Are Housing Prices Mostly Regulatory Costs?

 I've done research on housing costs, inflation, and regulation many times over the last decade or so.  See my previous article for background information that might be useful in the following.  Recently I claimed that over 70% of material costs for housing are due to building cost, and someone challenged this claim, asking for sources.

Now, I may have gotten ahead of myself, and I need to explain a few things.  First, I don't actually think the costs are directly due to building codes.  Rather, building codes require specific types of materials.  Many other viable options exist that are much cheaper, but building codes generally don't allow them to be used.  These include things like compressed wood products that are stronger, more fire resistant, and often even cheaper than the much more heavily regulated 2x4s, plywood, and drywall that are practically mandatory.  (In fact, compressed wood products are even more fire resistant than most steel studs, which will weaken and even melt with heat that would require many hours to get through compressed wood.)  Why aren't modern homes just built with poured concrete?  Because electrical code has requirements that don't make sense and thus cannot even be followed with poured concrete walls.  There's a reason we don't see extremely cheap 3D printed concrete houses flooding the market.  It's because building codes assume houses must all be build with hollow walls where plumbing and electrical can go, and the requirements making those assumptions cannot be satisfied with any other architecture, even if it is far more fire proof, earthquake resistant, water proof, and generally safer and technically superior in every way than "traditional" construction.

If you need evidence of the above, see this source on legal problems with 3D printed construction.  If you need more, you can also look up legal problems with very low cost tiny homes and with cantilever homes.  Building codes also get in the way of underground construction, which can be much cheaper in some areas than traditional construction (and which can significantly reduce heating and cooling costs).

So, the point here is that building codes restrict what construction materials builders are allowed to use.  This is where regulatory costs of these "legal" construction materials becomes a building code cost.  I don't have the time or energy to find sources on every construction material used in modern home construction, but I can give you one very solid one: Wood.  Here is a 2018 article about the impact of tariffs (a form of regulation) on home construction costs.  It is estimated in the article that this increased home construction costs by an average of $9,000 (and apartment construction by $3,000 per apartment).  That's on the low end of regulatory cost increases, likely running around 0.25% to 0.33%.  And keep in mind that this is just one regulation increasing the price of wood.  EPA regulations on logging and on energy (used for milling and kilning the lumber) likely add significantly more than that.  That article also estimates that regulatory costs make up 32% of multifamily developments (mainly apartment complexes).

I also have some personal knowledge of concrete production processes, and one the steps is heating limestone to high temperatures and maintaining those temperatures for several hours.  This causes the calcium carbonate to release its carbon component in the form of carbon dioxide.  EPA regulation over the last ~10 years or so has hit the concrete industry hard both with regulations increasing energy costs and with CO2 emissions regulations, making concrete foundations (also legally required by most building codes) significantly more expensive.

A more recent article explores how lumber price volatility, caused in part by concerns about regulatory changes and the impact of U.S. Treasury interest regulation, has caused significant increases in home construction costs.  This article estimates that regulations on construction materials increases home construction costs by 14.94%.  I don't have data on what percentage of home construction costs goes to materials, but labor is generally the bulk of the costs, so the regulatory costs included in material costs are almost certainly well over 30% and it's certainly conceivable that they are as high as 70%.  (Also, thus far I've not seen a study that takes all regulatory costs into account, including trickle down costs like transportation, EPA energy regulation costs, and such.  So that 14.94% likely only includes direct regulatory costs at the last step before the materials are bought by the construction company, which is only a small portion of total regulatory costs.)

This paper explores the regulatory costs of construction during development and construction (which doesn't even include the regulatory costs that went into the gathering, fabrication, and transportation of materials), and it estimates a total regulatory cost during those stages of 23.8% for single family homes. 

This article discusses the study and includes some nice breakdowns of data from the paper.  It also includes some additional data about regulatory price increases of lumber (mainly tariffs and market volatility caused by unpredictable economic regulatory changes) and lists a number of other materials impacted.  It also mentions delivery delays caused by pandemic regulations, which also contribute to cost increases significantly.

On top of all of this, I did construction work off and on in my late teens and early 20s, and I learned about additional impacts of regulations that don't typically get counted in estimates.  On one construction site I worked on, a team of plumbers spent their entire work shift sitting around doing nothing, because the electrical union had convinced the state government to add to building code a restriction on who can even touch electrical equipment.  Some electrical equipment, I forget what but something like a breaker box or some such, had been left too close to a sewer line or water line, such that the plumbers couldn't do the work they were supposed to do, and they couldn't legally move it.  The electrical workers weren't scheduled to come in until the next day, but the plumbers couldn't just take the day off, because they had families to feed, so the construction company paid for a day worth of labor from some 3 or 4 plumbers for nothing.  And it actually ended up costing a bit more than that, because the plumbers weren't scheduled for the next day, and they had to get their job done before insulating (what I did) and drywalling could be completed.  Delays caused by regulations don't just cost time, they also cost the wages of people scheduled to work who can't because of the delay, because people still need to make a living, whether everything is ready for them to work or not.

Anyhow, I don't have the time or energy to go step-by-step through the supply line working out the exact percent of the cost that comes from regulations.  I've provided plenty of sources showing that individual steps can end up costing at least 30% each in regulatory costs for the end product of those steps, and there are many more steps than just one for any kind of construction material.  Just 30% per step hits 69% in a mere two steps.  (This is a compounding increase, not an additive one, so the math is 1.30^2, which gives 1.69 or an increase of 69%.)  The truth is, I was really hedging when I said 70%.  It's probably closer to 80% or 90%, and that's just material costs.  When you include labor regulations, direct costs of build codes, licensing, and all of the other stuff, the total cost of a home is probably no less than 60% to 70% regulation, likely at least 80%, and if the math on regulatory compounding in my last article is right, it may be as high as 90% or possibly even higher.

The fact is, a significant majority of the cost of houses today is regulatory costs.  Even before loan costs and bank fees, you are mostly paying for the regulation.  You are paying for contractors to use more expensive, inferior materials.  You are paying for vehicle safety regulations that provide only marginal safety benefits.  You are paying for emissions and energy restrictions intended to solve problems that haven't even been proven to be real problems.  You are paying for plumbers to sit on their butts all day, so that the electricians can feel more secure demanding excessive pay for their labor.  And after all of that, the little bit of money remaining is what is actually paying for your house and the legitimate labor that went into its construction.

Unions

I have a problem with unions.  It comes down to two things: Unions are too powerful and too easy to abuse.  Unions are currently absolutely necessary to take care of problems that the government refuses to treat fairly.

The recent Supreme Court ruling on a dispute between an Amazon contractor and its warehouse employees (which I have discussed in more detail in a previous post) illustrates the second part of my problem.  Without unions, many workers are just plain not treated fairly.  In the Amazon case, workers were being forced to go through excessively long security checks daily without pay for the time spent.  Our Supreme Court justices (whom I must assume are idiots, because the only other option is that they are deliberately helping to enslave and oppress innocent Americans, and I want to give them the benefit of the doubt) declared that businesses do not have to pay workers for time spent doing anything that is not, in essence, part of the job description.  At this point, this declaration now counts as an infallible part of U.S. law.  The government offers no protection for what amounts to blatant wage theft.  There is only one solution: unions.

Unions were originally created in response to government inability to enforce fair labor practices.  In the early U.S., it was common for employers to underpay workers and to require far more hours of work than is healthy or fair.  Unsafe work conditions were more common than safe ones by a very wide margin.  People were regularly inured or killed in workplace accidents that could have easily been prevented, because owners were too cheap to spend even small sums to ensure safety.  Children were treated as slaves, working 16 hours days in these conditions, for so little money that entire families had to work, and that was still not enough to get by.  The government was not powerful enough to do anything to stop these unfair practices, and in many cases, the government did not have enough reach to even be aware of them.  The solution was labor unions.

Workers in these conditions eventually banded together, demanding fair treatment.  Their employers refused the the demands and threatened to fire anyone who continued to dissent.  Eventually the workers realized that if all of them dissented at once, their employers would be unable to replace them all fast enough to avoid financial catastrophe.  The worker strike was born (it was actually born in France, but it was quickly adopted by oppressed U.S. workers).  Nearly all of the workers in one or more factories refused to continue work until conditions, hours, and wages were improved.  Employers were powerless against the unions because they were dependent on the employees.  Firing them all would result in financial ruin for the company.  Initially the government panicked: Worker's unions threatened the U.S. economy.  If workers had so much power, they could easily force businesses to pay so much that it would cause rampant inflation.  Besides that, even short strikes resulted in production halts, and in factories that produced necessities, those halts could result in serious harm.  This did something else very important though: It put the problem of workers right in the face of the government, where it could no longer be overlooked or ignored.

The government realized that treatment of workers was a major problem.  It also recognized its responsibility in doing something about it.  The government still did not have the power or reach to handle the problem on its own.  It did have the power to protect the workers in their own attempts to deal with the problem.  Business owners lobbied the government to make unions and worker strikes illegal.  Their claim was that these things caused economic instability.  Their claims seemed reasonable, however, the government eventually recognized that the underlying problem was not the strikes, but the unsustainable hours and pay, as well as the often deadly work conditions provided by employers.  Laws were passed to protect unions and striking workers from retaliation.  Currently, workers cannot be fired for discussing unionization, actually unionizing, or for striking.  Workers who are striking on economic grounds (wages, other compensation, or work hours) can be "permanently replaced" (they cannot be fired, but if a willing replacement can be found, the strikers hours can be reduced to 0 indefinitely, which is approximately the same as being laid off).  The government also created a set of safety and treatment requirements and guidelines for how employees may be treated.  Strikes related to these issues are further protected, prohibiting even permanent replacement.  When it comes to safety and other government protected employee rights, replacements hired during a strike must be fired to make room for striking employees returning to work once the dispute has been resolved.

The potential for abuse of unions was still clear, so some restrictions have been added.  Closed shops, where the company may only hire union members, was strictly prohibited.  Closed shops allow the union to control all hiring decisions by restricting admittance into the union.  This gives the union veto power over any hiring action.  In the U.S., closed shops are illegal.  Union shops, where new hires are required to join the union after being hired, are legal, as well as agency shops, where non-union members must still pay union dues, and open shops, where employees may choose but are not required to pay dues if they are not union members, are all legal in the U.S..  Prohibition of closed shops prevented the most obvious abuses of unions, but it still left some loopholes, most of which still exist.


When unions were originally created, they were necessary.  They were very useful, and they did a great deal of good.  Since then, many things have changed.  The biggest change is power and reach of the government.  Workplace safety is no longer a serious union issue, because OSHA, a government agency, defines and enforced workplace safety.  If a workplace is unsafe, it is faster and easier for an employee to report the violation to OSHA than it is for a union to try to resolve the issue, and the penalties for those violations are enforced by the government, making workplace safety violations fairly rare.  Wages are still a problem, but not because the government is not powerful enough to do anything about it.  They are a problem because the government refuses to do anything about it.  Worse, the most common places for wage issues are not well suited to unions, because employee turnover is too high.  In the past several decades, most union wage issues were not problems of employers paying unfair wages.  Most of the issues were greedy employees who were already being paid far higher than the U.S. average wanting more than their fair share (and, in the case of the U.S. steel industry, this was one of the blows that ultimately killed it).  Unions are no longer useful tools for enforcing fair wages.  Instead they are tools for overpaid employees to rip off their employers even more.

Work hours were another major thing that unions were good for.  Twelve to sixteen hour work days were common.  Unions pulled the U.S. work week down to 40 hours and the work day to 8, requiring extra pay for any time worked beyond that.  Of course, the goal was actually closer to 35 or 30 hours a week (20 according to some), but unions lost sight of that goal almost a century ago.  Unions are no longer necessary to enforce this though, because the government has enacted laws prohibiting employers from giving employees more than 8 hours of work in a day and 40 in a week, with an additional requirement that when this is violated, employees are paid extra for time beyond those limits.  This is no longer a union problem; it is now a government problem.  Worse, despite unions and government, the average American voluntarily works an average of 50 hours a week and often the overtime goes entirely unpaid.  When the workers don't care, there is little unions can do to fix the problem.

Overall, unions have lost most of their usefulness.  They still have potential for abuse though.  Unions have a great deal of lobbying power.  In Alaska, in the mid '90s I believe, the workers at some of the power plants went on strike.  I don't know all of the details, but I do know that the labor union exercised power that belongs only to government and individual citizens, by manipulating the state government in making some very harmful laws.  The power plants hired electrical workers from Washington state, as temporary workers until the strike was resolved.  In retaliation, the union lobbied the state government to change certification laws to require electrical workers in Alaska state to have gone through their training in-state.  In other words, a journeyman or master electrical worker in Washington state could only be hired as an apprentice in Alaska, without going through all of the time required for certification within the state of Alaska.  The union did this to put more pressure on the power company by denying them well qualified temporary workers (the law specifically prohibited hiring them into positions that normally required journeyman certification).  Besides being a low and very unethical blow, this has some severe economic implications.  I am certain the argument given to the legislature and governor was that hiring out-of-state workers would drain money from the state economy.  I don't think this justifies using the law to lie about a person's job qualifications, but besides that, this economic justification was incomplete.  The end result was that the workers got most of their demands.  The economic consequences of that was increased cost for power, which resulted in economically damaging inflation in a state where the cost of living is already quite high.  There may have been short term economic costs of hiring out-of-state workers, but the long term costs of not doing so were far worse.  There is also another long term economic cost: The electrical workers union in Alaska now has a legally enforced monopoly on electrical labor.  The political power held by unions has not just been harmful in Alaska.  In other places in the U.S., unions have used the law or other political influence to merge with other unions against their will (by "merge," I mean "hostile takeover").

Unions have largely become for-profit institutions in the U.S..  Their primary goal is no longer doing what it best for the workers or even representing the workers.  Their goal now is to do whatever gets the union the most money.  This frequently means demanding higher pay even when it is not needed or fair.  It also preempts any requests for reduced hours, because reduced hours means lower gross pay, which means lower dues.  By allowing union and agency shops, the government has allowed unions to force employees to become union members and to pay union dues against their will.  Unions in the U.S. typically have a number of permanent employees who are not actually members of the union.  In many unions, this includes a CEO and other administrative positions, who make decisions about what the employees want, without actually having any experience of being one of those employees.  Some of these positions, like lawyer and accountant, are justified, but full-time administrative positions in a union are absurd.  Unions are now run primarily by people who are totally disconnected from the union members and their work environment.  Frankly, a union that is a for-profit business should not have any degree of legal protection beyond what is normal for any other for-profit business.  Otherwise, it is even more prone to abuse.

So, now we come down to the problem: The government now has the reach and power to make unions entirely obsolete, and it has already made them mostly obsolete.  Instead of doing that though, it is actually making unions more necessary.  Unions should no longer exist, because they should no longer be needed.  When they were created, the potential for good outweighed the potential for abuse.  This is no longer true...except, when the government fails to do its primary job of representing the will and best interest of the people.

The Amazon case is prime example of where unions are useful.  The employees are being robbed by their employer.  They could unionize and strike, demanding pay for their time worked, demanding that the security check be listed in the job description (making it an essential part of the job, and thus legally part of paid work time), or demanding that the security checks be discontinued.  They could even unionize and heavily lobby Congress to repeal the highly constitutionally questionable law the Supreme Court used to justify its appallingly oppressive decision (even abuses of power can have legitimate non-abusive uses).  The problem I have with this is that they should not need to unionize to get paid for all of the time they spend doing work required by their employer.

An employer should have the right to require employees to do worthless work (plenty already do it anyhow), but employees should have the right to get paid regardless of whether the work required is profitable or not.  This should be legally protected.  What free society has a law that explicitly permits employers to blatantly and openly require work time from an employee that does not need to be compensated?