Development Fees for new homes should fall as home prices drop

By: Cody Kitaura, News Messenger Correspondent
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The development fees required when building a new house have made it unprofitable to build homes for anyone but the wealthiest 21 percent of Placer County homebuyers, an analyst said Tuesday. Tim Youmans, managing principal for Economic and Planning Systems, Inc., said the current development fees were set during the peak of the housing boom, when average home prices were much higher. “(Housing) prices have dropped but cities and counties haven’t reacted quickly enough,” he said Tuesday at the Lincoln Chamber of Commerce’s Government Affairs Committee meeting. Because these land use, infrastructure and environmental fees don’t change with home values, they become more of a burden when housing prices fall, Youmans said. This is an even bigger problem for cheaper houses. According to the six-month study, it’s not profitable for developers to build houses in Placer County that will sell for less than $406,000. And only 21 percent of potential homebuyers in the county can afford to pay more, Youmans said. But during the peak of the housing boom, they were buying anyway. In mid-2005, the average home price in Placer County was $565,000 – almost nine times the median income. Youmans said the ratio should be closer to four to one. To make cheaper homes feasible again, Youmans said, local governments will have to rely less on new-home sales for revenue and developers will have to offer fewer amenities to cut down on costs. “There’s going to have to be a resetting of priorities on both sides,” Youmans said. Bill Mellerup, vice president of community development for Lewis Operating Corp., said developers have already begun to offer smaller houses with fewer extras. “Now, instead of having marble, maybe they’ll have regular tile,” he said. Lewis Operating Corp., which commissioned Youmans’ study, is planning a 2,470-home community in the southwest portion of Lincoln. When demand was stronger, Mellerup said, the company could borrow from future sales to pay off current infrastructure and development costs. “We can’t advance fund as many infrastructure projects (any more),” he said. “We basically … took some of the demand and used it early.” Lincoln City Councilman Tom Cosgrove said the City Council, which sets Lincoln’s development fees, plans to reexamine its strategies over the next year. He said he “already sees places” where fees could potentially be lowered. “One of the biggest mistakes (Lincoln makes) is building streets too wide,” Cosgrove said, adding that narrower residential streets would be cheaper and might discourage speeding. But local governments can’t change their fee levels overnight. When Woodland realized it had a similar fee structure problem, it took a year to lower its fees. Dennis Rogers, senior vice president of governmental and public affairs with the North State Building Industry Association, said development fees rarely go down so the city of Woodland wasn’t sure how to go about lowering them. Rogers said cities like Woodland and Lincoln need to be more realistic with their expectations of what they can build with development fees. “Everyone was just expecting single-family homes could pay for a lot more than they could,” he said in a phone interview. The committee will meet again at 8 a.m. on June 3 in a joint meeting with the Roseville Chamber of Commerce. It will be held at the Martha Riley Community Library in Roseville.