Diving into the Biden Administration's sweeping plan for housing change.
Published January 26, 2021
This is part two in our two part analysis of the Biden Administration's proposed changes to housing policy.
Read part one here.
Controlling Rising Construction Costs
"We need to build about 1.6 million new units, single-family and multi-family, each year to keep up with household formation, immigration, and just replacing the old housing stock," states Tobin. The high price of housing is most often blamed for that shortfall. (1)
Builders and developers commonly use tax incentives and other sweeteners that aim to ease building costs. If implemented effectively, the Biden plan will provide billions of dollars for subsidies and incentives. While this is positive, it will come with expensive conditions. As further described, enacting the proposed stiffer energy standards is expected to increase overall regulatory costs.
Homebuilders routinely cite regulatory compliance costs as a mandatory expense that inflates their communities' prices. According to Tobin, regulations contribute to about 25% of a single-family home's cost and about 33% for a multi-family unit. While Trump loosened some regulations during his four-year term, it is expected that the Biden administration would enact tighter standards, according to Tobin. (1)
A new push for stricter rules in flood zones could force the Biden team to choose between increasing construction costs or leaving homeowners exposed to climate damage.
Earlier attempts to impose more significant constraints on home construction in flood-prone areas have mostly failed as voters and industries pushed back. (2) Trump reversed Obama's orders mandating more stringent standards in federally funded construction in flood zones. Environmental groups will advocate returning to stricter standards again. In his housing plan, Biden vowed to find ways to control housing cost increases. This will be difficult for him to accomplish if he tightens regulations. (3)
Biden is widely expected to overturn Trump's Waters of the U.S. (WOTUS) rewrite, which pulled back federal protection for most of the nation's wetlands and streams. Land developers, builders, and agricultural interests supported Trump's rewrite, primarily because it promised substantial cost relief. Currently, Trump's WOTUS faces a slew of legal challenges and is on hold in Colorado. If Biden changes it, he will face a heavy legal lift, lengthy rulemaking, and an onslaught of industry opposition. (4)
Materials and Tariffs:
The prices of homebuilding materials trended upward through the majority of 2020, led by lumber increases. According to the U.S. Bureau of Labor Statistics, in the five months spanning April to September 2020, the Producer Price Index of lumber zoomed 90.9%. (1)
"Lumber prices are adding $16,000 to the cost of an average single-family home," says Mike Tobin. "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." (1)
Trump's foreign trade wars placed 25% tariffs on steel, while lumber and aluminum are subjected to 20% and 10% markups, respectively. In 2019 the U.S. imported $68 billion of iron and steel, $22 billion of aluminum, and $19 billion of wood, according to the United Nations COMTRADE database. (1)
Though a Biden presidency wouldn't necessarily remove tariffs, it would attempt to mend international fences. "Bringing the combined weight of partners and allies together, you're in a much better position to affect change," declares Anthony Blinken, nominee for Secretary of State. He continues that the Biden administration would use tariffs when needed but backed by a strategy and plan. (1)
During his campaign, Biden announced a plan that would eliminate 1031 Exchanges for taxpayers with annual incomes that exceed $400,000. The widely used tax benefit has been on the books for 100 years. A 1031 exchange allows real estate investors to defer capital gains taxes when they sell properties if they use the proceeds to make new investments, typically within a few months.
The primary benefit of 1031 exchanges is that it can provide more real estate suitable for development into housing. It is popular with wealthy retirees that have real estate holdings. It is estimated that $100 billion in property sales annually are attributed to 1031 exchanges. (5)
If implemented per the campaign promises, the Biden plan will provide billions of dollars for new residential construction and rehabilitation. New housing investments must adhere to the Davis-Bacon Act wage requirements to be eligible for funds. The Davis–Bacon Act of 1931 is a United States federal law that laborers and mechanics are paid the local prevailing wages on public works projects. It applies to "contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works".
As of 2016, the act increases the cost of wages in federal construction projects by an average of $1.4 billion per year. (6)
Making Housing a Right?
The first paragraph of Joe Biden's housing policy paper says, "housing should be a right, not a privilege." Later it says, "On the first day of his administration, he [Joe Biden] will direct his Secretary of Housing and Urban Development to lead a task force of mayors and other local elected officials to put on his desk within 100 days a roadmap for making this right a reality nationwide." (3)
The "Housing is a Right" slogan has many skeptics because it has a terrible track record. It sounds bold, but it also sounds a lot like this quote: "That new right is the fundamental and very precious right to have a roof over your head - a decent home." That's from President Lyndon Johnson when he signed the Housing and Urban Development Act of 1968. Unfortunately, after 50 years, the black homeownership rate is about the same as when President Johnson signed the act. (7)
The Black homeownership rate almost doubled from 1940 (23%) to 1970 (42%) when discrimination against Black families was legal, horrific, and widespread. Yet, after President Johnson declared it a right, the Black homeownership rate stayed essentially the same (41% in 2018). (7)
The Biden administration has lofty and important aspirations. It is essential to the well-being of the U.S. that African Americans build wealth through homeownership. It will not come easily. As shown by the lack of progress since the Housing and Urban Development Act of 1968, the Biden administration faces some tough challenges.
- Biden's ambitious Housing Plan aims to alleviate many of the housing ills in the U.S., including affordability and racial discrimination. It will expand affordable housing and may stimulate minority homeownership with a tax credit of up to $15,000.
- With a tab of $640 billion, the plan is costly. Critics argue that it is just "throwing dollars at problems." With the slimmest of control over the U.S. Senate, it may be challenging to get the funds that the President wants.
- The plan is elaborate and will demand considerable expertise to administer. Fighting exclusionary zoning and racist NIMBYism will be difficult challenges.
- The plan does little to rein rapidly rising construction costs. With increased regulations, it is likely to add to cost increases.
- Labor scarcity calls for a broadened immigration policy.
- Labor and material shortages constrain builders' ability to build new homes. The plan does little to address those constraints sufficiently.
- Efforts to improve the Black homeownership rate have shown no success during the last half-century. It is essential to our society that this plan delivers clear Black wealth- building progress.
- Centopani, Paul. "https://www.nationalmortgagenews.com/list/how-the-elections-outcome-could-shape-5-key-homebuilding-issues/." 27 October 2020. www.nationalmortgagenews.com. 16 January 2021.
- Flavelle, Christopher. "https://nytimes.com/2021/01/06/climate/flood-zone-building-restrictions.html" 6 January 2021. nytimes.com. 1 January/ 2021.
- Joseph Biden for President: Official Campaign Website. "The Biden Plan for Investing in Our Communities Through Housing." n.d. https://joebiden.com/housing/. 14 January 2021.
- Northey, Hannah. "https://www.eenews.net/stories/1063718667." 17 November 2020. www.eenews.net. 14 January 2021.
- Kathryn Brenzel, Georgia Kromrei. "https://therealdeal.com/national/2021/01/08/senate-flip-5-real-estate-takeaways/." 8 January 2021. www.therealdeal.com. 11 January 2021.
- Congressional Budget Office. https://www.cbo.gov/budget/-options/2016/52225 8 December 2016. www.cbo.gov. 17 January 2021.
- Wake, John. "https://www.forbes.com/sites/johnwake/2020/09/05/3-most-important proposals-in-joe-bidens-640-billion-housing-plan/?sh=40b3fa657dae." 5 September 2020. forbes.com. 16 January 2021.
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About Jeff Whiton
Jeff formerly headed operations for Lennar and KB Home in Colorado building nearly two per cent of the state’s total single-family housing stock. He was honored as Colorado’s Home Builder of the Year in 2001. Whiton also served as the CEO of the Home Builders Association of Metro Denver for eight years reviving the association from near bankruptcy after the Great Recession.