• Commentary

The Price of Compliance

Housing affordability is rapidly becoming an issue with statewide implications. While metro Atlanta was recently named one of the most overpriced housing markets in America, the lack of available housing is a concern for community leaders throughout Georgia, urban or rural, with buyers facing particular shortages in the entry-level market.

A new study by the Georgia Public Policy Foundation and National Association of Home Builders (NAHB) examines one aspect that contributes to the rising cost of housing: how government regulation contributes to the price of a new single-family home. In Georgia, this regulatory cost accounts for 26.9% of the final price, over 3 percentage points higher than the national average.

What does that number mean to a potential homebuyer today? If the price of a new single-family home is $350,000, then $94,150 of that price can be attributed to the cost of regulation. 

The study compares regulatory costs in both the lot-development and construction phases of building single-family homes, using the same methodology as a national survey conducted by the NAHB. Every developer and home builder surveyed in Georgia reported some level of cost associated with complying with these regulations. 

The survey data showed that regulatory costs during the lot-development phase account for 11.3% of the final house price. Regulatory costs during the construction phase averaged 15.6% of the final house price. The combined cost of regulation through those two phases adds up to 26.9% of the final price of a newly built single-family home.

What kind of regulations make up that number? Using that same $350,000 home as an example, let’s examine some of the costs that contribute to the final price. 

First, let’s walk through developing the lot of this $350,000 home. On average, developers can expect to spend an initial $4,550 applying for local zoning approval. 

After that initial cost come the “hard costs of compliance” for expenditures such as required studies, utility hook-ups and local impact fees; for the home in our example, developers can expect to spend $11,550 for these requirements.

Local governments often require that new developments adhere to community design standards. These are often specific requirements such as lot size and design and account for $9,100 in this example.

 Developers face another significant cost in requirements to dedicate land for public uses, such as regulations that require that they leave portions of purchased land undeveloped. While public greenspace may be laudable, it is worth noting that developers typically pass along to customers the cost for land they were unable to develop. On average, these charges account for $11,200 during development.

Other minor costs accrued during development include compliance with labor regulations ($2,100) and the pure cost of delay ($1,400) to account for this regulatory compliance.

The total cost of regulation for just developing the lot of a $350,000 home: $39,550.

When it comes to building this $350,000 home, the first expenditure for most builders is another round of fees, which cost $8,050. These are often building permits or inspection fees, or additional impact fees or utility hook-up charges not covered by the developer. 

Compliance with changes in building codes represented the most expensive regulation for builders, adding $24,500 to the final price of this home. Since most jurisdictions in Georgia have been adopting and enforcing building codes for decades, survey respondents were asked to quantify the cost of these changes over a 10-year period, after they have already been updated and revised many times. 

The second most expensive cost for builders is an issue the Foundation has previously highlighted: compliance with substantial architectural design standards. These ordinances account for $14,350 in the final price of our hypothetical new home. Many city and county governments have increasingly sought to impose architectural design standards motivated by aesthetics that tend to price out less affluent residents.

The cost of labor compliance for builders is $6,650, while the pure cost of delay for building compliance is $1,400, the same as it is for lot development. 

The total cost of regulation for building the home in our example is $54,600. Combined with the $39,550 cost of regulation during development, the total cost attributable to government regulation is $94,150. 

It is worth noting that the study does not argue that all regulations are bad or should be eliminated. Rather, it is intended to highlight the financial impact for builders and developers that is often passed on to buyers, which is vital when evaluating current and proposed public policy. 

Of course, regulatory costs are just one of several factors contributing to the lack of housing in the current market, which include record increases in lumber prices, and widespread shortages of materials and labor. However, given the regulatory costs highlighted in this study represent over a quarter of the final price in a new home, they are worth significant consideration by state and local policymakers when addressing housing affordability.