Factors include rising costs, inefficiency, and complex entitlements
By PATRICK DUFFY
Although there are many reasons why building attainable housing in the United States remains so challenging, rising costs for land, materials, and labor and longer entitlement timelines are among the most vexing. Add to this mix a reluctance among both existing residents and politicians to approve of more density, and it is no wonder states like California have trouble keeping up with housing demand.
For example, when it comes to land, most developers and builders simply do not have much leverage despite their size. According to the American Enterprise Institute (AEI)’s Center on Housing Markets and Finance, between the beginning of 2000 and the middle of 2018, its own pricing index for residential land in the United States climbed by nearly 90 percent, or close to twice the rate of inflation for that same time period. In high-demand areas in coastal California, land prices rose from 170 to over 225 percent. With such high land costs, the only ways to profitably bring a product online is to increase units per acre, pursue subsidies for affordable housing, or focus on the limited luxury market.
Moreover, given continued housing demand, both materials and wages also continue to put pressure on new building projects. According to an annual report by the commercial real estate brokerage Jones Lang LaSalle, in 2018 construction materials costs rose by 4.0 percent, while wages for construction workers rose by 3.4 percent. With more job options available given today’s overall low unemployment figures, the national construction backlog was still at over nine months by the end of that year.
Unlike land, savvy builders can at least have some control over what they pay for materials and wages, even if it’s saving a few dollars here and there for each home. Part of this saving can be achieved by better matching what consumers are willing to pay for, and not upgrading standard specifications unless there’s a clear demand for it. For example, with climate change promising higher temperatures and stronger storms, investing in the most energy-efficient windows and doors, resilient roofing tiles, waterproof stucco or siding, and water-permeable concrete surfaces can appeal to all types of buyers no matter where the current kitchen and bath styles are trending.
Doing plenty of research is also crucial, both in terms of paying a fair price and not over-ordering materials for the jobs at hand. While it makes sense to build in a small materials overage such as drywall or roofing tiles for a custom home, doing the same per house for an entire subdivision simply leads to expensive waste and lower margins. In today’s competitive economy, being a savvy buyer – whether as a consumer or as a builder – means becoming equally expert for all materials and tasks and not simply taking someone’s word as the final answer.
From the vendor’s side, customers can become the ‘builder of choice’ and get better prices by being easy to work with. This usually means being well organized, standardizing plans, and insisting on ample and timely communication. In fact, I would even argue that effective communication is probably the most over-looked factor that is completely under each person’s control. No one wants to work with the poorly organized builder contact who doesn’t return phone calls when there’s a ninemonth backlog for labor.
Besides costs for land, materials, and labor, there are also those charges often hidden to end users, which are the complex array of regulations and fees imposed by cities and counties for new development. In housing-starved California, these fees can add up. According to a series on construction costs in 2015 by UC Berkeley’s Terner Center for Housing Innovation, average impact fees in the state were almost three times national averages. Moreover, there is often little transparency for fees, as cities can suddenly demand additional fees or requirements on top of those originally published, which can add significant costs in both total fees and carrying times.
Finally, local land use regulations — including minimum parking requirements or environmental regulations falling under the California Environmental Quality Act (CEQA) — can increase development costs even more. Even when developers dutifully follow regulations and fees, the permitting and entitlement process can extend project timelines in ways that are not predictable. In some cases, builders are walking away from otherwise profitable projects because the combination of fees and endless studies make them too bothersome to pursue. Without a renewed focus on common sense political solutions to the housing crisis, there’s only so much the building industry alone can do.
Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He may be reached at email@example.com or 310-666-8288.