Too-STRICT CODES COST THOUSANDS

There are those who say that the only good code is no code at all. I disagree, and would dispute also that all stiff codes and regulations promulgated in the last 10 years are bad.

To say they are all bad is nonsense. Some of these codes and regulations are excellent. Some are necessary and some highly beneficial. For instance, smoke detectors save lives. Think what required smoke detectors would mean nationwide in 10 years.

Four-foot sidewalks in new subdivisions provide a safe place for pedestrians and for children to ride their bikes. A 10-inch concrete street base with a 3-inch asphalt topping and concrete curbs and gutters is far stronger than a county specification calling for a heavy stone base and asphalt.

On the other hand, a dead-end street with minor traffic other than that normally terminating there could very well do without such a heavy concrete-asphalt application. Simply put, a 747 could land on this type of surface. Residential traffic warrants less expensive streets.

Too stringent codes and excessive regulations, including too many inspections, increae costs. How much? We don't really know, because costs vary so much from place to place.

A glimpse into this area has been provided by a new National Association of Home Builders survey of builders. It deals with the costs of the 10 most overly restrictive new codes/regulations. We found a range from $1,260 per unit to as much as $3,560 per unit and as much as a whopping $4,500 in the Northeast region.

The codes and regulations governed 79 major areas: 15 in electrical, 14 in fire safety, 9 structural, 12 plumbing, 19 land and land development, 4 miscellaneous. Twelve types of impact analysis were required.

The problem was well summed up by a builder from Virginia: "The home buyer is slowly being regulated out of an affordable home."

A builder from New Jersey said: "New agencies and regulations since 1974 have added $6,000 per house."

The problem seems to be that we are relying more and more on all levels of government to police all phases of the free market economy. It is hard to turn around without some government agency looking over our shoulders.

"I don't think the government should be responsible for protecting everyone from all possible hazards," said a builder from Arizona. Of course it should not, but the government tries very hard to do just that.

The Occupational Safety and Health Administration has contributed its share to costs, confusion and delays. So far, fortunately, OSHA's efforts have been concentrated in non-residential construction, but its inroads have been felt in housing. One builder from Pennsylvania said: "OSHA is, in many respects, the worst of stupidity."

One major problem of codes is that there is little uniformity. Inspectors provide different standards of enforcement. One builder told the NAHB: "We need uniformity on a statewide basis."

On the other hand, we heard: "Indiana is fortunate in having uniform statewide codes with considerable industry participation in the adoption process." Gordon V. Smith, of Miller & Smith in Fairfax, wrote: "We attempted to hire a handicapped person but found that we could not afford to, since such an individual must be included under our own standard company health plan even though he would have been happy to have the job. He understood our reluctance to include him in our health plan, since this would add about $5,000 per year to the cost of this employ."

Respondents to the NAHB codes/regulations survey listed burning restrictions as the most overly restrictive code. Nearly three-fifths indicated this to be a major problem. The cost per unit, from the consumer point of view, was not all that much-between $90 and $150 per house. But it does provide additional irritation and delays, as well as cost.

Let me list some of the major problems in the order of importance given by builder-respondents:

Burning restrictions.

Ground fault circuit interrupters (outdoor, in bathrooms and on construction sites)

Oversized egress windows in bedrooms.

Mandatory dedication for parks and recreation.

Excessively wide streets.

Sidewalk requirements.

Minimum lot size.

Fire-rated wall and door between garage and house.
Excessive street and access roads requirements.

Setback requirements.

Antisiphon device requirement.

Restriction on Romex electric cable.

Smoke detector requirements.

Extra lighting outlets.

Restriction on use of 24-inch spacing of studs.

Bridging requirements.

Mandatory dedication for community facilities.
Tree ordinance.

Minimum floor space requirement.

Overly restrictive provisions for seismic design.

Now let's look at some examples of how these codes/regulations affect costs. The old BOCA code allows for stair risers of 84 inches. The new code is for an 8-inch riser. This is a minute difference, right? But this minor change requires an extra riser, which means that the stair system has to be deeper. The deeper stair system cuts valuable inches out of some rooms. Also, the extra riser adds to the stairway cost. See the domino effect emerging from a 4-inch code change? Virginia now requires a 7 percent grade on residential streets instead of the previous 10 percent. This means more cutting and filling, and fewer trees can be saved. Certainly this change adds cost and is unnecessary on a residential street, not to mention the impact on environment and beauty. The regulation was intended for highways-with speeds up to 55 m.p.h.

Final electrical inspection can be obtained only after installation of all appliances. Many unoccupied houses are needlessly exposed to theft and vandalism. Replacing appliances adds cost and inconvenience.

Each building site now must be tested for soil bearing quality at a cost of $75 per house. Since there is no history of a problem with this in the Washington area, the expense is unnecessary.

Building fees have more than doubled in the last two years. In some instances fees to review engineering drawings cost more now in Fairfax County than it originally cost to have the engineer prepare the drawings.

All these examples demonstrate that, although there is no single major cost item which one could identify as causing his house to increase in cost, together they make a substantial impact on the prices of new units.

Gordon Smith provided a thought-provoking summary on the subject: "This gives you an idea of the types of added expenses that are continually being placed upon the industry, most of which are questionable upgrading of standards which have served very adequately in the past.

"This continual marginal upgrading adds to costs and prices housing out of the range of a number of families, who then are forced to live in marginal housing that was built under very primitive early codes, and they have very poor electrical wiring, no insulation and inadequate plumbing. Thus it is my contention that these new senseless code requirements are forcing people to stay in outmoded housing which, ironically, adds to their safety and health risks which the code revisions are purported to help."

WHY CYCLES HURT GIANTS THE HARDEST

On the average, builders of new homes make a little more than 6 percent in net profit before taxes. Their general overhead is another 6 percent of the price, while marketing expenses are a little less than 3 percent.

Within these averages there are wide variations. Some builders make money and some lose. For instance, builders with an annual volume of $500,000 to $1 million show a range from a low quartile of 2.6 percent to a high of 10.9 percent net profit.

Typically, the medium-size builder, with an annual volume of between $1 million and $2 million, makes the least profit, 5.8 percent, and the large-volume builder nets an average of 6.0 percent.

The small builder, with sales of under $500,000, makes the highest profit, averaging 6.5 percent.

He also makes more on the money he puts into the business than the giant builder. His net profit on owner's equity is 35 percent, while the net profit for

those with a volume of more than $8 million net return is only 28.3 percent. This is a major reason why the little guy survives the ups and downs of the housing cycle, while giants go broke.

Only big builders have the capacity to invest in equipment and large land tracts for future development and to diversity into other activities. Large investments in land tend to get builders into trouble.

There are exceptions, such as Ryan Homes, which do not hold land or develop it. They buy individual lots and pre-sell their units.

Giants in the industry, on the other hand, work with relatively less of the entrepreneurs' own money than the small builders. This is because they often sell equity shares to the public, while small builders have their own money sunk in the business.

Many of these data come from "The Second Cost of Doing Business," a study done for the National Association of Home Builders in 1975 by the consultant accounting firm of Laventhol, Krekstein, Horwath & Horwath. Some of its conclusions were:

General and administrative expenses seem to decrease as a percentage of sales as volume increases. This decrease can be explained by economies of scale. Financial expenses are higher for larger builders than smaller ones. (One would have thought it was the other way around.) The explanation seems to be that smaller builders rely more on their own equity, while larger ones tend to have a greater capacity to borrow.

Marketing expenses tend to decrease with the increase in sales volume. This is attributable to the larger builders' ability to use their own staff, maintain models and benefit generally from economies of large volume.

The "current ratio" shows that builders with sales volume of between $4 million and $8 million are the most solvent. They can best maintain their liquidity. The percentage of net profit on total assets employed shows a downward trend with volume. Ordinarily, increasing volume results in better utilization of assets, but even this apparently has some maximum limitation in terms of volume level. Now let us put a house together and see how the cost pieces fit at different times. This is illustrated in the following table (1977 figures are for the first quarter): SHARE OF COST BY MAJOR CATEGORIES

As I pointed out in previous articles in this series, today a substantially smaller portion of the total cost is left for the house-the bricks and mortarthan ever before. Only 47 cents out of each dollar are left for the structure, compared to an estimated 69 cents in 1949.

What do we pay for the structure itself? This is shown in the second table. I broke down the cost for a typical house built in 1972, 1973, 1974, 1975 and in the first quarter of 1977. The sales price in 1977: $45,200.

As you can see, there has been little real change among the individual items over the years. Lumber, millwork and carpentry labor are the three largest components of the hard cost. Plumbing, concrete and masonry are the next group of major items, followed by drywall, wood flooring, heating and electrical work. This house, of course, could not be built in Washington. As everybody knows, this is one of the most expensive areas in the country. What the data try to portray are the nationwide costs of a typically priced unit.

There are some peculiarities of the housing market affecting costs which I have purposely left out of this series in order to concentrate on relevant cost issues. However, they deserve at least orief mention.

As we have seen, the cost of land has increased disproportionately, for the most part because of decisions of local, state and federal agencies either to limit the usage of the existing sewer systems, because of no-growth attitudes of some communities, because of environmental problems and other planning controls.

This happened at a most unfortunate time, when the demand for new homes started to accelerate because of the bulge of post-World War II babies entering the market. This demand is substantially above the demand experienced during the 1960s. At that time we could easily be satisfied with an average of about 1.5 million new units annually. We need at least 1.8 to 2 million units through the 1970s.

Another piece of the puzzle of new-housing cost has been the parallel increase in the prices of existing homes. Prices of new homes are interrelated with prices of existing homes.

Hence, if people pay 12 to 15 percent more for an existing house than the previous year, as has been the case in some "good" parts of the Washington area, the prices of new homes-and particularly the price of land in those areas-will follow the same trend.

There are some costs which we cannot do anything about, as they are determined by the prices of all other goods.

The cost of other factors, however, such as land, could be controlled by increasing the supply. There are still others, such as nonproductive fees, charges and environmental costs which add little or nothing to the house, which could be reduced. This would be a great help in stopping the fast rise in overall cost.

SOURCE US Department of Commerce. National Association of Realtors, prepared by National Association of Home Builders. Economics Department