Why ‘New’ Costs So Much

Robert Dietz, the National Association of Home Builder’s Chief Economist, in a speech to Anchorage’s real estate industry this month, predicted a mortgage rate hike to 4.1% in 2017 and 4.9% by 2018 compared to our current rate of 3.5% for conventional financing.

Dietz’s presentation also addressed the constraints on building growth as witnessed in Anchorage which continues to face historic lows for single family permits. He called them the ‘three L’s’. The first is a labor shortage for tradesmen which has had a long decline and currently has a labor force participation rate of only 63 percent due in part to the aging labor force for construction. Alaska’s median age in construction jobs is thirty-nine to forty and any homeowner looking for repairs can attest to a lack of trade people.

The second ‘L’ is a very low inventory of lots which continues to plague the housing industry on a national basis as well as locally. Lot size is declining while lot value is increasing. Nationally, the average single family lot size is 8,589. In comparison, the MOA zoned R1 single family lot size is 6,000 and there is continued discussion about a small lot ordinance which would lower that size due to our lack of available land for residential development.

Dietz’s third ‘L’ is lending—the lack of ‘AD&C’ access which stand for acquisition, development (of roads, water, sewer) and construction (vertical home building). Despite low interest rates and pent-up demand for housing, many lenders remember the trauma of the 2008 real estate recession and are hesitant to participate in AD&C lending which is considered the highest risk for timely performance.

Regulatory burdens are rising for home builders and have increased 29.8% over the last five years, as our local builders can testify with the enactment of the new title 21 and annual changes to the Design Criteria Manual. That increase includes building codes, environmental issues (SWPPP), wetland permitting, labor and zoning. NAHB research finds that 24% of the final cost of a new home is due to direct and indirect regulatory costs. Three fifths of that total is associated with land use. If a new home has an average cost of $400,000 that means almost $100,000 of that purchase price is due to over regulation. Of that $100,000, almost $60,000 is from the land development burden, including the cost of interest due to approval delays.

So, it is no wonder that our lots are getting smaller and more expensive as the disconnect between ‘new’ and ‘pre-owned’ continues to widen. Nationally, the gap between the new and existing homes since 2012 is now $72,100 compared to just $20,000 between 1990 and 2008. No wonder new home buyers are faced with sticker shock.