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The NAHB “Pricing Out” Farce – Spinning Statistics

Courtesy of Buddy Dewar (NFSA VP of Regional Operations)

As local governments attempt to adopt national model codes that include the fire sprinkler requirement, homebuilders argue that the added cost of fire sprinklers will chase away potential homebuyers. Homebuilders often cite the National Association of Home Builders (NAHB) spun statistics by saying, “According to the NAHB, a $1,000 increase in the home price leads to pricing out about 206,269 households.” This laughable statistical spin is actually believed by some homebuilders and even some elected officials.

My first reaction to this statistic was “If homebuilders are primarily concerned with ‘affordable housing,’ why doesn’t the homebuilder reduce the price of the new home by $5,000? That means 1,031,345 more households will be priced into the new home market!” Yeah, sure.

There are two problems with the NAHB arguments. First is the numbers. Second is that the NAHB ignores how houses are priced.

Let’s look at the data. The NAHB’s August 1, 2014 “Priced Out” report (available at the NAHB website) contains an obvious flaw. The NAHB economists use households with incomes that could never qualify for a home mortgage as the basis for their findings. The U.S. Household Income Distribution for 2014 Table in the NAHB paper includes over nine million (9,037,576) households with an annual income of less than $10,219. Why are these households even included in these statistics–even in the days of easy mortgages, a household of less than $10,219 would never qualify for a home loan!

Let’s take this one step further with the help of a mortgage calculator at BankRate.com. Using the new median house price of $275,000 and a 10 percent down payment suggested by NAHB, a homebuyer would require an income of $53,745. Going back to the U.S. Household Income Distribution for 2014, it’s clear that 53 percent of U.S. households would not qualify for the median priced house of $275,000. Yet these non- qualifiers are used to skew the statistical results.

According to the “Priced Out” NAHB theory, if the price of the home was increased by $1,000 (creating a mortgage of $248,750 after the down payment), the homebuyer’s income would need to be $53,962; only $217 more than the required income prior to the $1,000 increase. This $217 increase in required annual income supposedly would price out more than 200,000 (206,269) households. Even if one were inclined to overlook that roughly half of the “homebuyers” are non-qualifiers to begin with, this “Priced Out” theory suggests that over 200,000 (206,269) potential homebuyers would be rejected by a mortgage broker because they lack $4.17 a week to cover the added $1,000 to a negotiated sales price of the home!

If you are feeling wonky, pull out your calculator and have some fun with the rest of the numbers. The NAHB plays fast and loose with its data. For example, mortgage companies usually require a 20 percent down payment, reducing the mortgage on a $275,000 median priced home to $220,000. The income needed to qualify for this loan would be $47,773 (compared to the $53,745 cited in the NAHB stats), making the median priced home reachable to millions more households. Is that why the NAHB uses the 10 percent down payment figure in its statistics?

Additionally, the total households in the tables don’t add up and the expected growth numbers are suspect (do these include those aforementioned low-income households?).

As if obfuscating the numbers isn’t enough, the NAHB contention that a $1,000 increase drives out “X” number of buyers does not take into account the way in which houses are priced — and sold.

When arguing against fire sprinklers, homebuilders often single out a fire sprinkler system as “the” reason potential buyers are priced out, builders go out of business, and communities suffer from stunted development. To suggest that any one component in the home be computed individually in the final mortgage is a misstep. This ignores the market factors that go into pricing a home: location, local amenities, local economy, etc. To use the NAHB’s logic, two homes using the same building components located in different areas of town should be priced exactly the same.

The truth is that home prices are negotiated. Consider this scenario: A homebuilder lists a new home for $300,000. The homebuyer offers $290,000. The builder accepts. What happens to that $10,000? Does this mean the granite countertops are free, the fire sprinkler system is free, the kitchen island is free? Absolutely not, all of these items cost the builder money.

ALL of the materials needed to build a home should be figured into the home price collectively, not singularly. The builder is selling the entire package: the house, the infrastructure, the school district, the neighborhood – all of these components contribute to the negotiated final sales price. Homebuilders price new homes at the maximum amount expected. Like all negotiated products (think cars), the “list price” is often overpriced as the builder expects to settle for a lower offer.

The difference between what it costs the builder to build a house and the agreed upon sales price is the builder profit margin. We all support making a profit on one’s products. That is what makes our economy work. But don’t try to confuse the consumer and elected officials with misrepresented spins on cost and profit.

The NAHB “Priced Out” paper is false and misleading. Most notably, the NAHB includes over 61 million (61,998,613) households that cannot afford the median priced home used in its example, yet these households are used to generate the supposed 206,269 total households priced out if that median priced home sales price is increased by $1,000. The NAHB even includes households that do not have enough income to qualify for even the lowest priced homes, further skewing the “Priced Out” statistics.

Using the cost of individual building components as a reason to “price out” potential homebuyers ignores the basic economics of home sales.

And while we support reducing needless fees and costs which add to the cost of building a new home, we strongly oppose any effort to knowingly build an unsafe new home for the sole reason of maximizing builder profit margin. Publishing false and misleading papers is the trial lawyer’s dream.

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