Housing Costs

Housing costs represent the sum total of various factors, including property acquisition and development, building construction, marketing, financing, and profit. The National Association of Home Builders (NAHB) regularly surveys its members regarding cost components of new single family housing. The data in Table 1 are from a limited number of respondents, and the average cost in 2009 is higher than the national average of $270,900 reported by the U.S. Census. However, the survey reveals relative consistency in the cost components with the developed lot varying between one fifth and one quarter, and construction between one half and three fifths of total costs. The decline in profit margin since a high of 12% in 2002 is related to the economic downturn that began in 2008.

Finished lot costs are a reflection of land prices, regulatory requirements, and development decisions. Raw land prices are driven by the local housing market in which demand reflects the economy and quality of life preferences, such as viable neighborhoods and amenities such as parks; availability of public water and sewer; and zoning requirements specifying minimum lot sizes. Constraints on land supply, such as urban growth boundaries (UGB), can lead to higher land values; assessments of the UGB impact in the Portland, Oregon, region reveals a tenfold differential in land values inside versus outside the boundary. If zoning allows for higher densities and alternatives such as attached single-family housing, developers will respond to high land values by reducing lot sizes. Low land prices encourage low-density development.

Table 1 NAHB Construction Cost Surveys

For land to be developed, it must go through a subdivision review process that establishes standards for surveying and legally recording the newly established lots. Subdivision requirements also address the development of public infrastructure, including roads, sidewalks, storm water management, water and sewer, and so forth. A survey of New Jersey developers in the late 1990s revealed median lot sizes of two-thirds acre with raw values of $20,000 and median per-lot costs of $22,125 for compliance with subdivision regulations, including $5,000 for interior streets, $6,700 for water mains and storm and sanitary sewers, and $3,500 for open space.

The provision of infrastructure to specified standards in the subdivision process protects the local government from unnecessary maintenance costs and avoids the need to expend public resources to retroactively provide this infrastructure at some future date. As a result, infrastructure costs are “up-fronted” and subsequently incorporated into the initial asking price of a house. This explains why in 1949, when very few subdivision regulations were in place, lot costs constituted only 11% of total housing costs compared with 20.3% in 2009.

Many jurisdictions impose fees on development. Generically referred to as impact fees, they are often known as capacity, facility, and capital recovery fees, system development charges, and even development taxes. These are standardized fees designed to fund capital improvements needed to serve growth. Impact fees may address road improvements; parks; water, sewer, and drainage facilities; library, fire, and police services; and public schools. The 2010 national average combined impact fee among those jurisdictions that imposed such fees was $11,796 for a three bedroom, 2,000-square-foot house valued at $200,000. The average was even higher in California at $31,779.

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