Monday, December 18, 2017

Is Over-Regulation Killing the Custom Home Building Market?

Before we get into the heart of this subject let’s clear up what is a “Custom Home.” For this discussion a custom home is one built by a home builder building a home designed for a single distinct customer. Tract builders are not included. 

These custom home builders can be of any type; totally on-site, off-site (modular), log and timber, panelized wall and floor, concrete, 3D printed, straw bales, shipping containers and just about anything else that can be used to create a ‘one-off’ custom home. 

Some custom builders only build a few new homes a year while others build 50 or more. What they all share is the ability to build just what their new home buyer wants. They throw out the plan books and sit down with their customers and design a ‘one of a kind’ home. 

Regulations on both a federal and a state level have become extremely onerous over the past 10 years for those who want to build a custom home. Because of the a myriad of requirements and mitigations, costs to comply compound the length of time it takes to navigate through the maze causing some home projects to be delayed up to 3-5 years before the house is ever started. 

Additionally, local municipalities, due to aging or inadequate infrastructure, are requiring more offsite mitigations, which add to the financial burden. Are some of these regulations and mitigations justified? 

Yes, but it is being taken to an extreme that has made the cost of building a on a lot excessive. 

Sometimes the result of setbacks for every kind of problem, real and imagined by state and local regulations, makes even a large lot undesirable for the customer’s new home. 

As recently as 20 years ago small custom home builders ruled the roost. They simply worked with local code and planning officials in an informal way with some building permits being issued within a couple of days. It didn’t really matter what type of system the builder was using, permits flowed quickly. 

With the Housing Recession of 2008 the once large pool of small local builders began to drain away quickly with only an estimated 20% of those builders that were in business prior to the crash still in business in 2012. 

But regulations didn’t stop being imposed on builders making it a less desirable for new builders to enter the market. Fewer new builders are being added to the roll call in the history of single family housing. 

California passed a law that requires all new housing by 2020 to be “net zero” for power usage, meaning that it must be built in a way that does not use more power than it can produce. This requirement is a worthy initiative, but it comes at a very steep price for the purchase of a home. Other states will follow CA quickly with Maryland being one of them. 

Some states and local governments will soon be implementing an “affordable housing” fee on every new home built to be used to build affordable housing. Tract builders will be able to absorb some of these fees but what about the customer that wants their home built by a local custom home builder and finds out this new fee could add 5 figures to their home price. 

Custom home builders are dealing with another type crisis, the cost of building materials has skyrocketed with no relief in sight. Builders can’t afford to give a rock solid quote to the home buyer any longer. Costs to build a new home haven’t gone up 20-30 cents a square foot lately. We are now seeing yearly cost of building increases of $10 and more a square foot. 

Custom home builders are also struggling to find competent labor to address the rising needs, which is slowing production and raising labor costs. Between the cost of lots, the building requirements, and cost of construction, a detached starter home in some regions is now in the $500,000 range. 

Bottom line, whether it is affordable housing, standard residential, or rental housing, the cost to bring these products to market is excessive by national standards because we are in the over-regulated and over-taxed. Custom home building is at the mercy of many factors, not the least of which is regulations meant to improve our lives but in actuality is putting many custom home builders in a bad situation. 

One answer for custom home builders to help combat these myriad of problems is to turn to modular construction. Many of the problems faced by custom home builders can be solved by allowing a modular home factory help design your customer’s home, build it and ship it to your customer’s lot. 

Once set on the foundation, even the most custom home should not take more than 60-90 days to turn over to the customer. 

Yes, the process to build a new home today is not for the weak or faint of heart. It takes more time, effort and money than ever before to remain a custom home builder.

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