PG&E Codes and Standards White Paper – New Home Cost v. Price Study

February 4, 2016

It is widely accepted that increasing building code requirements increases the cost of building new homes in California. Some have further argued that these increased construction costs have resulted in increased new home prices. The extension of that contention is that advances in the State’s Building Energy Efficiency Standards – Title 24, Part 6 (“Energy Standards”) have contributed to making homes less affordable to Californians. This belief has been offered as a reason to temper the pace of advancing the Energy Standards. Others contend that new home prices are driven almost exclusively by demand; that while the cost of code compliance may impact developers’ profits, it has almost no bearing on home prices and therefore housing affordability in California.

Benningfield Group led a study for PG&E explore how strong the relationship is between the cost of home construction and the prices for which new homes sell. The study compared trends in the cost of inputs (e.g., labor, lumber, cement, windows) over time to the trends in new home sale prices. The intent was not to enumerate all of the costs, nor to determine how much the cost changes for individual inputs affected the total cost of construction. It was instead to determine how much, or even if, the price of new homes is determined by the cost of construction.

After a careful examination of several indices of construction costs and data on home prices, the UCLA Anderson Forecast came to two conclusions.

(1) Construction cost growth is only marginally associated with home value growth across metropolitan areas. We could not find evidence that increases in structure (construction) cost would cause higher home prices in either coastal or inland California.

(2) Metropolitan construction costs are highly correlated to the national cost of inputs. We could not find statistically significant evidence that California’s energy efficiency code Title 24 is associated with home construction costs in eight metropolitan areas in California, in which two metropolitan areas are in inland California.

You can review the findings of this codes and standards whitepaper by clicking here.