Home prices in Baton Rouge are still creeping up, but the largest contributor may not be what you expect, a National Association of Home Builders economist said.
Houses in Baton Rouge cost 31% more than they did during the pandemic, Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis for NAHB, said Wednesday afternoon in a presentation to the Home Builders Association of Greater Baton Rouge. While a flurry of factors like rising interest rates and high cost of living has impacted housing affordability, Nanayakkara-Skillington said increased regulatory charges have become one of the largest obstacles in the housing market.
Broader economic conditions in the United States have been uncertain: The war in Iran has increased costs for essential commodities like gasoline and fertilizer, economic growth is largely concentrated in data centers and artificial intelligence, and the bulk of consumer spending is from the top 20% of earners. Cost of living has outstripped take-home pay for many Americans, creating a tough environment for home building and buying, Nanayakkara-Skillington said.
Regulatory costs, which include charges for conducting studies and changes to building codes, total an average $132,000 per new home construction, according to NAHB data, making up about a quarter of a new home cost. That is 40% higher than average regulatory costs five years ago.
Changes to building codes are the largest share of the regulatory cost at about $40,000, followed by fees paid by the builder after purchasing the lot, which can be about $20,000. Other costs include applying for zoning approval, which can amount to $7,000.
“It's almost impossible to build at those levels when the regulation cost alone is about $132,000,” Nanayakkara-Skillington said.
The association expects single-family home building to fall by 4% by the end of the year and does not forecast an increase for the next two years. There is a 1.5 million housing unit deficit, Nanayakkara-Skillington said, which needs to be remedied by building more than 1.1 million homes each year.
Mortgage rates rose above 7% last month, and Nanayakkara-Skillington said she expects them to settle around 6% — the COVID-era mortgage rates of 2% to 3% are long gone.
The waning housing supply is coupled with fair demand, especially from millennials. Though the national population growth is slowing, Louisiana and East Baton Rouge Parish have seen an uptick.
Struggles in the single-family home market have fueled activity in the townhouse and multifamily markets as a result, she said. Residential remodeling is set to be the best performing sector, she said, powered by trends where people are choosing to age-in-place or upgrade their homes rather than move.
Labor is a challenge too — with competition from large data center projects, residential construction has struggled with talent, losing 50,000 workers in the past year, while non-residential construction added 100,000 workers, according to NAHB data.
Scott Bardwell, owner of Bardwell Homes, a Baton Rouge custom homebuilder, said demand for houses has been moderate, with no major swings in either direction. Most home recent sales have been a result of people moving into town or due to other major life events like death or divorce, he said.
The home building labor force took a hit with the national immigration crackdown, and Bardwell says he foresees fewer builders in the future due to consolidation of businesses in the industry and baby boomer retirement. But he is optimistic about the local market due to population growth and job opportunities.
“I would rather be in Baton Rouge than almost any city in the country because we do have jobs. We are growing. Our housing stock is aging. People want new houses,” Bardwell said.
Matt Holmes, general manager of Holmes Building Materials, said the cost of lumber has not made a huge impact on home building costs — which typically gets a bad reputation after its price spike during the pandemic — but manufactured home building materials are contributing to housing unaffordability. The local population growth makes him hopeful, but inventory needs to grow, he said.
“Right now, we're growing together, and there just seems to be too much inventory for like spec homes and stuff around that range,” Holmes said.