Can Trump Cut Housing Costs By 23 Percent?

Can Trump Cut Housing Costs By 23 Percent?Reducing home prices by almost 25 percent would radically change the US housing market and one man says he can do it.

Speaking before the Board of Directors of the National Association of Home Builders at a Miami meeting last week, presidential candidate Donald Trump said “twenty-five percent of the cost of a home is due to regulation. I think we should get that down to about 2 percent.”

Let’s see: 25 percent less 2 percent equals home costs which are 23 percent lower.

Can that really happen? If Trump can produce such results why isn’t this the biggest story of the presidential campaign? The entire US economy would be transformed. A president who could perform such a housing miracle would be as popular as Washington, Roosevelt or Kennedy.

To be successful Trump will have to deal with two interesting propositions. The first is that regulation unfairly increases home prices by 25 percent. The second is that a Trump Administration can reduce such costs by more than 90 percent.

Trump and the 25 Percent Illusion

Speaking before the House Financial Services Committee Subcommittee on Housing and Insurance in March, NAHB representative Granger MacDonald explained that “25 percent of the price of an average single-family home built for sale is attributable to regulation imposed by all units of government at various points along the development/construction process.”

The implication is that, if true,  home prices have swelled 25 percent because of unfair and burdensome regulations that can be easily removed. In fact, that’s not the case at all. To see why we have to look at the source of the 25 percent estimate.

In 2011, Paul Emrath, Ph.D., an economist with NAHB’s Economics and Housing Policy Group, calculated that “regulations imposed by government at all levels account for 25.0 percent of the final price of a new single-family home built for sale.”

However, Emrath also explained that his figures were limited to costs.

“No attempt,” he said, “is made to estimate possible benefits resulting from a particular regulation, or category of regulations, or to argue that costs associated with particular regulations are (or are not) justified.”

So sure, requiring homes to have sewer hook-ups, gas lines that don’t leak and walls that don’t collapse can be seen as regulatory “expenses” but who would want anything less?

Trump and Mortgage Rates

In his March statement MacDonald said “the Federal Housing Finance Agency (FHFA), the Federal Housing Administration (FHA) and the federal banking regulators all have taken steps to ensure the U.S. economy will never again be as vulnerable to risky mortgage lending. The collective force of the actions taken by these agencies, along with the lingering doubts and uncertainty of market participants, has resulted in an undue restriction on the availability of mortgage credit to many creditworthy borrowers.”

Just how many “creditworthy borrowers” cannot get mortgage financing? This is about the best time in the past 50 years to get a mortgage. Existing home prices have risen for the past 52 months as of June according to the National Association of Realtors. Home sales, says NAR, are “at their highest annual pace since February 2007.”

If affordability is a material problem then how come home prices and sales are soaring? Aren’t buyers financing most of these sales?

“Overall,” says the University of Michigan’s Surveys of Consumers, “the data remains consistent with real personal consumption expenditures improving at an annual rate of 2.6% through mid 2017, with new and existing home sales also benefitting from low mortgage rates.”

Mortgage rates float with supply and demand. According to Freddie Mac, 30-year, fixed-rate prime mortgages were typically priced at 3.45 percent last week, very close the 3.31 percent record set in 2012. The average borrower in recent decades paid 8.6 percent for mortgage financing according to Standard & Poors. Nationwide, there are some 2,400 down payment assistance programs and big banks have in hand excess reserves worth $2.2 trillion, money they have not loaned out.

Getting rid of a few fees today will mean nothing if interest rates go up. And a President Trump — just like a President Obama or a President Clinton — has no authority to set mortgage rates. Not only that, but since much regulation is local no president can do much if anything about many costs without establishing a federal Department of Zoning and Licenses, an expansion of government few would favor.

Trump and Cost-Shifting

There are also complaints about the Davis-Bacon Act, legislation from 1931 which according to MacDonald “often sets the highest industry wages or organized labor wages in an area as the prevailing wage for federal projects.”

In other words, if a builder erects an apartment project funded with government-backed dollars then workers must be paid something more than the minimum wage. One solution, of course, is to finance private projects with private capital and avoid the complexities of government backing.

But what if Davis-Bacon was repealed? Workers would be paid less and expenses would be shifted to taxpayers.

A 2015 study from the University of California at Berkeley found that “persistent low wages are costing taxpayers approximately $153 billion every year in public support to working families.” If worker incomes were cut a President Trump would face a bigger deficit.

Trump, according to the NAHB, said at the Miami meeting that over-regulation is costing the economy $2 trillion per year. But what is over-regulation? Think of all the money we might save by letting drug companies market untested medicines or allowing grocery stores to sell undated milk.

The bottom line: While reducing regulatory costs is a laudable goal, ignoring regulatory benefits is a price too high.

(Photo courtesy of Kimson Doan)

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