There's been a lot of talk in recent years about how the millennial generation, those born between 1980 and 2000, don't seem to be in a rush to buy a first home. If you've discovered that starter-home prices seem to rise faster than your ability to tuck away savings, you aren't hallucinating. The fact is, home builders are being squeezed by higher costs, attributable to new compliance issues and escalating land prices.
According to a new survey by the National Association of Home Builders (NAHB), the average cost home builders face to meet new construction regulations has increased by almost 30 percent during the last 5 years. And here's a spoiler alert: The homebuilders don't absorb those costs, they pass them on to buyers.
The higher regulatory costs stem from a slew of local concerns, including storm-water discharge, updated construction codes, even environmental impact worries. All these conspire to hamper the builders' ability to construct affordable single family homes, especially low-cost starter homes. The vice president at NAHB responsible for the survey, Paul Emrath, readily admits that these added costs make it difficult to satisfy the market's low end, the category which many first-time buyers fall into.
The survey found that about 24 percent of an average new single-family home's price arises from government regulations. Almost 15 percent of this is due to regulations that were imposed during the lot's development, and subsequently drive up the end price of a finished lot (which seems a little opportunistic, doesn't it?). In dollar-and-cents terms, regulations cost an average of $84,671 for new single-family homes, versus $65,224 in 2011.
The data also shows that new home prices have risen even faster than new regulatory costs in the last 5 years, 33.8 percent versus 29.8 percent respectively. Part of this is due to another cost factor adding to the woes of first-time home buyers, the escalating prices of raw land.
About 10 years ago, home builders bought up relatively cheap land at the outer fringes of suburbs in order to meet rampant demand. When the housing bubble collapsed in 2008, so did land prices in the boondocks. Now, the recovery of the housing market has once again pushed up land prices, creating a higher minimum price that homebuilders must charge for starter homes.
Dennis Webb, an executive at homebuilder Fulton Homes, summed it up nicely by noting that there wasn't enough profit available to spur development of entry-level houses.
U.S. Census data confirms the story. There's been a drop in the share of sales of new homes costing less than $200,000 in the last 4 years, from 38 percent to 19 percent. The share of first-time homebuyers is flatlining at 32 percent, a nearly 30-year low. In this new reality, it's not surprising that a recent Bank of America survey showed that 75 percent of first-time buyers would rather skip the starter home stage and wait until they can afford a long-term home.
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