VALUE OF NAHB MEMBERSHIP IN 2014 ESTIMATES PRODUCED BY THE ECONOMICS AND HOUSING POLICY GROUP JANUARY 2015

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1 VALUE OF NAHB MEMBERSHIP IN 2014 ESTIMATES PRODUCED BY THE ECONOMICS AND HOUSING POLICY GROUP JANUARY National Flood Insurance Act Saves Business for Builders and Remodelers Estimated value: $1,125 per housing unit started in NAHB lobbied successfully in support of the Homeowner Flood Insurance Affordability Act. The legislation provides a more affordable rate structure for policyholders; repeals the requirement that flood insurance premiums increase immediately to full actuarial rates for homes that are sold; and restores grandfathering for properties that were paying premiums applicable to their initial flood risk rating, allowing owners to pay premiums based on the original risk zone rather than updated flood risk zones. It also restores the substantial improvement threshold that triggers a higher flood insurance rate if a remodeling project adds 50 percent level of a structure s value (a recent change had lowered the threshold to only 30 percent). To estimate the impacts, NAHB used premium rates on subsidized properties that were available directly from FEMA. A rate differential on grandfathered and non-grandfathered properties had to be estimated by applying regression to county level data on aggregate policies, premiums, and the share of grandfathered properties. The average value of properties in flood plains by county also needed to be estimated and were based on the latest American Community Survey (U.S. Census Bureau) data maintained on NAHB s server, adjusted for inflation and being near water (using the model described in "NAHB House Price Estimator, Updated"). From this information, to analyze an effect on home sales, NAHB estimated PITI for a typical mortgage on the subsidized or grandfathered properties and compared the result to the PITI that would have prevailed under a system of actuarial premiums. Using the conventional assumption of an elasticity of -1, the percentage increase in PITI was then used to estimate the reduction in sales per year. According to data from the HUD/Census Bureau American Housing Survey (AHS), 4.85 percent of existing home owners sell their homes in a typical year, and 28.5 percent of these would have spent it on a new home (also computed from the AHS). Result: $755 million more in new construction from existing home owners who won t lose value when they sell, and therefore have more to spend on their next, sometimes new, homes AHS data further show that, in a typical year, 0.8 percent of pre-1975 owner-occupied homes are remodeled extensively enough to increase the value of the structures by 30 to 50 percent. The annual cost of a standard home improvement loan for 40 percent of the value of the structure was calculated, as well as the percentage increase in the cost from moving to full actuarial rates. These numbers were applied to 0.8 percent of the affected homes. An elasticity of -1 was used to translate the percentage increase in cost to a percentage reduction in remodeling undertaken by home owners. Result: $361 million a year in additional remodeling because home owners now won t have to bear extra insurance costs simply because they remodel. Total of additional new construction and remodeling is a little over $1.1 billion per year. Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $1,125 per start. 1

2 2. Farm Bill Generates Additional Home Building and Remodeling Estimated value: $1,273 per U.S. housing unit started in The Farm Bill, signed into law by President Obama includes an important provision championed by NAHB that allows more than 900 communities nationwide to retain their status as rural areas where residents have access to important rural housing programs. USDA estimated 933 rural places would lose that status if not for this provision. NAHB investigated places in the 25,000-35,000 population range (using the most recent American Community Survey data maintained on NAHB s server) and estimated that 257 additional places would benefit due to the expansion of the cap to 35,000. Average numbers of housing units in the places in the affected population range were used to estimate the number of single-family and multifamily homes in the places benefitting from the bill. The ratios of homes in the benefitting areas to homes in the places classified as rural in 2013 were calculated and applied to USDA program data for the year (Housing Assistance Council: USDA Rural Development Housing Obligations 2013 Year-End Report). Grants, loans and $ obligated from the following programs were considered: Single-Family Housing Programs 502 Direct 502 Guaranteed 504 Repair & Rehab Multifamily Housing Programs 515 Rental Housing (all used for rehab) 533 Housing Preservation 538 Guaranteed MF Preservation & Revitalization The 538 program specifies a maximum LTV of 90% for for-profit developers, 97% for nonprofits, so $ obligated were marked up by 8.7 percent. None of the other programs have explicit LTV limits, so a conservative assumption of no difference between the loan (or grant) and the investment in housing was used. For single-family purchase loans, the national ratio of singlefamily starts to single-family starts + existing sales (from NAHB s housing forecast for 2014) was used to estimate the share of loans used to buy new homes. Results are as follows: Loans/ Grants Investment in Housing New single-famly construction 8,774 1,195,995,957 New multifamly construction 33 24,521,098 Residential remodeling 2,361 22,033,262 Total 11,168 1,242,550,317 In addition to new construction, owners of some Low-Income Housing Tax Credit (LIHTC) properties in these areas also benefit, because (due to a provision in HERA that NAHB supported) rents are allowed to be higher in certain rural areas. Using HUD s 2014 county-level income limit data file for Multifamily Tax Subsidy Properties, NAHB estimates the average annual rent difference is $564. From the same data, NAHB estimated that there are 37,351 LIHTC apartments in these areas, which produces an aggregate benefit of $21 million in extra rent to the property owners. 2

3 The new investment and increased income for owners of rental property total roughly $1.26 billion. Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $1,273 per start. 3. EPA Drops Post-Construction Stormwater Rule Estimated value: $665 per U.S. housing unit started in In a major win for the home building industry, the Environmental Protection Agency (EPA) is abandoning plans for a National Post Construction Stormwater Rulemaking, plans that NAHB repeatedly told the agency would have added onerous, costly and in many cases impractical steps to the residential development process. In a recent study conducted in part by the EPA, it is estimated that low impact development (LID) techniques proposed in the EPA s storm water rule would lead to an increase in building and site costs of one percentage point (Christian et al.). The impact of implementing this ruling in lower density areas such as single-family was estimated by NAHB to be roughly 0.5 percentage points. From these figures, NAHB was able to estimate the cost saving for the residential construction industry of $660 million in 2014 from the non-implementation of this ruling. If the rule were adopted, it would apply more stringent standards in 32 states where LID retention requirements are not currently applied by state and local jurisdictions. Based on NAHB s state housing forecast, single-family housing starts in the 32 states account for 51% of the national share. The 2014 forecasted multi-family housing starts in the 32 account for 66% of the national share. The forecasted share of housing activity in the affected states was applied to the December 2013 annual estimate of the value of construction put in place. The constructed value was aged by the Case-Shiller National HPI forecast to determine the 2014 estimated industry savings. Dividing by NAHB s forecast of 992,508 total housing starts for calendar year 2014 generates an estimate of $665 per start..4. U.S. Supreme Court Ruling on Clean Air Act Benefits Multifamily Builders Estimated value: $808 per U.S. housing unit started in The U.S. Supreme Court ruled in June that EPA doesn t have the authority to require multifamily and commercial builders to get pre-construction permits for greenhouse gases generated by the buildings they construct. NAHB joined other trade groups in filing suit against EPA in 2010 because it was interpreting the Clean Air Act to allow it to treat apartment complexes like power plants. As a result, many multifamily builders and developers would have been required to get pre-construction permits for greenhouse emissions. Typically, such a permit would cost about $60,000. Costs due to delays would add an average of about $40,000 to each property, depending on size. For a property with 50 or more apartments, costs due to delays could go as high as $200,000. The suit included a declaration from an NAHB economist estimating, among other things, that the above costs would reduce investment in multifamily housing by approximately $730 million per year. This estimate is for a typical year based on a long run average, and NAHB s forecast for multifamily starts in 2014 is close to the long-run average. However, the estimate is also based on 3

4 an average construction value of $116,515 per apartment as of The equivalent estimate for 2014 (published in the May article Impact of Home Building and Remodeling on the U.S. Economy) is used to adjust for inflation and bring the older estimate forward in time to $802.1 million that would have been lost had the EPA requirement (hat NAHB opposed in 2010, and succeeded in delaying and eventually defeating) been in effect throughout Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $808 per start. 5. Keeping Costly Provisions Out of Building Codes Saves on Construction Costs Estimated value: $1,120 per U.S. housing unit started in For years, the Construction, Codes and Standards (CC&S) department of NAHB has maintained an ongoing effort to keep costly items out of the code. When successful, this saves builders money in subsequent years in areas built to those codes. At the 2015 International Code Council hearings in Atlantic City, N.J. in early October, for example, NAHB was successful on 78 percent of the codes proposals that the association either supported or rejected, including five key proposals that NAHB fought against, to keep building codes flexible, cost-effective and productneutral. NAHB members won t directly benefit from these particular victories until local jurisdictions begin to adopt the 2015 version of the code. However, in 2014 members realized benefits from key accessibility proposals that NAHB kept out of the 2009 and 2012 IRC that would have required builders to provide elevators or lifts in all townhomes and split level homes with entrances that do not open into living space and porches on all homes (to satisfy a zero clearance entrance provisions). The annual benefits are, in fact, increasing as more jurisdictions adopt these codes and more homes are being built in the affected areas. Using the method described in the document detailing NAHB s victories for 2012, adjusting the costs per unit that Codes staff estimated at that time for inflation (using the annual CPI for 2012 and NAHB s forecast for 2014), the new estimates are that, in 2014, the above code victories saved builders $893 million in costs of including elevators and $218 million in costs of building porches on homes where they otherwise would be provided (numbers that are slightly lower than previously estimated due to recently released data form the Census Bureau showing that a smaller share of new construction would have been subject to the provisions). Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $1,120 per start. 6. Value of NAHB Designations Earned During the Year Estimated value: $250 per U.S. housing unit started in NAHB members continue to invest time, effort and money to attain professional designations offered by NAHB, which they clearly wouldn t do unless they believed the designations provided value. There is further evidence in NAHB s latest consumer survey, where 64 percent of recent and prospective home buyers agreed that contractors with such specialized, professional designations are worth paying a higher price for. A simple way to assign a rough value to a designation is to look at the revenue differential between businesses of members with and without the designation. It is possible to do this by 4

5 matching records of builders and remodelers who have earned NAHB professional designations to NAHB s 2013 Member Census. The results are as follows: Companies of builder members with one of NAHB s builder designations, Certified Graduate Builder (CGB) and Graduate Master Builder (GMB), had revenues that averaged $792,077 more than companies of builder members without one of those designations. (Note: there are too few members with GMB designations to analyze separately.) Companies of members with the Certified Green Professional (CGP) designation averaged $518,795 more. Companies of remodeler members with a Certified Graduate Remodeler (CGR) or Graduate Master Remodeler (GMR) designation averaged $700,848 more than companies of remodeler members without one of these designations. Companies of members with the Certified Aging-in-Place Specialist (CAPS) designation averaged $108,334 more. By the end of 2014, an estimated 996 NAHB members will have earned one of these designations during the year, based on records current as of August 15 and assuming that designations are earned at a constant rate throughout the year. This implies designations earned during the year will ultimately result in an aggregate value of $207.7 million. We assume designations are earned at a constant rate during the year, so half of this will be realized in By similar logic, half of the $288.4 million in value estimated for designations earned in 2013 will be realized in Total estimated value realized in 2014 is therefore $248.0 million. Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $250 per start. 7. Delayed Affordable Care Act (ACA) Requirements Saves Costs for the Building Industry Estimated value: $510 per U.S. housing unit started in NAHB pushed hard for a delay of the Affordable Care Act s requirements for employers with more than 50 employees. Partly as a result of these efforts, requirements for businesses with 100 or more full-time workers have been delayed to 2015, and requirements for businesses with 50 to 99 full-time workers have been delayed to We value this victory at the value of the tax penalty that would have hit businesses that do not currently provide health care coverage. Based on the number of residential construction businesses at the end of 2013 (from the Bureau of Labor Statistics Quarterly Census of Employment and Wages) and NAHB s Member Census, we estimate that, in total, about 6,500 home builders and remodelers have 50 or more employees. Assuming that 6 percent of these do not provide health coverage (based on the general percentage for businesses in this size category reported by Kaiser Permanente), produces an estimate of 391 residential construction firms that would have been hit with the tax penalty in The tax penalty is based on the number of workers ($2,000 x number of workers 30). According to NAHB s Member Census, the average number of employees for builder members with at least 50 employees is , implying an average tax penalty of $180,700. Multiplied by the estimated 391 affected residential construction firms produces an aggregate estimate of $70.7 million in avoided tax penalties. ACA provides for additional penalties that could affect businesses that provide health care coverage below the ACA standard if some of their employees opt out of the 5

6 company plan for that reason. We do not attempt to estimate this, so the $70.7 million is a conservative estimate. Residential construction firms subcontract out a large share of their work, and so will also be impacted indirectly by increased costs that hit their subcontractors. Similar calculations to the ones described above produce an estimate of 1,360 residential trade contractors who avoided an aggregate $731.2 million in 2014 tax penalties. This estimate is naturally larger than the one produced for builders and remodelers, because there are more residential trade contracting establishments, and they tend to have more employees. We assume that percent of this cost would affect builders and remodelers, based on the share of their businesses that trade contractors subcontract in from others (according to the latest available, 2007, Economic Census). We further assume that costs are passed onto builders with a mark-up of 17.4 percent (taking average gross profit from NAHB s Cost of Doing Business study as a general industry standard). The result is an estimated $435.6 million in additional costs for subcontractors avoided by builders and remodelers. In addition, as the deadline approached for all Americans to have or apply for health care coverage under the Affordable Care Act (ACA), NAHB conducted a series of four webinars designed to inform members about how to navigate the ACA s requirements. In total there were 279 registrants for the one and a half hour sessions. Valuing these at the $1.7 per minute standard described in #9 produces a total value of $44,776. Total annual value of avoided tax penalties, subcontractor costs, and education services combined: $506.3 million. Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $510 per start. 8. Workforce Act Funds Training for Careers in Home Building Estimated value: $18 per housing unit started in In July, President Obama signed into law H.R. 803, the Workforce Innovation and Opportunity Act. NAHB championed this bill because it will help alleviate labor shortages in the housing industry by providing investment and resources to train workers for careers in home building and other industries. In addition, the law reauthorizes the Job Corps and Youthbuild programs as federal programs operated through the U.S. Department of Labor. Enactment of H.R. 803 preserved an $18 million annual Job Corps contract between HBI and DOL that provides job training in 74 sites around the country with 151 programs. Over the long run, the bill will increase the supply of trained workers for the residential construction industry. Industry value of $18 million in the short-run. Dividing by NAHB s forecast dated 8/01/14 of 986,061 housing starts for 2014 generates an estimate of $18 per start. 9. Extending Mortgage Insurance Tax Deduction Preserves New Home Sales Estimated value: $347 per housing unit started in H.R. 5771, the Tax Increase Prevention Act of 2014, extended the deduction for mortgage insurance for 2014, including deductions paid for FHA- and VA-backed loans. Such deductions 6

7 reduce the after-tax cost of purchasing a home with a low downpayment, which is common among first-time home buyers. NAHB estimates with IRS data that the loss of the deduction would eliminate about 1.6% of home sales by buyers expecting to use the deduction. We estimate approximately 1,280 potential lost new home sales if the deduction had not been extended for 2014, reducing industry revenue by approximately $344 million. Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $347 per start. 10. Extension of Energy Tax Credits Stimulates New Construction and Remodeling Estimated value: $767 per housing unit started in NAHB has long lobbied for tax credits designed to promote energy efficiency. Recently, this involved lobbying for the extension (both prospectively and retroactively for all of 2013) of the 45L and 25C credits. H.R. 5771, the Tax Increase Prevention Act of 2014, retroactively renewed 45L, which provides builders a $2,000 tax credit for the sale of homes that achieve a 50 percent improvement in energy efficiency over the 2006 International Energy Conservation Code. In 2014, home builders are expected to qualify for $267 million in tax savings due to 45L, according to estimates from the congressional Joint Committee on Taxation. H.R. 5771, also retroactively renewed 25C, which provides consumers a tax credit of up to $500 for the purchase of qualifying energy-efficient products. The 25C tax credit supported almost 140,000 jobs in remodeling in 2009, and government data indicates that the typical energyefficient remodeling project costs a little more than $2,800. NAHB estimates that nearly 18 percent of these remodeling projects would not have occurred without the credit, however that effect is reduced due to the retroactive nature of the extension (to approximately 6%). Using tax data and NAHB estimates, the expected extension of the 25C credit for 2014 resulted in an additional $494 million in remodeling revenue for the industry. Combined, the effect of the extension of the 45L and 25C credits is an estimated $761 million in additional new construction and remodeling in Dividing by NAHB s forecast dated 1/01/15 of 992,508 housing starts for 2014 generates an estimate of $767 per start. 7