Mary Owens: The way forward for Nevada County, continued
May 7, 2017
I will be continuing this month's article with a fundamental explanation of why building moderate-priced housing in Nevada County and most rural areas of California is challenging. This article will be focusing on the long term aftermath of Proposition 13 and the loss of local control over property taxes.
As I wrote last month, the last major step in the complete redesign of local tax issues came with the passage of Proposition 4 (Gann Limit Initiative) in 1979. But more importantly, it encouraged all districts, cities, and counties to impose user fees for new services, which were not limited under the new complicated web of spending limits of Prop 4. Home builders were now facing a myriad of "mitigation fees" when trying to build new homes or do major remodels. "Fees for service" literally meant every hour of service provided to the public for housing construction was now potentially a "billable" activity for the local governments. The resulting mitigation fees increasing over time for construction are significantly increasing the cost of building a moderate sized home. How each home is impacted depends upon where the home is located, if it is hooked up to a sewer system versus a septic system, and if it has treated water or a well.
Below is an example of estimated costs of a home built in the county that is 1500 square feet in size, with NID water and public sewer.
County road fee $5761
School fees ($3.36 a sq. ft.) $5040
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Fire fee ($0.40 a sq. ft.) $600
NID connection $10,029
Building permit $6,000
Sewer connection fee $9,500
PG&E connection fee $1,500
Total fees $29,401
The above fees average about $35,000 to $40,000 in the City of Grass Valley, and in Truckee average about $45,000. All of the fees quoted here are lower than most areas of California. Our area is not above normal.
The average construction cost of a moderate priced home are $125.00 a square foot. Fifteen hundred square feet times $125.00 equals $187,000. Now the moderate house in the county is costing $216,401 without the price of the land or profit to the contractor. If we assume a lot can be purchased for $75,000 and the contractor needs a 15 percent profit margin, now this moderate-priced housing cost to construct is standing at $335,111. Add the construction period interest expenses of approximately $15,000, and now costs have now risen to $350,111. But the contractor also has to pay a real estate agent to market the home and pay title and escrow fees upon the close. To net out the costs of $350,111 after the real estate commission to sell the home and pay the title company for their services, this moderate sized house must sell for a minimum of $376,463. That means that moderate priced home is pricing in about $250 a foot. But the developer is not getting any extra profit for all the risk in the investment of building a home. This risk can be significant if any delays occur. Interest expenses keep increasing if the homes are not built on schedule and sold quickly. There are other factors that can increase the costs of the house even more. Our example was for a home on a relatively flat lot. If the home is being built on a steep hillside, the costs of construction would be significantly higher. As we all know, finding flat land in Nevada County can be challenging.
In order to enable the contractors to build at this cost per square foot, the builder has to be certain that there are buyers willing and qualified to step up and buy these moderately sized homes at this price per square foot. Is the demand there is Nevada County? YES!!! It is not uncommon for houses for sale in this price range in Nevada County to get multiple offers within hours of the listing and go into escrow the same week the house is listed.
So why isn't more moderate-priced housing not being built? Is the issue just a Nevada County issue? No! It is a statewide and nationwide problem, and the rural areas are impacted in particular. Is there too much housing inventory in the country? NO! Existing single family home inventory is historically very low.
Are builders building at a rate that can support demand? No! (See chart). Since 2010, the number of structures built in the United States is at an historical low.
So, what is causing this economic dysfunction in single family housing? The simple answer is the Dodd Frank Act of 2010. This law needs to be amended to allow single family housing starts to flourish again in rural communities. It's a complex web of regulations gone wrong. More on this next month.
Mary Owens, CPA, MS, Principal, President of Investments, Branch Manager RJFS with Owens Estate and Wealth Strategies Group, located at 426 Sutton Way Suite 110 Grass Valley, CA 95945 | (530) 272-7500. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. The information provided has been obtained from sources considered to be reliable but we cannot guarantee that it is accurate or complete. Any opinions are those of Mary Owens and are not necessarily those of Raymond James. Raymond James Financial Services and its advisors do not provide advice on tax or mortgage issues. These matters should be discussed with the appropriate professional.
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