Inventories are down. We don’t have enough homes to sell. Supply shortages are putting upward pressure on prices. I hear this all the time from REALTORS® across Wisconsin and across the country. And it’s not just anecdotal, it’s empirical. In Wisconsin, the supply of housing was down 22.2 percent in December, with just 4.9 months of supply compared to 6.3 months in December 2015. In January this year, the supply of homes on the market dropped to just 4.3 months. And it’s worse in urban markets with just 3.2 months of supply in Wisconsin’s 26 metropolitan counties. Six months of inventory is considered balanced.
At a recent Marquette University housing summit co-sponsored by the WRA, nearly all the presenters — economists, brokers, lenders and academics — spoke to the issue of housing supply. Dr. Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said the lack of new construction — which is part of the supply problem — was caused by the “three Ls”: labor, lending and lots, and the lack thereof. The dearth of skilled labor in the recession/post-recession period has certainly hurt, as have tighter lending standards resulting from overly prescriptive federal regulations on banks. Distressed properties have thankfully ebbed but that removed another source of homes on the market, and new listings were down 18.3 percent in December 2016 to 3,520 homes compared to December 2015, which had 4,307 homes.
New listings were down 6 percent for the year 2016 with 108,605 homes compared to all of 2015, which had 115,532 homes.
But there is another culprit as to why new construction is lagging demand, and it was referred to time and time again, not just with the experts at the Marquette summit, but by many others including both the Obama and the Trump administrations, and that culprit is the cost of government regulations.
According to a special study by the NAHB, government regulations at all levels account for 24.3 percent of the final price of a new single-family home. Most of this — about 14.6 percent of the total cost — is due to the higher price of a finished lot from regulations imposed during the construction process. The other 9.5 percent of the house price results from costs incurred by the builder after purchasing the finished lot.
President Donald Trump acknowledged these numbers when speaking at an NAHB gathering during his presidential campaign. He vowed then to cut unnecessary regulations as a means to increase home construction and housing availability and affordability. But it’s not just builders, Republicans and Trump who feel overregulation dampens new home construction. Late in his administration, President Barack Obama released a White House study linking local regulations as barriers to housing development that in turn have precluded many housing markets from responding to growing demand. The study said while some of these laws were intended to protect the environment, they were also designed to exclude multifamily and affordable housing. Other barriers identified in the White House study included restrictive land use zoning, off-street parking requirements, arbitrary or antiquated preservation regulations, residential conversion restrictions and unnecessarily slow permitting processes.
The NAHB study identified the various forms of regulations and the various levels of government that impose them. Local regulations include permit, hook-up and development impact fees, and impose construction standards that directly increase costs or cause costly delays, all of which increase prices and decreases affordability. State governments pile on many statewide building codes and statutes that authorize a multitude of local government fees. The Feds also play a role with requirements like mandatory storm water discharge permits, adding high fees and many times also causing protracted delays.
Congressional Republicans, who control both the House and the Senate, have said deregulation is a priority. The House has already passed the REINS Act that requires Congress to take an up-or-down vote on any major regulation that would have an annual economic impact of $100 million or more. And President Trump has signed an executive order that seeks to curtail rule-making actions by requiring agencies to eliminate two existing federal regulations for every new regulation they adopt.
“Less is more” is a phrase commonly associated with the world of architecture, connoting simplicity and clarity with good design. It actually originated in the 1850s from the arts, notably poetry and painting. But over the next several years, it appears this approach will now be applied to the world of economics, and in particular, real estate economics. In the case of housing supply, less is definitely not more. Less is less. But in the case of government mandates, will less regulation equate to more housing? It appears the federal government is willing to try and will invite state and local governments to join them. Stay tuned.