There is finally much good news in the residential real estate market. The inventory of single family homes and condominiums in Massachusetts has dropped almost 10,000 units, or 29 percent in the past year. Single-family home sales were up 18 percent in 2012, and condominiums sales were up 25 percent. Pending home sales in January were up nearly 20 percent from the same period a year ago.
Likewise, building permits rose 35 percent in the commonwealth in 2012 after hitting bottom in 2011. New home sales were up 27.6 percent in the Northeast in January from the previous month, compared with 15.6 percent nationally.
Amidst all the good local and national news, why then would the National Association of Home Builders (NAHB) “Builder Confidence Index” decline in February? The answer to this question reveals the realities of building new housing, and how the issue of costs is magnified in New England.
The NAHB survey reported that more than 75 percent of builder respondents expect rising building materials prices to be a significant obstacle in 2013, up from 46 percent in 2012. The cost and availability of labor was of concern to 51 percent of respondents, and nearly half expect the costs and availability of developed lots to be problematic, up from 24 percent a year ago.
A monthly cost index published by Jackson Lumber Co. for framing materials illustrates the immediacy of the cost issue. As of January, costs for “economy specifications” for 2-by-6 wall studs, wall sheathing, siding, roof sheathing and roof shingles increased 31 percent from a year ago, and 59 percent from 2010.
Further exacerbating the problem is a smaller workforce of subcontractors and laborers. Every segment of the industry contracted dramatically during the recession. So, as permitting picks up, particularly in the apartment segment of the new construction market, labor shortages will become more prevalent, putting pressure on labor costs.
High Permitting Costs
In addition, Massachusetts is a high-cost state in terms of permitting housing.
Much has been written about home rule and the effect of local housing barriers on the cost of entitling land and building a home. The definitive work on this was published in 2005 by the Pioneer Institute for Public Policy Research, which catalogued the burden of local zoning, wetland and septic regulations in approximately one-half of the communities in the commonwealth. Economist Edward Glaeser, director of Harvard University’s Rappaport Institute for Greater Boston, utilized the data to project the increased housing costs attributable to this regulation.
Since that time, not only have local rules been unabated, but now costly state rules are further contributing to the cost of building housing. For instance, the Green Communities Act established a “Stretch Energy Code.” With these increased energy efficiency requirements, the state has given localities the discretion to add thousands of dollars to the cost of building a new home. Further, it is feared that the state will soon recommend revisions to the stretch code that will further ratchet up costs, and will reward communities imposing the new specifications.
These costs affect the ability of home builders to produce housing.
Consider, for example, a 2,000-square-foot dwelling on a spot lot on an existing street in a typical suburban community. The lot would be serviced by a private septic system and town water. The going sales price has been $430,000.
A few years back, builders could construct this home for about $90 per square foot, or $180,000. Now, however, increased costs have driven the price up to approximately $115 per square foot, translating into a total cost of $230,000. After deducting 5.5 percent selling costs, this leaves $174,200 on the table for the builder to purchase the lot and derive a profit.
Unfortunately, land owners charge $150,000 for a spot building lot in this typical community. Obviously, in this example, there are negligible profits at a lot price of $150,000, building costs of $115 per square foot, and financing and soft costs of $20,000 – this before fixed business overhead costs. Unless the land owner is willing to give up significantly on the lot price, the deal does not happen and the house is not built.
Is energy efficiency important? Absolutely. But is it so important that we do not build a house in the first place as it becomes uneconomical to do so? While home builders may be able to better absorb the cost of extreme stretch codes in larger, more expensive homes, Massachusetts needs to back off on costs for workforce housing less than 3,000 square feet.
The stretch code costs are an instance of the type of mandates and regulation that have imperiled our ability to build needed condominiums and single-family homes in Massachusetts. It is the proverbial “death by a thousand cuts.”
Once again the home building industry this year is facing an organized and rather silly campaign for mandatory fire sprinklers in single family homes which will needlessly add several thousands more dollars to the cost of building homes if approved.
At risk are not just the economic benefits of a healthy real estate market, but our ability to provide good, reasonably priced new homes for the young families we desperately need to keep and attract to remain competitive.
Mark H. Leff is a senior vice president for construction lending at Salem Five Bank and former president of the Home Builders Association ofMassachusetts.
