2022 Projections and the High Cost of Regulation

Every year, the California Association of Realtors (CAR) makes projections for the coming year based on housing trends and financial market activity. In late 2021, CAR said home prices will likely continue to increase and that home sales will slow. Their projections are based on statewide data but based on what’s happening locally, I think they’ll hold true for Mendocino County as we get further into 2022.

Here in rural Northern California, I expect housing prices will continue to increase, but not significantly. I also think the number of sales will slow because so many people already made their move. Last year, two factors enticed people into the housing market: historically low interest rates and a shift in the job market to allow more full-time remote work thanks to the pandemic. Any pent-up demand for housing was largely satisfied.

One reason housing prices will increase locally is because we have a shortage of residential real estate. When there isn’t enough of anything to go around, people are willing to pay more to get theirs. The shortage is mostly caused by simple economics: when developers cannot make a profit, they do not build. Yet, even as state and local government officials, in their infinite wisdom, talk about making housing more affordable, they continue to pass laws that increase costs and make it more difficult to build.

Let’s take indoor sprinklers, one of my favorite examples. The state requires sprinklers to be installed in all new homes. However, until recently, Mendocino County allowed homeowners with old, unpermitted residences to come into compliance via a Class K permit, which dramatically reduces building code requirements. The idea of grandfathering in exceptions is a well-established practice among pragmatists, but the Mendocino County Board of Supervisors ignored the precedent and recently voted to require sprinklers in large Class K housing.

The thing I find most frustrating is that I have yet to see any compelling data proving the benefits of sprinklers justify the cost, especially in the Ukiah Valley where we do not have high rises. When a fire alarm sounds, people do not have to descend from the tenth floor to exit. Smoke detectors do the trick.

Sprinklers typically add about $5 per square foot to the cost of building a 2,000 square-foot house (about $10,000 total), but they provide little protection to the homeowner. To pay for that extra $10,000 over the life of a 30-year mortgage at current interest rates, you’re looking at an extra $45 per month in loan payments and another $10 per month in property taxes, not to mention any sprinkler maintenance costs. Talk with your insurance agent to see how much an indoor sprinkler system decreases your annual premium. I sincerely doubt it’s enough to offset the $660 expense.

Another example of the unnecessary expense caused by this regulation occurred when a local apartment complex had a fire that gutted one of its units. The insurance company agreed to pay to restore the unit and bring it up to current building codes because the apartment complex owner had purchased a code-compliance policy. However, when the local fire marshal discovered that the other units were not up to current code, he insisted the whole building be upgraded. (For the record, buildings must adhere to the building codes in effect when they are constructed, not to be continually upgraded.) The insurance company would only pay for the burned unit, leaving the complex owner with a $100,000 bill to upgrade the rest.

If we all want there to be rentals available at a reasonable cost in our community, the cost of owning and managing investment property must be reasonable. In the example above, if the apartment complex owner refinanced and borrowed $100K at today’s low rates, his cost would be about $450 per month plus $100 per month in increased property taxes and associated repair and maintenance. That comes out to about $80 per unit, which the owner would likely to pass on to his renters. One way or another, renters will pick up the tab, either in increased rent or in the lack of availability of new units.

If elected officials want to make housing more affordable, they should start by cutting unnecessary regulation.

If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 45 years.

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