A regulatory nightmare haunts the American dream

Insight on the News, Feb 12, 1996 by Gayle M.B. Hanson

The rate of home ownership for Americans under age 40 has fallen by 10 percent. Families are priced out by costs added by government ranging from deficit-driven interest rates to environmental extremism.

Despite the Clinton administration's promise to increase home ownership by 8 million before the year 2000, the most notable accomplishment of the Department of Housing and Urban Development's National Home Ownership Strategy thus far is creation of an on-line information database. An embarrassed civil servant at HUD calls it an "electronic buyer's guide for late-blooming yuppies."

While bureaucrats at HUD are surfing the Internet, many would-be buyers have been scuttled by the high cost of home ownership. According to the National Realtors Association, which represents some 750,000 real-estate professionals nationwide, in the 14 years from 1980 to 1994 the rate of home ownership fell from 44 to 34 percent for the 25-29 age group. It fell from 61 to 51 percent for the 30-34 age group, and for those 35-39, the rate dropped from 71 to 62 percent.

What's keeping this generation of Americans from purchasing their own homes? "Certainly one of the most important and certain ways to lower the cost of a mortgage would be passage of some kind of balanced budget," says Diana Furchgott-Roth, resident fellow with the American Enterprise Institute, a conservative Washington think tank. In fact, President Clinton's veto of the reconciliation bill, which would have required a balanced budget by 2002, is viewed widely within the real-estate industry as the biggest single barrier to home affordability. Had Clinton signed the bill, the predicted decline in interest rates would have made homes affordable to some 10 million Americans who currently are priced out of the housing market. That's 2 million more people than are being targeted for home ownership by the HUD incentive plan.

But first-time buyers aren't the only ones who would have benefited from a balanced budget. According to a recent study by the economic consulting firm DRI/McGraw Hill, the vetoed bill would have brought interest rates for fixed-rate mortgages down 2.7 percentage points by 2002, providing home buyers with an overall savings of approximately 15 percent.

So what does this mean in terms of a monthly mortgage? Currently, a 30-year fixed-rate mortgage for $100,000 means a $665-a-month payment, and $139,511 in interest during the life of the loan. If a balanced budget were passed and interest rates were to drop 2.7 percent to approximately 4.25 percent, the same $100,000 loan would cost a home buyer $492 monthly. The lifetime interest on the loan would fall to $77,098 for an overall savings to a young family of $62,400.

"There is no question that a balanced budget would dramatically affect the ability of people to buy homes," says Randy Smith, president of the National Association of Home Builders, or NAHB. "We've been championing the idea for the past 10 years."

However, even if the Republican drive to achieve a balanced budget finally were to succeed, other housing costs would remain high. According to the NAHB, every $1,000 increase in the purchase price of a median home can force more than 21,000 potential buyers out of the market nationwide The chief cause of those increases, says the association, is government.

"What we are talking about are multiple layers of regulations that are affecting the cost of housing," says economist Gopal Ahluwalia, NAHB vice president. "There are some costs that we can measure and some that we cannot," A recent study by Ahluwalia looked at the direct regulatory costs affecting the prices of homes. The survey of home builders across the nation found that the average direct regulatory cost was, on average, 10 percent of a house's total price. "The average new-home price reported by those surveyed is about $180,000, so this implies that the price of homes could be reduced by an average of $18,000 if the regulatory process were reformed or streamlined," Ahluwalia tells Insight.

And while the 10 percent holds true for the average, in certain regions of the country -- California and New England, specifically -- the direct regulatory cost is estimated to be as high as 25 percent.

Among those direct regulatory costs are building permits and street, sidewalk and engineering costs. In the 20-year period from 1974 to 1994 it was those costs that escalated most dramatically. A starter home in Cincinnati cost $29,950 in 1974, with $3,000 of that from regulations; in 1994, the same entry-level house cost $104,950 with $16,975 due to direct regulatory costs.

While industry economists recognize the need for some regulations, they are concerned about a proliferation they believe does little other than add to costs. For instance, a committee of officials that develops model building codes used in more than 20 states voted to change the shape of the steps on staircases from the current 8.5-inch riser and 9-inch tread to a 7.25-inch riser and 10-inch tread. The change, which is scheduled to go into effect in 1996, could increase the cost of an entry-level townhouse by $2,000 to $3,000 as the home is made larger to accommodate the longer staircase extension. And while impact fees average about $600 nationally, in some communities in California they can run as high as $20,000 to $30,000, according to the NAHB.