Eben Fodor, the preeminent expert on cost/benefit analysis for real estate development projects, has issued a new study titled “Review of NAHB Development Impact Model for House Building.” (NAHB stands for National Association of Home Builders.)
The NAHB Development Impact Model has been regarded for years as the most comprehensive and reliable tool that municipal policy makers have for making decisions about new development. As Mr. Fodor shows in his review of their data and methodology, however, the NAHB – are you sitting down for this – has used bogus data and an even more bogus methodology to intentionally mislead public officials as to the real costs and revenues associated with new construction.
I'm shocked, shocked!
The NAHB model overstates revenues to the local government by including state sales taxes, income taxes and fees in the local revenue number. The accompanying documentation provided by NAHB does not make this clear; yet even with this overstatement of revenues, the costs still exceed the revenues. So the NAHB model applies a multiplier to produce what it calls “indirect revenue,” and then applies ANOTHER multiplier to produce what it calls “induced revenue.”
Without getting into too much detail, suffice to say that when it comes to costs, the multipliers are NOT applied; so the inflated revenue is compared to uninflated costs to “show” that there will be a net financial gain. This is shown by the following diagram from the review:
The fundamental revenue number is composed mostly of impact fees, which most towns in Massachusetts (including Chelmsford) do NOT have. But even with impact fees, financial legerdemain is necessary to “show” a positive financial impact on the community where development is to occur.
As for costs, comprehensive studies of costs for individual municipalities have shown that the NAHB cost model comes up with numbers that are about HALF of the actual costs incurred by new construction. These excess costs are of course subsidized by taxpayers. Besides underestimating infrastructure costs and costs of services, the NAHB model assumes that permit fees and inspections are pure revenue with no associated costs, completely omits financing costs for new capital projects, and so on.
The NAHB model projects a net positive impact on unemployment, and does so by assuming that the occupants are new to the area and generate new spending that creates a partial job (.53 to be exact). But the model ignores the fact that if the occupants are new to the area then the house creates a NEED for at least one new job for the homebuyer to be able to afford that new spending, new mortgage, and new taxes. In fact, many households require two incomes, and therefore need two new jobs. Obviously, if only .53 jobs are created by the arrival of the new household, unemployment is going to be negatively affected.
We know from empirical evidence that rising tax rates, unemployment, crime and a host of other undesirable effects arise from growth in today’s municipalities, so it was puzzling that the NAHB model always shows positive impacts. Thanks to Mr. Fodor, now we know why.
As Fodor summarizes, “If new houses resulted in the net local revenues and tax benefits claimed by NAHB, then those areas of the country with the most house construction over the past decade would be in the best financial condition today. However, the opposite is the case. States like California, Florida, Arizona and Nevada, that have seen the most residential development, are in the worst financial condition today. These states are also among the top in the nation in unemployment rates, foreclosures rates, and declining property values.”
The full document can be obtained here:
Roland Van Liew