Self-Taught MBA: Rolling Back Regulation
Donald Trump is the first builder to become president of the United States. Among his campaign promises, he included reducing the regulatory cost of homebuilding from 25% to about 2%. What does this mean for your business?
As a developer of affordable homes, I have struggled with ever more stringent construction codes and municipal costs that keep driving up the price of building a basic abode. In 1992, I could construct a small, split level starter home for about $75,000, all costs in, except the land. The same house costs me about $160,000 to build today, including code upgrades and municipal fees.
While still a candidate, Donald Trump addressed the National Association of Home Builders (NAHB) Board of Directors, at their Midyear Meeting in Miami, on August 11, 2016. He proposed an ambitious, industry-favorable platform that included rolling back the regulatory cost of building a house from the current 25% to something on the order of 2%.
It’s difficult to imagine how anyone would achieve such a radical reduction, but in the President’s budget blueprint, submitted to Congress on March 16, 2017, we can see just far how he aims to rollback regulation.
What Does the Rollback Look Like?
The President’s budget request represents a first step in the government funding process, you can peek at it at the Office of Management and Budget website (OMB). There’s a long road ahead before the real budget gets passed, and judging from past efforts at passing legislation, the process will involve much acrimony and compromise. Nonetheless, let’s look at the proposal as it relates to our industry.
Some of the programs that may be cut, or greatly reduced in the president’s budget, include:
- Eliminating the Weatherization Assistance Program and the State Energy Program, used to retrofit insulation and weather sealing for older homes of low income residents and rentals, as well as state grants for energy saving projects, such as incentives upgrading to a more efficient HVAC system.
- Eliminating funding for the Community Development Block Grant program, used to upgrade rental and low to moderate income housing in targeted neighborhoods, and for downtown improvement districts.
- Eliminating the HOME Investment Partnerships Program, which provides funds for development of affordable housing.
- Eliminating the Choice Neighborhoods, a program that supports organizations like Neighborworks, in their locally driven strategies to address struggling neighborhoods.
- Eliminating the Self-help Homeownership Opportunity Program, which helps fund organizations such as Habitat for Humanity, with grants to nonprofit organizations that have experience in using homebuyer and volunteer labor to build housing for low-income families.
- Eliminates funding for Section 4 Capacity Building for Community Development and Affordable Housing, which provides training and capacity-building for community development corporations (CDCs) and community housing development organizations (CHDOs), to carry out community development and affordable housing activities that benefit low-income persons.
- Eliminates funding for more than 50 EPA programs, such as Energy Star, IndoorAirPLUS, and WaterSense; as well asTargeted Airshed Grants, for community air quality projects; and the Endocrine Disruptor Screening Program, which tests products for their potential effect on estrogen, androgen and thyroid hormones, a concern for those seeking to qualify certain indoor finishing products for LEED certification.
Will the Rollback Cut Homebuilding Costs?
The only regulatory rollback proposed that may impact homebuilding costs comes with rescinding the Obama-era WOTUS regulation, directing the EPA and the Army Corps of Engineers (Corps) to greatly expand the definition of the “Waters of the United States“, known as the (WOTUS) rule.
Although in existence since the 1970s, WOTUS came to infamy in the agriculture and construction industries after the Obama-EPA greatly expanded de definition of “waters of the united states”, to include small tributaries and even artificial bodies, such as man-made ponds. The revision prompted local governments to begin aggressively policing excavation and grading, demanding ever more stringent erosion control measures that certainly made much tougher to dig a basement and build a house. If you had any water feature on your land, such as pond or stream, the WOTUS review and permitting process added fees and months to your permit application. The NAHB opposed this rule vehemently, and published a celebratory announcement when Trump rescinded it on February 28 of 2017.
It’s possible that many stalled developments will now move toward permitting, and others will avoid costly delays.
Otherwise, the drawdown of housing advocacy funds and energy efficiency programs will either hurt, or only very slowly impact homebuilding costs.
Over time, the elimination of the EnergyStar program may have a negative effect on insulation and sealing codes, as much of the International Energy Conservation Code prescriptions for homes came directly from the research and standards developed by EnergyStar, as well as associated programs, including IndoorAirPLUS, and WaterSense.
Ultimately, the federal government has little influence over what local jurisdictions adopt in local code. Some municipalities may continue to move aggressively in developing more stringent energy standards toward a net-zero code, such as Boulder, Colorado, and other municipalities may walk back some energy requirements, or leave standards as is in the next iterations of the International Building Code (IBC), as likely in Omaha, Nebraska.
Aside from improving energy standards, these programs have also provided a branding opportunity for many builders, who market their EnergyStar certifications as a sign of higher quality. The federal programs will have to be replaced with private label certifications, such as Masco Environments for Living.
Other programs, such as the Department of Energy’s Building Technologies Office may shut down. The DOE sponsors programs, such as the Zero Energy Ready Home, and Challenge Home, provide a homebuilder’s training ground. These programs have made builders become aware of building science, and taught us methods to improve construction quality. Without the apprentice programs of bygone union days, or the European system of architectural engineering colleges for contractors, the only major research and development has come through these EPA and DOE programs, as well as the National Association of Homebuilders, to a smaller extent.
Why Do Costs Increase?
No industry is enamored of regulation, especially when heavily bureaucratic and unsympathetic. But the homebuilding industry has, by and large, embraced the higher standards set by pioneers in green building and energy efficiency. As a builder that enjoyed the challenge of upping the ante on quality, I wonder if builders will continue to push the envelope of quality and performance that the EPA and DOE pioneered. Despite builder grumbling, the inflationary pump in construction cost has not come primarily through with overregulation.
The Cost increases in our industry obey economic laws that deregulation won’t improve. The first comes with supply and demand. Just as low housing inventories drive up real estate prices, so low labor inventories drive up employee and subcontractor costs. With fewer young people getting in the trades and a reduction in immigration, this trend may get much worst.
Building codes in the United States are developed by consensus, in a semi-democratic process, with input from industry lobbyists, industry trade associations, and a few builders and engineers.
The heavy hand of manufacturer’s lobby drives much of regulation. There’s no better marketing strategy for a manufacturer of building products than having your products become a legal requirement. For example, when I built homes in California in the 1990s, earthquake resistant standards required about $900 of specially hardware in the frame. Thanks to effective lobbying from companies like Simpson Strong Tie and HCS, it now easily exceeds $10,000. That’s not the EPA’s fault.
Up north, the Canada Mortgage and Housing Corporation (CMHC) resembles our HUD/FHA/ and Fannie/Freddy agencies all rolled into one. They fund research and development in building science, and because they do not depend on industry funding, many of the construction methods they come up with solve the same problems we tackle but through cost-effective means. When I built affordable housing, I often sourced my building methods to the Canadian methods because it saved me money.
Extra insulation, unlike expensive and excessive framing hardware, questionable fire suppression systems, and unwarranted electrical plugs in two-foot long corridors – the bane of affordable home builders — has the benefit of lower the cost of ownership, and the advantage of providing an argument for buying a new, more energy efficient house, over a lower cost existing one of the same size. Downsizing the EPA won’t have as significant effect on lowering regulatory costs as many builders expect.
But you may have the opportunity to go back and build the way we used to build, mudding the streets and clogging the rivers with runoff, and paying no attention to indoor environmental health, or better methods to seal, insulate and build-in higher energy performance. We may not achieve Net Zero housing by 2030.
I wonder how you will respond, by relaxing your building standards? Or will you continue to improve your construction quality, without the impetus of forced regulation.