American Dream Deferred: Regulations Rock Residential Real Estate Market – Arkansas Money & Politics

Long gone are the days when an average American can buy their first home for $12,000. As cost of living increases and wages continue to stagnate in many parts of the country, homeownership for many has gone from a rite of passage to a distant dream.

Younger generations have reported feeling a hopelessness about the prospect of ever owning a home, but several Arkansas-based real estate companies are working to keep that dream alive and tackle the issues plaguing the industry.

Rausch Coleman Homes has built starter homes for nearly 70 years, becoming the fifth-largest privately held builder in the country, the 21st-largest overall and the largest in the state.

“Our true focus is really maintaining an entry-level price point to ensure attainability for families,” said Kristin Peck, vice president of government and public affairs at Rausch Coleman, “and that can often be difficult, given the economic and regulatory factors that drive prices up for us.”

She said 62 percent of their homebuyers come from rental properties. The average national price point is about $237,000, and an average home offers about 1,400 square feet. Rausch Coleman’s business model sees the company build homes from a limited number of preset designs to keep costs down, then allows homebuyers to choose upgrades such as marble countertops or vinyl floor planks as they can afford them.

Headquartered in Fayetteville, the company has expanded over the past few decades to operate in seven states. Using the same materials and tools as other homebuilding companies, Rausch Coleman also uses economies of scale to keep prices down.

“We’re very proud of our mission, which is to improve quality of life one home at a time,” Peck said.

Peck recently took a trip to Washington D.C., where she met with elected officials to talk about the International Energy Conservation Code, a standard of codes set forth by the federal government and one of many regulations that have hampered the residential market.

“It’s a well-intended rule, but what this particular one will do is significantly raise the price of homes if it’s adopted across the board,” Peck said. “[The Department of Housing and Urban Development] and the [Department of Agriculture] recently proposed that new rule, so if anyone wants to get an [Federal Housing Administration] or USDA mortgage, the house has to be built to those 2021 international energy codes, and if that happens, that will raise the price of homes within the Arkansas market up to $15,000.”

According to Home Innovation Research Labs’ 2021 IECC Residential Cost Effective Analysis, homes in Arkansas, which is in climate zone, are looking at 20 to 49 years of payback for minimal energy cost savings.

“If it saves $5 on your energy bill, the cost of actually putting these codes into place really doesn’t bring a payback for the homeowner,” Peck said.

Lobbying against new IECC regulations, the National Association of Home Builders called for Congress to put a provision in the 2025 Transportation, Housing and Urban Development, and Related Agencies Appropriations Bill to prevent HUD from using federal funds to implement the mandate.

Peck said she hopes to work with municipalities, states and the federal government to educate them on how regulations impact home prices and affect prospective homeowners’ ability to buy a home. Meanwhile, longtime real estate professionals are dealing with other challenges.

“When I got into the business in 2003, buyer agency was commonplace,” said John Selva, principal broker and real estate advisor at Engel & Völkers in Little Rock. “It evolved probably about 10 years before I got into the business, early 1990s, so before only sellers were represented.”

Selva started with Crye-Leike Real Estate Services right out of college and, after several years, opened his own agency, Pulaski Heights Realty in Little Rock, in 2007, just in time to feel the effects of the housing market bubble bursting. The company nonetheless survived the crash and stayed in operation until 2019.

“I wanted to focus on more of a smaller, service-oriented firm — a few good agents, not a hundred agents,” Selva said.

He said he was approached by many chains about franchising but turned them down until in 2018, when he was looking to refresh his branding. That’s when E&V came knocking, offering a small-shop concept.

One attractor for E&V to enter the Little Rock market was stability, Selva said. Little Rock’s population has consistently grown, passing the 200,000 mark as of the 2020 census, and has seen only a few years of minor decrease in the city’s history.

“They wanted to bring this high-level service for high-end clients to everyone,” Selva said. “It’s high-end service for anybody — luxury at all price points.”

The company now has two offices in Little Rock: the flagship Kavanaugh office in Hillcrest and one in the Pleasant Ridge Town Center in west Little Rock that opened in 2021. Selva’s wife, Jena, assists with running the business. Its cheapest home on the Little Rock site comes in at $192,000, while the most expensive is just shy of $2 million.

Arkansas is in Zone 3.

Another recent tremor in the residential real estate market could have far-reaching effects on how homes are bought and sold going forward. A settlement following a class action lawsuit against the National Association of Realtors mandated the organization pay $418 million over a span of four years. In the suit, levied against NAR and several national brokerages, the plaintiff argued that NAR forced home sellers to pay higher commissions to be split between their agents and the buyers’ agents. Commissions for home sellers’ agents are kept artificially high by the condition of sharing commissions for access to the Multiple Listing Service, the plaintiff claimed.

As a result, agents will not have access to information about how much commission is being paid for a property, which means they will not be able to give their clients the most accurate picture of fees, Selva said. Another change proposed in the regulation is that buyers’ agents have to have agency agreements signed with their buyers.

Selva said when he started in the industry, Arkansas already required signed agreements between buyers and agents, which may explain why it was one of 12 states not named in the nationwide suit. The settlement will not require payment by the buyer in the agreements but will ensure that if the buyers’ agent is not paid by the seller, an agreed-upon payment will be made by the buyer.

Selva said in a ideal world, buyers would cough up extra to pay their agent’s commission, but most buyers are already saving strenuously to scrape together enough for the down payment, closing costs and other associated fees. He said it makes sense for the seller’s agent to share commissions with the buyer’s agent because the buyer’s agent brings in the buyer.

He said the change could set the industry back and impede transparency, and the “evolving process” has caused uncertainty about the future. With the proposed changes in place, agents such as Selva will have to call the sellers’ agent and ask if the seller is willing to offer buyer agent compensation. If there is no compensation available, the buyers will have to add the fee from their signed agreements with their agents to the total of their home purchase price.

“Maybe some other business models will come out of this,” Selva said, “but as infrequently as people do these transactions, and it’s the biggest transaction most people make in their lives, I think the majority of people see the value in having someone who knows what they’re doing guide them through that process.”

The new regulatory challenges come at a time when the future of the market is as uncertain as ever. The effects of government assistance programs that injected capital into the market through the CARES Act in an attempt to combat homelessness and housing insecurity during the COVID-19 era have yet to be seen. Peck said the past decade has seen the recovery of the market from the 2007-2008 financial crisis, and housing starts are projected to continue increasing over the next few years, but anything could happen.

According to the Housing Affordability Pyramid compiled by the National Association of Home Builders Housing Policy Department using income data from the U.S. Census Bureau, 40.5 million people around the country can afford a home up to $150,000. Going up from $150,000 to $250,000, that number shrinks to 26.1 million. Another study by the NAHB found that for every $1,000 the price increases, 160,000 people are priced out of a home nationally. In Arkansas, that number is 711 people. The median home value in the state is about $136,000.

The fastest-growing region in Arkansas for new homes according to the NAHB is the Fayetteville-Springdale-Rogers, Arkansas-Missouri Metropolitan Statistical Area, or northwest Arkansas. The area saw 5,700 single-family building permits and 1,400 multi-family permits in 2021. The Little Rock/North Little Rock area saw 2,500 and 1,100, respectively.

“There’s a lot of conversation right now about housing affordability, about housing inventory, and how that ties into not just the economic success of any state or any community, but really, the success of families,” Peck said. “There’s so many benefits to owning a home, so we’re trying to work with our regulators to make sure that there’s some sound policy in place that enables more homeownership for these families.”

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