Housing affordability is dinging the state budget

The Josiah Bartlett Center has warned for the last few years that local government inaction on housing might prompt legislators to restrict local zoning authority. But legislators might have an even stronger incentive to act than the growing public frustration with local land use regulations: Falling revenue.

A combination of high interest rates and an extreme shortage of homes on the market has pushed housing affordability to a two-decade low in the state. Though interest rates clearly play a role, the New Hampshire Association of Realtors points out that supply remains the primary culprit. “It’s a lack of inventory that continues to push pricing to record heights,” the association wrote last month.

Home prices have fallen a bit in New Hampshire since hitting a record in October. But that’s not because the market has improved. Rather, interest rates are keeping some potential buyers on the sidelines, causing a decline in the number of aggressive bidding wars. When interest rates ease, buyers will return to a market still plagued by a severe inventory shortage.

No one knows how long interest rates will remain high. If the squeeze of high rates and low inventory continues to push buyers out of the market, New Hampshire could see a prolonged home sales slump. And that will be felt in Concord. In fact, it already has been.

For the first five months of the 2024 fiscal year, real estate transfer tax revenues are down 20%, or $23 million. That’s the largest decline of any state tax this year. 

We know what some are probably thinking right now. “But what about Interest & Dividends tax revenue?” Eliminating that tax, as state law does by the end of next year, will have a larger impact on the state budget. 

But the I&D tax phaseout is part of a strategy to make New Hampshire more economically competitive. The anticipated tradeoff is that making the state more attractive to investors, retirees and entrepreneurs will generate greater economic activity, and thus greater economic growth, in the long term. 

There is no such tradeoff with falling home sales. A $50 million annual decline in real estate transfer tax revenue caused by falling home sales is simply lost revenue. 

Worse, it reflects shrinking economic activity in an important industry, which will have ripple effects in the broader economy. Lawmakers have made clear that they want state policy to stimulate economic growth. Local policies that hurt economic growth, such as overly restrictive land use regulations, are increasingly being scrutinized by legislators. 

Though state lawmakers and local boards are unable to affect interest rates, they can do something about the housing supply. They can lift regulatory burdens that block or restrict new home construction. 

So far, legislators have been reluctant to preempt local regulations. Yet with  polls showing that most Granite Staters want government to address the state’s housing shortage, pressure is increasing on legislators to act. Falling state revenue by itself probably wouldn’t trigger state action. Combined with rising political pressure to act, though, it becomes another incentive for legislators to do something. 

So local boards (and voters at town meeting) have another warning sign. The longer local governments wait to clear the way for more home construction, the more likely it becomes that legislators will do it themselves.