25.1 percent of the builder’s construction costs and 15.6 percent of the final house price.
Combined with results from the development phase of the project, total regulation captured in both surveys and attributable to all levels of government accounts for 26.9 percent of the final house price. Compared to NAHB’s national averages, a higher share of Georgia lot developers and builders reported incurring each type of regulatory cost listed in the survey, except for hard costs of compliance during development (where both are 100 percent) and land dedicated to the government (where Georgia is 7.8 percentage points lower). The differences are notably larger among Georgia home builders during construction for architectural design standards (13.7 percentage points higher) and OSHA/labor compliance (16.2 percentage points higher).
Conclusion
Although workforce shortages and the cost of building materials constitute the bulk of attention on the rising price of homes, this study demonstrates that government regulation is a significant factor in both the supply of housing and the affordability. As the NAHB has observed, home builders in Georgia are “subject to a wide array of regulatory costs, including various fees, standards, and other requirements imposed at different stages of the development and construction process that may be imposed by any combination of federal, state and local governments. The only way to construct a reasonably comprehensive picture of these costs is to collect information from the builders and developers who experience them.”
Notably, these regulatory costs contributed 26.9 percent of the price in a new single-family home, higher than the national average, and disproportionately impactful for consumers seeking entry-level housing. This suggests that local governments are imposing ordinances beyond the national standard, an implication worth further exploration. While regulations may be only “one L” as identified by the state (Laws), it is wise to consider their impact alongside those of Land, Lumber and Labor to ensure a robust housing market for all communities.
