The cost of land and entitlements drive housing costs and are influenced by a variety of factors. Permit, tap, and impact fees coupled with work required to adhere to regulations, zoning, and building codes, directly affect pre-construction costs. Substantial dollars that can make or break land deals have been spent on pre-construction expenses before a footing is poured or a nail is hammered.
For years, prevailing thought in the construction industry was that land costs should represent 20% to 25% of the total home price. According to a 2022 survey done by Pro Builder magazine, however, approximately 29% of home building revenue is now attributed to pre-construction land costs. This is up from a similar survey done in 2019 which found that 22% of home building revenue was attributed to land costs. The average sales price of a new home in Alabama reached $378,553 in May of 2023 meaning $109,780 went to pre-construction costs for a new home, a $26,500 increase from 2019.
While land prices are primarily market driven and subject to the economic principle of supply and demand, zoning and subdivision regulations are bureaucratic processes. It is a costly and time-consuming process to obtain entitlement and regulatory approval and can often be mired in politics. It takes twelve to eighteen months and costs on average from $150,000 to $300,000 to procure entitlements. The subjective nature of development reviews, the process by which a municipality examines a development based on their land-use policies, makes them risky. Lodging a challenge to a municipality’s decision can bring land development to a halt.
Impact fees related to utility services are essential, yet costly. As local jurisdictions grow, fees to improve strained resources are tacked on to the price of new home construction. For example, the cost of a new sewer treatment plant financed by bonds is recouped from impact fees charged to the developer or builder. Similar costs are associated with other offsite infrastructure. Municipalities often condition a subdivision’s approval on the developer improving the road, water, and sewer. These costs are then passed on to the home buyer in the form of higher list prices.
Adherence to building codes is also a necessary expense. Most states implement the International Residential Code (IRC), but whether a state adopts the amendments is constantly in flux as the International Code Council updates the IRC every three years. With each iteration of the IRC code comes new requirements that carry a price tag. To compound the problem, state legislatures are passing “net zero” residential building codes to combat global warming. One report estimates that “net zero” policies could increase the cost of home construction from 1.8% to 3.8% - adding approximately $10,000 to $23,000 to the median cost to a single-family home.
Stringent building codes, onerous land-use policies, and impact fees are examples of pre-construction costs that push homeownership out of reach for American families. When it comes to housing policy, our nation must balance the roles of government oversight to ensure energy-efficient housing and sensible land-use regulations while supporting free market principles that supply affordable housing.