Posts Tagged special purpose taxing districts

The Challenge of Affordable Housing – Part 1 a

As I noted in my last blog, during the Building Contractors Association of Southwestern Idaho Political Action Committee interviews of candidates for public office, the majority of the candidates cited the lack of affordable housing as one of major the issues facing us. During the discussions, a number of the candidates said they understood that it is a supply and demand issue.

The more I thought about it, the more I felt the need to dispel some possible misconceptions regarding the supply and demand issue.  A commonly held misconception regarding supply and demand and its impact on pricing is that providers increase prices when demand exceeds supply and decrease prices when supply exceeds demand.  While this might be true in some industries, it isn’t true in homebuilding. Builders use the same mark-up percentage on their direct cost (the sticks and bricks) regardless of demand to calculate the sales price. Builders typically use a 15% to 20% markup. Markup is also referred as the expected or planned Gross Profit Margin.  The markup covers the Builders operating expenses which include financing expenses, sales and marketing expenses, general and administrative expenses (overhead), and the owner’s compensation, and the Builder’s Net Profit Before Taxes. It also covers Slippage – the variance between the Builder’s expected or planned gross profit margin and what is actually attained for a given period or particular job.  Slippage can result from a number of factors including but not limited to unanticipated increases in material and labor costs, delays due to lack of skilled trades or inclement weather, or other factors beyond the Builder’s control.  It can also result from increases in financing expenses due to unanticipated delays in selling the home.

The National Association of Home Builders (NAHB) has been conducting a biennial survey of its builder members and compiling the findings into a publication titled The Cost of Doing Business Study since 1970.  As shown in the table below excerpted from the latest study, during that time, the average Gross Profit for Builders has ranged from 14.4% in 2008 to 23.9% in 1978 with the average being 19.29%. The average Net Profit Before Taxes for Builders has ranged from minus 3.0% in 2008 to 10.0% in 1991 with the average being 5.1%. In 2017, the most recent year for which numbers are available, The Cost of Doing Business Study, 2019 Edition, the average Net Profit Before Taxes was 7.6%.

While it is not a factor in how Builders determine their markup, supply and demand is a factor in the direct cost of the home. The biggest impact of supply and demand has been in the finished lot cost. Over the years, NAHB has periodically conducted “construction cost surveys” to collect information from builders on the cost of the various components that go into the sales price of a typical single-family home.  

As shown in the tables below, the cost of the lot as a percentage of the sales price was 20.3% on 2009 and 21.5% in 2017. But those percentages don’t tell the whole story. In 2009, the average lot size was approximately 21,879 square feet – approximately ½ acre.  In 2017, the average lot size was approximately 11,186 square feet – approximately ¼ acre. The average cost per square foot of a finished lot in 2009 was $3.50.  The average cost per square foot of a finished lot in 2017 was approximately $8.22 – an increase of approximately 235%. 

While supply and demand is a factor, it is not the only factor impacting the cost of the lot as we will discuss in The Challenge of Affordable Housing Part 2 – The Cost of Regulation

Posted in: builder profit, building, cost of building, home building, home buyers, homeownership, housing affordability, housing for all, land development, Uncategorized

Leave a Comment (0) →

The Challenge of Affordable Housing – Part 1

Last week I spent several days interviewing candidates for public office as a member of the Building Contractors Association of Southwestern Idaho Political Action Committee. A majority of the candidates cited the lack of affordable housing as one of major the issues facing us.

It is not a simple issue of supply versus demand.  Affordable housing is a multi-dimensional problem. Some of the reasons are beyond our control such as increasing material costs due to tariffs imposed by the federal government or the changing demographics.  

However, many of the reasons for the problem ARE within our control or, more accurately, the control of our local elected and appointment government officials. Those reasons include:

  • Increasing fees that add to housing costs
  • Outdated ordinances that limit the range and mix of housing types
  • Unwieldy, lengthy development review and approval processes
  • Environmental/growth controls that constrain land supply and developability
  • Citizen involvement in nearly every phase of the process adds NIMBY delay and uncertainty

We need to recognize the fact that households encompass an increasingly diverse demographic that has changed over time.  Forty-eight percent of adults are single. There are more extended families in multi-generational households. Forty-one percent of young adults live with their parents. Our aging population is living in homes that aren’t very accessible. And we are experiencing a greater divergence in household incomes.

So, let’s start by defining the problem in terms of household incomes.

Generally speaking, affordable housing in the United States is defined as a percentage of household income with the consensus being that that housing expenses shouldn’t be more than 30% of what you earn, leaving 70% of your income for food, clothing, transportation and other necessities. If you spend more than 30% of your income on housing expenses, you are considered “overburdened”.   

According to the U.S. Census Bureau,  the Median Income in 2017 dollars in Ada County is $60,151 for Households, $87,423 for Married Family Households, $33,494 for Non-Family Households.  There are 164,389 Total Households, 84,065 Married Family Households, and 59,435 Non-Family Households. Of the Total Households, 68.3% are homeowners and 31.7% are renters. For Married Family Households, 82.8% are homeowners and 17.2% are renters.  For Non-Family Households, 53.4% are homeowners and 46.6% are renters. But with regard to homeowners, we need to keep in mind that the median home price has almost doubled in the last 10 years and I believe it’s safe to assume that the majority of homeowners purchased their homes for much less than the current median home price.

According to the Boise Regional Realtors, the Median Sales Price for homes in Ada County is currently  $355,000.  A 20% down payment would be $71,000 and the mortgage would be $284,000. At current interest rates for a 30-year fixed rate mortgage, the monthly payment including property taxes and insurance would be approximately $1,850 or 36.9% of the median household income, 25.4% of the median household income for married families, and  66.3% of the median household income for Non-Families.

A 3.5% down payment for an FHA loan would be $12,425 and the mortgage amount would be $342,575. At current interest rates for a 30-year fixed rate mortgage, the monthly payment including property taxes, insurance, and private mortgage insurance would be approximately $2,276 or 45.4% of the median household income, 31.2% of the median household income for married family households,  or 81.5% of the median household income for Non-Family households.

We also need to keep in mind that the median is the middle point and that half the numbers are above the median and half are below. For Total Households, approximately 49% have incomes less than the median.  For Non-Family Households, the percentage is 74.4%.

But household incomes are not something we can control, so we will focus on those reasons we can. 

Next topic:  Increasing fees that add to housing costs

Posted in: building, home buyers, homeownership, housing affordability, housing for all, Millennial Home Buyers

Leave a Comment (0) →

Posted in: building, economy, education, home building, home buyers, homeownership, land development, Remodeling, sustainable building, sustainable development

Leave a Comment (0) →