How the election's outcome could shape 5 key homebuilding issues

October 27, 2020 10:42 AM

The shortage of housing inventory casts a shadow over a real estate industry that's otherwise enjoying high demand and favorable lending conditions. With the number of listings hitting a 13-year low in September, analysts have remarked that the biggest thing limiting sales numbers these days might just be the lack of product to sell.

A host of factors make increased construction a complicated proposition. Ever since the overbuilding of the housing crash left many projects vacant, stricter regulations were put in place, such as Dodd-Frank's implementation of High Volatility Commercial Real Estate rule, which discouraged lenders from making risky loans by adding a 150% risk weight to certain construction, development or acquisition loans. While protective measures curbed the number of financially risky projects going up, they also made construction more expensive.

Regulatory costs imposed on construction for everything from zoning to delays to permitting requirements. In densely populated markets where the cost of land is higher, breaking ground on new builds can prove difficult without heavy subsidization, according to Brian Turmail, vice president of public affairs and strategic initiatives at the Associated General Contractors of America.

Current labor and lumber scarcities also squeeze builders' profit margins, de-incentivizing them from building anything but the priciest kinds of residence.

"A lot of the stuff being built is high-end because those are the only projects that are affordable, given the cost of building in most congested areas," Turmail said in an interview. "To do more construction, especially more affordable construction, we ought to look at why it cost so much to build housing in the first place and look at ways to make it a more affordable proposition."

Affordable housing developers and community leaders often cite governmental policy as a potential means of encouraging construction where it’s needed. With the upcoming election set to determine the policies shaping housing's near future, below we tease out how the candidates could impact the key roadblocks to a building boom in the U.S.

The costs to build

Even before the pandemic, inventory lagged behind.

"We need to build about 1.6 million new units — single and multifamily — each year to keep up with household formation, immigration, and just replacing the old housing stocks," Jim Tobin, chief lobbyist with the National Association of Home Builders, said in an interview. "I think this year, we might get up to 1.2 million and that's where we have been for the last couple of years."

The high price of building is most often blamed for that shortfall.

Builders and developers commonly make use of tax incentives and other sweeteners that aim to ease the costs of building. As a developer himself, President Trump launched a program designed to draw investment to development projects in areas in underserved communities.

The administration's Opportunity Zone program, enacted with the passing of the 2017 Tax Cuts and Jobs Act, allows investors to avoid capital gains taxes by pouring cash into construction projects (among other things) within designated low-income Census tracts. The program is in part intended to boost enthusiasm for building housing within those areas, though critics say the program has largely funded luxury residences, hotels and storage facilities.

Homebuilders routinely cite the costs of regulatory compliance as a mandatory expense that inflates the costs of their projects. Regulations contribute to about 25% of the cost for a single-family home and about 33% for the cost of a multifamily unit, according to Tobin. The fastest way to incentivize homebuilders could be regulation reform, he said.

A second Trump term would almost certainly come with a lightened regulatory load. An executive order issued in 2017 mandated the elimination of two regulations for each one created. This saved companies $570 million per year, according to NAHB estimates.

A Biden administration would assume tighter compliance standards, according to Tobin. But Biden's known stances on housing includes injecting $640 billion over 10 years to increase inventory and affordability — including the creation of the $100 billion Affordable Housing Fund. The program’s funding would come through raised corporate taxes, according to the campaign platform.

Federal policy changes

While much is done at the state and local levels, the winner of the presidential election will carry the heaviest influence on shaping the overall housing sector. The industry has been a bright spot during the COVID-19 recession and would be expected to continue helping the economy out of the doldrums, regardless of who takes office next.

"Under the Trump administration, the Department of Housing and Urban Development was largely in the mode of rolling back programs and regulations and partnerships with local communities. That would likely continue if he is reelected," MarySue Barrett, president of the Metropolitan Planning Council, said in an interview.

"The expectation is a Biden administration approach would be dramatically different with support for coordination across federal and state agencies, delivering assistance to hard hit local communities and investing in their infrastructure," she added.

President Trump's calling card of deregulation could benefit builders. So far though, real estate professionals put more financial backing behind the Biden campaign, with some citing an unfulfilled promise of $1 trillion in infrastructure spending among their disappointments in Trump.

Neither MPC nor NAHB donates to politicians. However, AGC — through its political action committee and 88 nationwide chapters — endorses and contributes to federal candidates. Across the last two years, AGC's PAC made 201 contributions totaling $664,500. Republican candidates received 183 of those donations worth $598,000 and Democrats got the remaining 18 and $66,500 from the trade association, as of Oct. 19, 2020.

Procedural roadblocks

Delays created by the slow grind of local governmental zoning and permitting processes can also add substantial costs to a builder’s budget.

To shorten the process and save money, government officials could re-examine development, land use and zoning approvals processes. While components of these procedures are determined at the municipal, county, state, regional and federal level, meeting consumer demand means mapping a streamlined, modernized plan that shortens project timelines.

Limiting community input, which often gives way to NIMBYism, is one way to lower the barriers to building, especially in congested metro areas, Turmail said.

"If a neighborhood is zoned for multifamily, then the community doesn't get to come in and decide," Turmail said. "We have communities around the country that are wonderful to live in, but by making it wonderful to live in, you've made it absolutely impossible to build in affordably. You end up with these great progressive, wealthy playgrounds, in places like D.C. and San Francisco, while the working class folks are priced out of those markets and have to commute an hour and a half, two hours out."

State and even federal government can intervene in some local processes. The state California, for example, overrode local laws by mandating that the construction of accessory dwelling units bypass the step of soliciting community input.

Sometimes well-intentioned legislation can have a cooling effect on construction. In cities like Washington, D.C., construction requirements also contain local labor add-ons. The hiring mandate increases construction costs, training and adds layers of compensation, according to Turmail.

"Generally, you see local hire mandates in places that haven't done a good job preparing their workforce," he said. "As a result, they've got to force employers to hire them, as opposed to actually training their workers."

Both sides of the election seek to help in this regard. President Trump put in an executive order to establish the National Council for the American Worker — a group for developing and retaining high-demand industry workers.

Biden's labor policies include collective bargaining for unions and independent contractors, enforcing prevailing wages and terminating mandatory employer arbitration. He also wants to expand protections on undocumented workers who whistleblow OSHA violations.

The issue of immigration appears as a major rift between parties, but one that could unlock more skilled homebuilders.

The immigrant workforce

Residential construction employment grows along with the overall economic recovery. After a combined loss of 426,300 jobs in March and April, the sector gradually rebounded, adding 388,600 positions from May through September. That labor force totals 2.9 million, inclusive of 827,000 builders and 2.1 million residential specialty trade contractors, based on NAHB analysis.

To ramp up construction to meet consumer demand, increased single-family housing starts and an all-time high homebuilder confidence level, more skilled workers are needed.

Immigrants drive the construction labor force, as well as the overall American economy. Foreign-born workers accounted for 16.6% of all U.S. labor and 24.3% of construction workers, according to the 2018 American Community Survey. Those shares get up to 40% in states like California (40%), Texas (39%), Florida (37%), New Jersey and New York (both 36%).

Allowing qualified workers to legally enter the country while providing a path to legal status for undocumented workers would invigorate the labor pipeline, industry advocates say. Besides helping with the worker shortage, immigration reform would curb the degree to which contractors exploit undocumented citizens by denying them benefits and offering unfair wages.

"Anything we can do to welcome more investment and more immigration is going to be supportive of our most important sectors, including the homebuilding industry. It's both reliant upon and benefits from a clear and consistent the immigration policy," Barrett said.

Along with the MPC, both the AGC and NAHB advocate for a better immigration system. This issue is perhaps where the two presidential candidates diverge most.

"President Trump has had a very anti-immigrant stance for the last four years, which I think exacerbates industries like ours and our labor woes. But by the same token, he's encouraged workforce and skills development and moving people into the trade. So that's been very good," Tobin said. "With a President Biden, we would see an immigration plan that would open our borders and give us access to the international labor workforce we need. I think Joe Biden would favor more unionized labor and residential construction is not a unionized industry. That's something we would share some concerns about."

Material costs

The prices of homebuilding materials trended upward through the majority of 2020, with lumber as the main component.

In the five months spanning April to September, the Producer Price Index of lumber skyrocketed 90.9%, according to the U.S. Bureau of Labor Statistics. Prices paid for lumber posted its record largest monthly growth in September, surging 28.6% month-over-month.

"Lumber prices are adding $16,000 to the cost of an average single family home," Tobin said. "That's another reason why we're seeing affordability and construction delays because lumber just can't get to the job site as quickly as it can."

Foreign trade wars imposed by the current administration, at least in part, are responsible for the escalation in construction costs. Per the White House's website, imported steel faces 25% tariffs while lumber and aluminum are subjected to 20% and 10% markups, respectively.

In 2019, the U.S. imported $65.75 billion of iron and steel products, $22.29 billion of aluminum and $19.3 billion worth of wood, according to the United Nations COMTRADE database.

Through Twitter, Trump — a self-proclaimed ‘Tariff Man’— touts the position he's taken in regards to his foreign policies and sanctions levied. Based on the stances he’s taken with China, Canada and Mexico, another four years would presumably bring more of the same.

Though a Biden presidency wouldn't necessarily remove tariffs from foreign trade, it would try to mend fences.

"Bringing the combined weight of partners and allies together, you're in a much better position to affect change," Tony Blinken, one of Biden's top advisers said on a Chamber of Commerce video call. He continued, explaining that the Biden administration "would use tariffs when they're needed, but backed by a strategy and a plan."