Compliance and Fees are 24 Percent of New Home Prices

Compliance and Fees are 24 Percent of New Home Prices10/18/2024CommentaryAffordable housing has been a central focus in the campaigns of both Democratic and Republican presidential candidates . Each candidate is proposing strategies to address the rising cost of housing that has blazed through our nation.The dramatic rise in the cost of housing has been demonstrated by the Federal Reserve Bank, tracking the monthly average costs of goods across the United States. The " Consumer Price Index for All Urban Consumers (CPI-U): Shelter " measures the cost of renting or the equivalent rent that would be paid for owner-occupied housing. In contrast, the CPI-U for "All Items Less Shelter" reflects the average cost of all goods and services excluding shelter in U.S. cities. Since November 1982, shelter costs have surged by 311.79 percent, while the prices of all other goods have risen by 189.77 percent.Both major party presidential candidates have overlooked a significant factor contributing to this disparity: government intervention . Among the higher costs from government meddling, impact fees have not been adequately addressed. Impact fees are one-time charges imposed by local governments on new or proposed development projects. These fees are intended to help cover the costs of providing services to the new developments, such as infrastructure improvements for roads, utilities, and the education system. While these fees can be a source of revenue for local governments, they create a scenario where the government effectively double dips. Residents are charged for infrastructure improvements twice: first through impact fees and again through property taxes.

This combined financial strain can be daunting for low-income earners, who already find it challenging to manage the escalating costs of home ownership or renting, let alone the rising taxes and fees.

The purpose of impact fees is to ensure that existing residents are not burdened by the costs of new development. For example, if a 1,000-unit apartment complex is built in a city, the increased demand on roads, schools, and other utilities will require improvements and expansions to the infrastructure in order to handle the influx of residents. Impact fees help fund these necessary upgrades. Developers are charged these fees to support the local government's efforts to accommodate the new growth.

Naturally, developers will pass the cost of impact fees onto prospective homebuyers by distributing the cost into the sale price of each new build. Consequently, the new buyers bear the cost of infrastructure fees. While this may not initially be a problem, the issue arises when property taxes are charged for the same purpose—funding schools, roads, sanitation, and other infrastructure projects—by the local government.The escalating financial burden on new homeowners , especially those with low-incomes, is a growing concern. The surge in home prices has led to a drastic increase in rental costs and a rise in homelessness. According to the Pew Research Center , homelessness has soared where rent prices have increased.

Housing costs pose a significant challenge for most Americans, and especially for those living paycheck-to-paycheck who aspire to own a home and achieve the American Dream.

The major parties' presidential candidates have attempted to address the affordable housing crisis, proposing very different solutions. Vice President Harris has put forth a plan to offer a $25,000 tax credit to eligible first-time homebuyers, while former President Trump has suggested lowering interest rates to reduce mortgage costs. Neither candidate has acknowledged government intervention as a critical compounder of the affordability crisis. Impact fees are just one example of the significant regulatory costs in real estate, pushing housing out of reach of the poor.According to the National Association of Home Builders, government regulations add $93,870 —or 23.8 percent—to the average cost of a home. Even more concerning is the comparison between the regulatory costs in real estate and those in other sectors. A January 2024 report from the CATO Institute found that the average U.S.-based firm, depending on size and industry, spends between 1.3 percent and 3.3 percent of its total wage bill on regulatory compliance. All told, federal government-imposed compliance costs account for 12 percent of the nation's GDP . This excessive regulatory burden impacts the real estate market by further increasing the costs of development, which developers often pass on to consumers through higher home prices or rent. These additional expenses—stemming from permitting fees, compliance costs, and bureaucratic delays—are ultimately reflected in the final sale or lease price, further inflating housing costs.Harris and Trump have missed a crucial opportunity to address the root cause of the housing affordability crisis, including how infrastructure around new developments is funded. The recent Sheetz v. County of El Dorado case illustrates how impact fees, imposed on developers, further inflate housing prices by passing these costs onto buyers. In April 2024, the United States Supreme Court ruled that the $23,000 impact fee was unconstitutional and was not proportional to the development's impact. Moreover, a University of California Berkeley study (PDF) found that 6 to 18 percent of housing prices in California are directly attributable to impact fees. Despite their substantial influence, these fees remain largely ignored by presidential candidates, who instead focus on interest rates and government subsidies, missing a key driver of the affordability crisis.

Policymakers have two options to rectify this issue. The first is to continue relying on impact fees but follow a "user fee" model, where the costs are borne directly by individuals rather than distributed across the broader local population. Similar to toll roads, this system would impose fees solely on those who use the infrastructure.

The second option is to eliminate impact fees, recognizing the overall benefits of new housing to the community. In this case, the cost of improving infrastructure to accommodate new development would be borne by citizens solely through property taxes.

Hidden, double-dipping charges make homeownership even more expensive. Reforming impact fees, among other strategies to relieve the current regulatory burden, would lower costs and likely increase homeownership at the margins.

From the American Institute for Economic Research (AIER)Views expressed in this are opinions of the author and do not necessarily reflect the views of The Epoch Times.