Monday, October 31, 2005

Flawed study on smart growth and home prices

A recently released study (article and full report) claims that more centralized cities have lower housing costs, and therefore putting urban boundary growth controls in place should not increase housing costs, and should even lower them.

The researchers found that increasing population in the center of an area by 10 percent reduced median housing prices by 2.7 percent. They concluded that measures to reduce sprawl and concentrate growth in the urban core tends to make fewer large homes on big lots available, pushing buyers to smaller homes on smaller lots.

"Our findings show that smart-growth policies designed to control sprawl in and of themselves do not raise housing prices in a region," said Robert Wassmer, a professor of public policy and administration at Sacramento State. He conducted the research with Michelle Baass as part of her master's thesis; the study is to appear in an upcoming issue of the Journal of Policy Analysis and Management.

"Sprawl affects the way we live," Wassmer said in a news release from the university about the research. "Sprawl has been blamed for traffic congestion, air pollution, loss of open space, and economic, racial and ethnic segregation. But sprawl also enables people to buy the bigger homes they often desire in the suburban places they view as far away from the problems of the central locations."

Many regions, including the capital through the Sacramento Area Council Of Governments and its Blue Print Project, are encouraging so-called "smart growth" approaches. Such approaches emphasize higher housing density and placing residences close to jobs and transit -- as a way to reduce sprawl and congestion. Critics complain that growth limits to protect open space force development to more expensive sites and limit the supply of new homes, driving up costs.

Wassmer and Baass looked at U.S. Census data for more than 450 urbanized areas to study the relationship between concentration of population in the urban center and housing prices. "Our evidence shows that greater centralization in an urban area results in a reduced proportion of upper-priced homes in that urban area and a lower median priced house for the entire area," Wassmer said.

This seems to me to be another case of Mark Twain's "lies, damned lies, and statistics." Other studies have shown that cities that restrict housing supply create a sharp increase in housing costs, with Portland being a prime example. This study cleverly avoids that fact by broadly looking at 450 cities rather than just those that have and have not created supply restrictions and doing a direct comparison. How does that help? Well, it adds hundreds of old, stagnant, and declining cities in the northeast and midwest to the statistical database. Those cities were mostly developed in the pre-1950 pedestrian age, and are naturally more dense and concentrated - but also have very poor housing values. Voila, you get a statistical correlation between central city concentration and lower housing costs. The tip-off for me was the "reduced proportion of upper-priced homes" quote: if you've ever been to one of those cities, you know that you don't see many wealthy people or expensive houses.

But this simple correlation says nothing about cause and effect of supply and demand, which has been pretty well vetted by the economics community. It's pretty simple, folks: if you restrict supply below demand, prices will rise to bring them into balance. You can't get around the laws of economics. Ask a Russian.

15 Comments:

At 11:54 PM, October 31, 2005, Anonymous Anonymous said...

Or Portland has high housing costs because it is a beautiful city on the west coast with a ton of high-salary jobs that people are flocking to to avoid the overpriced California market.

Its funny how including a broad sample of cities which happens to include some declining ones is somehow bias, but then assuming that the only reason Portland housing is expensive is due to zoning.

Perhaps you should consider working as spinmaster for the Bush administration? Looks like they will be needing some more help real soon.

 
At 8:25 AM, November 01, 2005, Blogger Tory Gattis said...

Portland showed a clear acceleration in housing prices as the urban boundry filled in vs. previous housing price growth - substantially faster than Seattle with similar weather and amenities. Actually, Portland's economy is pretty anemic, with substantial unemployment and not many high paying jobs. Just read in the HBJ this week that PreCash, a $10M VC-backed tech company in Houston, actually moved here from Portland in 2001.

Even Harvard has noted the impact of supply restrictions on increasing housing prices:
http://tinyurl.com/adu8k

The Harvard study seems substantially more rigorous than the Sacramento State one.

 
At 10:51 AM, November 01, 2005, Anonymous Anonymous said...

Here's another possible conclusion: Urban boundary growth controls are fine; being unable to appropriately densify in response to increased demand is not.

 
At 11:08 AM, November 01, 2005, Blogger Tory Gattis said...

That could be part of the problem, esp. since most neighborhoods actively resist densification - and politicians tend to be more responsive to voters than planners. But high-density housing is not the equivalent of a suburban home. Most people - esp. families - aspire to a home with a private backyard, and will pay more to get it if the supply is restricted. Lower and middle income families get left out. Some tolerate an apt or condo, but many choose to move elsewhere. Witness the incredible growth of Phoenix with people leaving overpriced California. Or just note the low-cost suburban character of the highest growth cities in the country: Atlanta, Riverside, San Bernadino, Houston, Dallas, Ft. Worth, San Antonio, Austin, Phoenix, Raleigh-Durham, Charlotte, and south Florida.

 
At 11:55 AM, November 01, 2005, Anonymous Anonymous said...

Well, it's pretty hard to effectively gauge consumer preference of a single-familiy home with a yard over a denser neighborhood with easy access to parks/greenspace when the price differences are so huge.

And with resistance to densification in desirable denser cities being what it is, I wouldn't be surprised to see low-cost suburban boomtowns continue to grow and the inner cores of desirable denser cities continue to become absurdly expensive. As a result, it we'll unfortunately probably never be able to do a realistic side by side comparision of family lifestyle preferences all else being equal.

 
At 12:54 PM, November 01, 2005, Blogger Owen said...

anonymous,

Well, the price differences are a part of it. It's a package deal -- High density areas have higher land costs. If it were just a matter of developers building far more high-density housing, they'd have cashed in long ago. The problem is that the demand is there, but it isn't as great as the demand for single family homes in the suburbs.

 
At 1:25 PM, November 01, 2005, Anonymous Anonymous said...

"If it were just a matter of developers building far more high-density housing, they'd have cashed in long ago."

That's not a reasonable statement to make.

 
At 1:40 PM, November 01, 2005, Blogger Tory Gattis said...

The point I think Owen was trying to make is this: there are plenty of giant developers doing giant master-planned suburban communities involving hundreds of millions of dollars. There is nothing stopping any of them from buying a parcel of land and doing the same thing with density, and make it affordable (at least as affordable as high-density construction costs can be made) - inc. all retail and amenities. Yet none of them do it. Why? It's kind of hard to believe there's a giant market demand and profit opportunity out there that's just being willfully ignored by the massive construction industry.

The very, very modest developments that have been done - like the Woodlands and Sugar Land town centers - are miniscule compared to the seas of suburban housing around them. If the demand for density were anywhere near the same demand for suburban detached houses, then the "town center" part of these developments would be a much, much more substantial portion of the overall development.

 
At 2:28 PM, November 01, 2005, Anonymous Anonymous said...

Well, this is probably well outside the scope of this comment-thread, but there's something to be said for authenticity...

Or, to put it another way, if it were possible to just throw up an outdoor mall and call it "density" then, yes, that is what everyone would be doing. But the fact that developers eschew tossing up density in rural areas in favor of slogging through a denser city's planning and permit process for 5-8 years says a lot about the type of demand they are following.

 
At 3:58 PM, November 01, 2005, Blogger Tory Gattis said...

Agreed. The logic for density is: I want to live in this area, detached homes are unaffordable, therefore I will buy into density. The unaffordability and density are linked. People don't really desire density/pedestrian-orientation for its own sake - or the developments previously discussed would exist.

Some argue that "people want to stop having to use their cars for all their trips", but their market choices expose that claim to be false (or again, dense master-planned developments would exist). The truth is, people only accept density if it more affordably gets them in the location they want with the amenities they want - and those amenities have to be a *whole* lot more than walkable shopping, which any decent-sized master-planned community developer could easily construct.

Ultimately, these areas may permanently require wealth as a prerequisite, by which I mean that people must be wealthy enough to afford housing there (of whatever type) and still have enough disposable income left over to continue to support the amenities they moved there for in the first place (restaurants, museums, bars, cafes, bookstores, whatever). If they have to use almost all their income on housing, those amenities will begin to wither.

 
At 5:19 PM, November 01, 2005, Anonymous Steve said...

I think this discussion is trying to consolidate a lot of different factors into very simplistic conclusions, which is admirable but unlikely to be successfully robust.

"Smart growth" regulations, or restrictive regulation of development in general (whether "smart growth" or not), will, in my opinion, generally contribute to increased housing prices in metro areas that are growing economically. Anything that restricts the supply of desirable buildable property or slows the development process (or just increases the cost of permitting) - in the urban core or on the fringe - will have an upward push on prices. I think this is what the Harvard study concluded.

I think Houston is an example of a place where less regulation enables cheaper housing - both on the exurban fringe and in the incredible and fast-growing supply of townhomes in the urban core. You just can't have such a well-lubricated housing machine in high-regulation environments. In development-speak, Houston's low "barriers to entry" in turn keep prices low because supply is added so easily. Expensive housing in the Northeast and on the West Coast is certainly not solely due to government regulation - nice weather, scenic (and sometimes undevelopable) landscapes, attractive cities, innovative global economies, "hip" destination culture, and the existing equity of home sellers from California all play into it too. But I have little doubt regulation plays a significant role.

I too have an issue with the Sac State study - I think it should have broken out single family vs. higher density housing. For many buyers, the two are not interchangeable products where selection is guided solely by price. Suburban single family homes offer certain features - everything from private yards to more interior square footage to school districts - that urban core housing does not. A large segment of our population, especially but not limited to families with children, will simply not be willing to give this up. As Tory mentioned, I believe this is why Phoenix and similar cities have become such fast-growing destinations. They offer the affordable sprawl that is no longer available on the West Coast and in the Northeast.

On a related point, the demographic diversification and segmentation that is now occurring in our population is leading to development of denser housing types, including in the suburbs, and especially where there is either a "resort" atmosphere or a strong sense of place like a town center (even "non-authentic" ones). I mean, 10 years ago, who would have thought that you would see mid-rise condos in The Woodlands? It may be a small quantity, but it is a significant change nonetheless.

 
At 9:46 PM, November 01, 2005, Anonymous Anonymous said...

"The truth is, people only accept density if it more affordably gets them in the location they want with the amenities they want - and those amenities have to be a *whole* lot more than walkable shopping, which any decent-sized master-planned community developer could easily construct."

Not only that, but as the amenities increase (and in many cases an increase in accessible nearby amenities usually means the amenities themselves are a function of the density), it turns out that people will pay a premium to live in the middle of it all. So this in effect turns the "I want to live in this area" part of your housing logic into "I want to live in this area...because of its density."

 
At 7:13 PM, November 09, 2005, Anonymous Anonymous said...

I came across this string of comments on a study that Michelle Baass and I completed on the influence of a more centralized urban area on housing prices. If you read the study closely (which you can at http://www.csus.edu/indiv/w/wassmerr/WassmerBaassSprawlHousing.pdf )you will see that my co-author and I only find that the median price of homes in a United States urbanized area in year 2000 was lower, and the percentage of homes priced at greater than $300,000 was also lower; the greater the percentage of the area's population that lived in its central places. Also note that this finding was calculated using regression analysis which allows for the necessary control of other factors that drive differences in house prices (exceptdifferences in lotsize and square foot which is not available in Census data we used). That is all it says. This fall in median home price and percenatge of high-priced homes is likely to occur because in these more centralized urban areas people live on smaller lots and in small size homes (which was not controlled for in the study). But these changes are exactly what so called "Smart Growth" policies set out to achieve. Our findings in no way says that people are better off if their urban area is more centralized, just that that median home price is not higher. Which by the way is a claim that many have put forth to discredit Smart Growth. I hope this offers some clarification.

Cheers,

Rob Wassmer
Professor, Sacramento State University

 
At 10:12 PM, December 17, 2005, Blogger Ray Hyde said...

So in other words, if you live in a smaller home on a smaller lot and pay the same price, you didn't pay more even though you got less for the same money.

No wonder I'm not a professor.

 
At 6:38 PM, April 30, 2006, Anonymous Anonymous said...

Tony Gattis makes a good point that density in itself is not a selling point, location and amenities are.

I would make the point that density will increase in current 'growth' cities as energy prices rise.

Houston with its sprawling suburbs could not have developed without 60 years of affordable gasoline. Suburban development is enabled by the simple fact that people are able to afford long commutes.

If gasoline prices as expected fluctuate in the short term, and over the long term continue rising, in the least disruptive case people start looking more favorably at more central locations and in the most disruptive case simply cannot afford a 30 mile commute each day.

To meet demand, developers will build higher-density construction. Owners of exurban housing would see the value of their house decrease. Zoning to favor higher density-growth may be doing these guys a favor in the long run.

 

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