Red Tape Now Adds $132K to the Cost of a New Home

Permits, building codes, inspections, and regulations are tacking on huge costs to build new single-family homes, which are inevitably passed along to homebuyers.

And the burden is only growing, according to the National Association of Home Builders. A new NAHB study found regulatory costs have jumped almost 40% in five years and now account for 26.4% of the average sales price of a home.

Given a new home averaged $499,500 in January, it equals $131,734 in regulatory costs for the typical home. That's a burden for a nation already short millions of housing units and struggling with housing affordability, said NAHB Chairman Bill Owens.

“This study illustrates how excessive regulation is deepening the nation’s housing affordability crisis and making it harder for builders to deliver the affordable, attainable housing that our nation sorely needs,” Owens said. “Policymakers should remove unnecessary and costly regulations that are pricing buyers out of the market and slowing construction of new homes and apartments.” 

Those costs make it even harder to solve the housing shortage. Already, it will take close to eight years to close the supply gap, according to a new report on the housing supply gap from the Realtor.com® economic research team.

Regulatory barriers

NAHB studies regulations of different kinds—building codes, architectural designs, labor rules, fees, and studies. The kinds of costs to a home have changed over time. Where the price of land rules fell from 2021 to 2026, for instance, construction rules increased by a higher percentage.

NAHB's data, which takes into account numbers from the U.S. Census Bureau, shows costs increasing steadily. In 2011, they contributed $65,224 to the cost of a new home. By 2021, that rose to $93,870.

Regulations create costs in different ways. For instance, about 88% of developers told NAHB they must comply with extra design standards set by communities, above and beyond the set zoning code. Or they face requirements to leave a portion of land in their development for government or public use.

Then there's the matter of timing: 94% of developers said they typically face a delay due to some regulations. That drives up interest on development loans, which can be passed on to the customer.

Most significant to the cost of the house, though, is building code changes. Over the past decade, many report that architectural design standards—requirements around siding, fences, or orientation—cost extra to comply.

These costs pressure builders who are already facing pressure on the front end—as they offer deeper concessions to cash-strapped buyers. That's slowed down building and also sped up industry consolidation.

Variation, a problem by itself

To developers, it's not so much any one community's requirements, but the vast difference between each and every one. Some communities specify what direction a garage can face. Others mandate dimensions of certain features down to a quarter-inch.

Jeff Holzmann is COO of Dallas-based RREAF Holdings, a real estate investor that builds and manages manufactured housing and multifamily communities across the Sun Belt. He estimates regulations vary from 25% to 33% of costs across the states RREAF serves.

But the exact regulations vary from place to place. Georgia and the Carolinas, for instance, rack up costs for traffic studies. In Texas, it's been zoning and entitlements, which trigger a rush of neighbor lawsuits. The court system is supposed to be a remedy, but it's even slower.

"When outcomes are more certain and more likely, that lets me double down, hire people, and commit capital to projects," Holzmann said.

Aliso Viejo, CA-based homebuilder Thomas James Homes CEO Steve Schlageter said rules can vary from town to town in its West Coast markets. California mandates environmental reviews, and in other places, the California Coastal Commission must weigh in.

The builder uses pre-designed plans in a bid to cut down on rules and project reviews. That's lately been a bonus as more developers deal with rising costs of building materials. But Thomas James also risks eating the costs of rising prices if the timeline gets drawn out too much.

"Every municipality is a little different. They all have their own rules and regulations for who can review and interpret," Schlageter said.