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A Brief Look into Housing Affordability and Challenges Facing Residential Builders in Texas

David Glenn and I have known each other for a while now, first as colleagues at the Texas Capitol and quickly growing into friends thereafter. David is the type of person that is easy to be friends with - he's very personable, quick to laugh, and he genuinely cares about the people around him and wants to see them succeed. He's also quite smart, and in his new role at the Home Builders Association of Greater Austin he's entered a new phase to his career that I can't wait to see develop. I expect great things out of David, and below you'll see why. Cheers -AC


A Brief Look into Housing Affordability and Challenges Facing Residential Builders in Texas

by David Glenn The cost of regulations and the effect on housing

It’s a conversation that’s happening all over the country, and in many high growth areas in Texas—why is housing so expensive?

The housing market is endlessly complicated and impacted by a wide range of factors, like labor shortages, trade wars, cost of materials, and market forces. Many of these factors are difficult to control, but this column will focus on one contributor to the price of a home that is well within a city’s control—rules and regulations.

It is important to note that this column is not advocating for the deregulation of residential construction for the sake of keeping costs low. Seatbelts and air bags undoubtedly add to the overall cost of manufacturing a car, but I think we can all agree that they have saved lives and the additional cost is justified by the benefit. However, home builders often encounter subjective regulations that add to the cost of construction with very little evidence of benefit to the home buyer.

These well-intentioned regulations can slowly erode affordability in a city in a “death by 1,000 cuts” type situation.

The National Association of Homebuilders (NAHB) took a look at the impact of regulation on the cost of a home and found that approximately 25% of the price of a home is attributed to regulations. In central Texas, that can be approximately $50,000 to $100,000 in the price of a home. From 2011 to 2016, the cost of regulation has increased 29.8% while the disposable income per capita in the U.S. only increased 14.4%, indicating that the cost of regulation has increased at nearly twice the rate as a customer’s ability to pay for it.

There are many challenges facing the home building industry, but if I had to sum it up succinctly into one word, it would be “affordability.” In 2013, homes selling for $200,000 or less made up 40% of the home closings in the Austin area. Today, that number is approximately 11% of closings. This drop off indicates that there is an entire segment of the population who is now unable to afford a home.

Impact of regulations in real dollars

One question that I often hear from lawmakers across central Texas is, “how does the price of a home affect families in real dollars?” Each year, the NAHB looks at metropolitan statistical areas (MSAs) across the country, comparing the median home price with the median family income. In simpler terms, they analyze the cost of a home and a potential home buyer’s ability to pay for it. This analysis gives us the “priced out index,” which is the number of families that are priced out of the market for every $1,000 increase in cost to a home. For the Austin MSA, the study indicated that for every $1,000 increase in thecost of a home, 1,090 families can no longer afford to move to the area, making Austin one of the worst offenders in the country.

This index is an important tool to educate policy makers on the real-world impact of a city’s regulations on affordability. For one real world example, a city in the region decided that it was going to increase the amount of mulch required to protect the base of a tree from 4” to 8”. This change came without stakeholder input and without data to support the need for the change. If the cost to add an additional 4” of mulch to the site increased the overall cost of the home by $200, the city has now priced out roughly 200 families.

Consistency and predictability

It’s easy to imagine how regulating the size of a house or the materials that can be used during construction might impact the cost of a home. However, perhaps an even more significant driver to the cost of building is consistency and predictability. In a regulatory environment that is constantly changing, it can be difficult to keep up with a city’s ordinances week to week, day to day. This challenge is amplified if a builder builds in more than one community. Unlike the Texas legislature, which meets once every two years to change state law, cities can change their ordinances as often as every other week. This creates a “moving target” for builders who are trying to comply with city rules.

In addition to the speed at which things change, another challenge can be found in the differences in regulations from one city to the next. To demonstrate this point, I would like to highlight tree regulations, which are relatively common in Texas. As a reminder, this argument is not to say that we should not have tree regulations, but rather to highlight the difficulty of operating under a patchwork of regulations with varying terminology, definitions, and requirements.

I looked at four central Texas cities to see how they define “protected trees” in their communities: Kyle, Leander, Round Rock, and San Marcos. Of these cities, Kyle had the simplest definition—any tree that is 28” or wider in diameter is considered protected, regardless of tree species. Leander has two types of protected tree definitions, “heritage” and “significant,” both of which have different tree diameter measurements than Kyle. Additionally, Leander’s tree ordinance includes a subjective statement, defining protected trees as any tree that the “city desires to preserve to the greatest extent possible.” Codifying subjective definitions such as this one allows for a wide range of interpretation, resulting in inconsistent enforcement of the ordinance.

A protected tree in Round Rock falls into one of two categories: “monarch trees” and “champion trees.” Their tree ordinance is fairly straight forward, but requires a different type of analysis because they define their protected trees based on species and trunk diameter. For example, a 25” Italian stone pine tree is protected in Round Rock, but is not protected in Kyle or Leander. Finally, San Marcos’ tree ordinance uses common terms—“protected” and “heritage,” and includes a chart of tree diameters and protected species. It’s important to note that although this format is similar to Round Rock’s, the tree diameters and species lists are not the same. San Marcos’ ordinance has another example of problematic subjectivity regarding how a tree diameter is measured. According to the city’s codes, the measurement for the trunk diameter should be taken “at breast height.” Does this mean that if your inspector is taller, your tree is measured smaller than if it were measured by an inspector who is shorter?

To summarize, across four cities we have protected trees, heritage trees, monarch trees, champion trees, and significant trees, all with various measurements and species types. And this is just the definition of protected trees. Each city has different regulations on how to care for the trees, procedures for planting trees, removing the trees, and so on. While San Marco’s tree ordinance is only four pages long, Round Rock’s ordinance is 13 pages long. As you can imagine, it quickly becomes a compliance nightmare to ensure that a new home doesn’t violate a city’s rules.

So, what can be done to ease some of these issues? There are a number of ways that cities and builders can work together and tackle these issues, including:

  • Stakeholder input – Any time a city is considering a new regulation, the city should vet the regulation through a robust stakeholder input process to ensure that the regulation is meeting the needs of the community without triggering unintended consequences.

  • Learn from other cities – It is always wise to study how other cities have overcome obstacles in their respective communities. Many builders operate in multiple cities and can often provide insight into how another city is tackling a common issue.

  • Be creative – All options should be on the table and both cities and builders should look for out-of-the-box solutions that are a win-win for everyone.

  • Communication – Perhaps most importantly, cities and builders should foster a close relationship where information can be exchanged freely. The two groups should meet often and regularly, and notice of changes in rules or regulations should be communicated far in advance whenever possible to allow for the industry to adjust and adapt to the change.

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