How the government contributes to the low supply of starter homes

As featured in The Washington Post.

I hear a lot of criticism of millennials, with some implying they’re lazy and perhaps entitled. However, when I look critically at this group I don’t see much difference between them and my generation at the same point in life. My generation — Gen Xers — was criticized in almost the same way by the boomers, and you know the greatest generation was appalled at the prospects of this country being run by the baby-boom generation.

The fact is that millennials are staying at home with their parents longer or renting when they really want to buy. This group is lagging behind previous generations in achieving independence, but is this evidence that they’re lazy, entitled and unwilling to support themselves?

I have something of a unique perspective on this topic as a real estate investor, developer and real estate agent. Moving out of your parents’ home and especially buying a home of your own is kind of the benchmark for adulthood in this country. I’m acutely aware of the many housing challenges facing this generation.

The fact is there are fewer starter homes available today than in previous generations for several reasons.

Government policies and regulations are driving up the prices of housing. In fact, regulations imposed by government at all levels accounts for 24.3 percent of the final price of a new single-family home built for resale, according to the report “Government Regulation in the Price of a New Home” by Paul Emrath for the National Association of Home Builders.

Did you know that in 1950 the average land costs for a new single-family home was about 5 percent of the total cost of the project? Back then, the average home size was 983 square feet. These days the developed-lot costs account for nearly 40 percent of the total new home project budget. Now, according to the National Association of Home Builders, that number has more than doubled.

Decades ago, a developer would apply to build a subdivision. If the county approved the project, it would sell bonds to raise funds for streets and utilities. They would recoup that cost with all the additional taxpayers moving into the community to fill the new homes. But now counties and municipalities make the developer put in the streets and sewers and deed them to the government upon completion. The counties also have started charging impact fees for the increased demand for schools, police, etc.

The additional development costs drive up home prices. It also drives up the size of homes, which is directly counter to any regulatory attempts at making homes more environmentally friendly or “green.”  The most efficient home is a small home.

New construction drives the market, so if the cost of a new home goes up, then the cost of existing homes follow. If the costs of a project exceed the value a builder can get, then they don’t build. The lack of inventory works the same way. As demand outpaces supply, existing home prices go up until the price is high enough to encourage new development.

The problem is that the builder doesn’t really bear these costs. It’s the buyer moving into the area to start a career and a family who picks up the bill.

Builders want to build, and we know there is a huge demand for smaller homes at a lower price. I would absolutely love to build 1,600-square-foot starter homes in this area. I could sell those quickly and move on to the next project. However, there’s no way to make a project like that work with permit and impact fees and utility costs around $75,000 per home. That’s nearly half the cost of the build price on a 1,600-square-foot home. Many local governments are outright banning small home construction.

That’s why you see so many high-end housing developments — including $1 million condos — going up in our area. With so many costs associated with construction, it’s very difficult to make money building $500,000 condos.

We are looking at a housing crisis in the Washington area.

Where exactly is this next generation filling the $40,000 a year jobs with their freshly minted college degree supposed to live?

On top of that, a lot of communities, like Arlington, are implementing rules that discourage homeowners from renting out portions of their home. This seemingly is a barrier to people who would need the income from renting out a room to offset the exorbitant costs of their oversize home.

Local governments have an inherent interest in driving up home prices. They want a higher tax base. They much prefer a million-dollar home over a middle-class home, despite the rhetoric to the contrary. Recognizing this fact and addressing some of these issues would go a long way in helping many millennials sitting on the sidelines become homeowners.