Monday, March 24, 2008

Academic study of land-use regs increasing housing prices

An academic study was recently released quantifying how much land-use restrictions increase the cost of housing in various cities. The researcher is based in Seattle, and this article from the Seattle Times focuses on that city:

UW study: Rules add $200,000 to Seattle house price

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase (90%!) was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.

"In a nationwide study, it can be shown that Seattle is one of the most regulated cities and a city whose housing prices are profoundly influenced by regulations," he says.

...

But Eicher argues that "demand does not need to drive up housing prices."

Cities such as Houston and Atlanta, which have few growth restrictions, have shown that. They've been able to add enough housing to meet demand, so their home prices have risen more moderately than heavily regulated San Francisco and Boston, which have a harder time increasing housing.

...

Building in Seattle can be very time-consuming compared with nearby cities, because of Seattle's neighborhood-based design-review process, says Linda Stalzer, project development director for the Dwelling Company, an Eastside homebuilder.

Design-review committees, composed of citizens interested in architecture and development, are located throughout Seattle; their job is to review commercial and multifamily housing designs before they're approved.

"Depending on how complicated your project is, it might take you three or four times to get through it," Stalzer says.

Add together all the various review and comment periods, and it can take 12 to 18 months to get to the point of applying for a building permit, she says.

On a 25-unit Capitol Hill town-house project now under way, Stalzer estimated the various fees (including consulting and mitigation costs, but not building permits or land prices) have totaled about $650,000.

...

"We all love parks and green spaces. But we must also be informed about the costs. It's very easy to vote for a park if you think the cost is free."

I actually discovered the study and article via the Antiplanner blog, which has an extensive analysis here, including this note on Houston:

Eicher says that regulation has increased housing prices in every city he examined. The smallest increase is about $21,000. By comparison, the Antiplanner found that growth management has boosted housing prices in only a little more than a third of the urban areas in the U.S.

I have to wonder if, for some places, Eicher is relying too much on his regressions. His numbers say that regulation in Houston has boosted housing prices by $49,000. But the median home in the Houston urbanized area is worth only $122,000. Taking out the cost of regulation leaves only $73,000. (Unlike most urbanized areas, which are mostly suburbs, the Houston urbanized area is mostly Houston, so these numbers are comparable.) That seems pretty low, but maybe it makes sense.

It's good that these costs are finally being acknowledged and quantified as the City Council debates new development ordinances. Hopefully they will take them into account and weigh any additional regulations very, very carefully.

Thanks to Brian for the link.

Update: Demographia's take on the study.

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29 Comments:

At 6:43 PM, March 24, 2008, Anonymous common_sense said...

Well, the $200K number sounds a little over the top. I have family that lives right outside of the city on the Eastside and their town home wasn't much more than that.

But I will cede that these regulations add costs. But all regulations add costs! Many, many times these costs are worth the benefits. Safety regulations add costs; environmental regulations add costs; transportation regulations add costs...even the setback requirements in Houston add costs!

Some of the regulations in Seattle may be a little overbearing but I doubt most people there would be too concerned. People in Seattle are very concerned about the environment and protecting the beauty of the area. They value asthetics over "cheapness" which seems to be so popular in Houston. It's a balance and personally, I think they are a lot closer to ideal than Houston at this time.

 
At 9:42 PM, March 24, 2008, Blogger Tory Gattis said...

I'm not sure you'd be as happy with the extra costs if you were a middle-income family trying to afford a home and raise a family on the national median household income of $48K ($43K in Texas).
http://en.wikipedia.org/wiki/Household_income_in_the_United_States

 
At 10:01 PM, March 24, 2008, Anonymous common_sense said...

Tory-

People in Seattle and other cities make sacrifices. Instead of purchasing a single family home they purchase condos or town homes. Eventually they may move up to purchase a traditional single family home. They also spend less on gasoline and drive a lot less than people in Texas. The median income is also higher in places like Seattle.

But, in the end, it is simply a different mindset. They sacrifice size for a better environment. Where people in Texas are obessive about their children playing in the backyard, people in Seattle will go to one of the plentiful parks with their children. My brother and his wife's town home has a yard of about 10ft by 10ft. Instead they spend their time hiking in the local woods, on Lake Washington, etc. Frankly it is a better community lifestyle...

 
At 12:01 AM, March 25, 2008, Anonymous Anonymous said...

Gee do you think the housing prices in Seattle are affected by the fact that they are on a pennisula?

http://maps.yahoo.com/;_ylc=X3oDMTExNmIycG51BF9TAzI3MTYxNDkEc2VjA2ZwLWJ1dHRvbgRzbGsDbGluaw--#mvt=m&lat=47.60358&lon=-122.329454&mag=6&tt=seattke&tp=1&q1=seattle%2C%20wa

Houston has deal with zero landscape issues regarding growth.

 
At 7:21 AM, March 25, 2008, Blogger Tory Gattis said...

I'm sure that's the perspective they tell themselves. The reality is that the regs are a win-win-win-win for the residents: they pump up the value of their homes by restricting new supply, they lock out newcomers they don't want, they prevent any kind of built-environment change that might upset them, and they drive out the more "undesirable" populations by making it unaffordable to live there.

It's the natural path of very liberal, high-welfare city or state. Those programs are expensive, so why not zone those people somewhere else so we don't have to pay all those benefits to them, all in the name of protecting the environment or neighborhoods. It all sounds perfectly reasonable - a very nice rationalization - but the underlying motivations are pretty ugly.

 
At 7:41 AM, March 25, 2008, Blogger Brian Shelley said...

Tory,

There are two downsides for locals. Property taxes surge with higher valuations in most states (not Calif.). Home price volatility, the second order effect of restricted supply, can wreak havoc on people who buy a new home and need to sell for whatever reason.

 
At 7:57 AM, March 25, 2008, Anonymous Anonymous said...

Common-sense...

You talk as if townhomes and condos are cheaper than a single family house. I don't know about you, but in many cases here, those are just as much or more expensive than a house. Plus, you get a lot less bang for your buck.

So I don't see how them moving into one of those is a 'sacrafice.' I see it as a luxury.

 
At 1:15 PM, March 25, 2008, Anonymous kjb434 said...

^^
Good point.

I know of three families (w/ kids younger than 4) that live in townhome/patio home styled housing in the inner loop near me that plan to move to farthest suburb they can once the kids are school age.

The parents want their kids to have their own yard and good schools. The commute and gas cost for the parents is not a concern. Kids are the priority. Also, the townhome they live is cost about the same they were planning to pay for their suburban home.

Most condos in the Houston cost more than single family homes that can offer so much more. Look at one of the recent condo towers. The Mosaic near Herman Park had 1-bedroom units starting at $164k. Starting mean lower floor and bad view. For $164k you can easily get a sizable home in the burbs. If you don't mind it being a couple of years old, you can get a lot of home for the price.

I live in a patio home with my partner with no kids. It's a perfect fit for us, but if we ever consider having kids we will definitely move out to the suburbs.

I really with people would get over whether urban, intown, dense living is worse or better than suburban, out of town, low density living. It's all about choice! Houston gives people that choice.

Another note, some people should look at some of the new inner city developments. We have no problems getting urban development build in this city. The set back rules is absolutely not an obstacle. I've mention many projects before, but there is another one nearing completion. Yale at Washington Ave is another Residential development that is creating dense urban style in Houston. The sidewalks on Washington Ave and other streets are being converted (by the developer) to wide walkable areas with tree being planted for future shading.

There is to much evidence that development rules do not need to be changed. The Planning Commission is very adapt to know and to grant variances for urban projects. They have been doing this for years and will continue to do so.

 
At 3:12 PM, March 25, 2008, Anonymous mike said...

So it's classism and racism that causes those wealthy liberals to make draconian regulations that drive out and oppress the poor? Sheesh, give me a break. It's more like, I live in a nice neighborhood now, but I want it to stay nice thirty years from now, so I am going to make some regulations so that people won't build things that make the neighborhood look bad (as has happened in most unprotected Houston neighborhoods).

Will the costs go up? Of course they will. People pay more for stable communities than they do for precarious ones.

 
At 3:49 PM, March 25, 2008, Blogger Tory Gattis said...

Are you kidding? The vast majority of unprotected Houston neighborhoods were disasters covered with old, small, crappy, falling-down shacks of houses before they were replaced with very nice new townhomes. And now, it's the holdouts in those neighborhoods that make it look bad, not the newer projects.

 
At 4:27 PM, March 25, 2008, Anonymous kjb434 said...

^^
Actually that is so true.

And older single family neighborhoods such as Meyerland, Oak Forest, and even areas around Sharpstown have a renewed interest. People are preferring these older homes that are not as cooking cutter to remodel.

A neighborhood falling apart has to do with the community of residents that inhabit it, not the regulations imposed within it or by a municipality. Regulation is only there to keep people out. So yes, heavy regulation is a discriminatory practice.

The holdouts in the in the gentrifying neighborhoods are making a lot of profit when they eventually sell. If they don't sell, their children typically do when it gets passed on in inheritance. I've seen this happen to three homes already in my neighborhood.

 
At 4:53 PM, March 25, 2008, Blogger Michael said...

>>The vast majority of unprotected Houston neighborhoods were disasters covered with old, small, crappy, falling-down shacks of houses before they were replaced with very nice new townhomes.

Forms-based zoning would not necessarily prevent new development.

Another problem is apparently that deed restrictions ultimately expire, and many communities have trouble renewing them.

I think you are also missing the point. If regulation is a "win-win" for homeowners, why should I oppose it? Let's see, it gives me:
- price appreciation
- better environment
- better quality of life

The downsides are:
- higher property taxes - which I will protest, and that entire system needs to be overhauled anyways in Texas
- some people will settle somewhere else (I think this impact is minimal and also offset by people choosing to "downsize" or live in apartments rather than relocate). Also as evidenced by plenty of other cities in the sunbelt that have zoning like Dallas, Austin, and Atlanta who are also experiencing explosive population growth.

You may be right, that increased zoning and regulation is the natural tendency of any developed urban area. But I fail to see why this is necessarily a bad thing. It may be more like a basic law of urbanization.

>>It's the natural path of very liberal, high-welfare city or state. Those programs are expensive, so why not zone those people somewhere else so we don't have to pay all those benefits to them, all in the name of protecting the environment or neighborhoods. It all sounds perfectly reasonable - a very nice rationalization - but the underlying motivations are pretty ugly.

Is that Rush Limbaugh? The supposed "underlying motivations" here are absurd. Also who says that we do not pay for services / infrastructure / programs for the poor if they are not our next door neighbors?

>>And now, it's the holdouts in those neighborhoods that make it look bad, not the newer projects.

This depends on where exactly you are talking about. But in some areas around Montrose, I think the reverse could be said as well. I think there is plenty of the new development you are talking about going on around town. But if you truly want to give people "choice", then one of those choices should be "I want to live in a moderate single-family home community near town". You can't have that choice when in nearly every community, developers can build 4 condos on a single-family lot and alter the community forever.

-Mike

 
At 5:22 PM, March 25, 2008, Anonymous kjb434 said...

"I want to live in a moderate single-family home community near town"

Have you priced this? If zoning forced this type of development and limited density to a certain area, you would have force more people to move to the suburbs. Those condos and townhomes are allowing people to actually be able to afford living near town.

And what you are proposing goes against what the demand really is.

*******

"I think you are also missing the point. If regulation is a "win-win" for homeowners, why should I oppose it? Let's see, it gives me:
- price appreciation
- better environment
- better quality of life"

I guess this is the same concept as in: if the government pays me not to work to support myself, i should just remain in my government housing and vote to keep getting this benefit. Why work and be beneficial to society when it's easy to not do anything.

The concept of insulating oneself from change and risk by promoting laws and regulation is an extremely selfish position. We live in a dynamic world and in a free market climate. Regulating ourselves out of risk only creates more problems.

The free market is quite powerful and does it's best to move around regulation and adapt to it, often with unintended consequences. The housing mortgage mess we are in is a great example.

 
At 6:29 PM, March 25, 2008, Blogger Michael said...

KJB,

>>I guess this is the same concept as in: if the government pays me not to work to support myself, i should just remain in my government housing and vote to keep getting this benefit. Why work and be beneficial to society when it's easy to not do anything.

This is really out of left field. I don't think there is any comparison between supporting regulations that help promote things like transit, the environment, and achieving well-planned density and welfare. If you want to call zoning a "hand-out", that is a real stretch. I suppose the road in front of my house is also a hand-out - I should have built that sucker myself if I really wanted to prove myself in this world!

>>The concept of insulating oneself from change and risk by promoting laws and regulation is an extremely selfish position.

You are right. Laws are overrated. I say "every man for himself" and let's go back to the Hobbesian state of nature! Oh wait... the present laws, democracy, and regulations that we have ultimately emerged out of this chaos because people *like* to have some predictability and order in life.

-Mike

 
At 7:16 AM, March 26, 2008, Blogger Brian Shelley said...

As Kevin Hassett recently wrote at Bloomberg.com, the downside to land-use regs that has most recently revealed itself is price volatility. The same cities that saw skyrocketing values because of restricted supply are now seeing price free falls.

My old college roommate has a co-worker in California who is $200K upside down on his mortgage because of the price drop. Now he is being transferred. He can't afford to sell the house, so he's going to have to live in an apartment in his new city and rent his old house for less than the mortgage payments until things improve.

The land regs created a house of cards, and the credit crunch blew it over. So it's not a win-win-win situation, it's a win-win-win-high-risk-of-huge-financial-losses situation.

 
At 9:50 AM, March 26, 2008, Anonymous mike said...

brian, the land use regs did not create the housing bubble. We had land use regs in this country a long time before the housing bubble. That is really a reach.

 
At 10:04 AM, March 26, 2008, Anonymous mike said...

"Are you kidding? The vast majority of unprotected Houston neighborhoods were disasters covered with old, small, crappy, falling-down shacks of houses before they were replaced with very nice new townhomes. And now, it's the holdouts in those neighborhoods that make it look bad, not the newer projects."

Something tells me that any neighborhood whose houses are more than twenty years old and less than 2,000 sq ft strikes you as "old, small, crappy, falling-down shacks of houses." There are many, many once great areas of this city that declined because they had no way of controlling what could move in. It was only after the warehouses and chain-link fences came in - not before - that the houses started becoming dilapidated (because people had fled).

Why do you think the cottage neighborhoods in West University remained stable while the Heights, Rice Military, and Montrose were going downhill? Regulations!

Right now the creep of blight is encroaching into the suburbs. In northwest Houston it has reached 1960 in many places and is moving past it. Deed restrictions help, but having a nice neighborhood can only do so much when the roadways around it look like junk (Stuebner-Airline, Kuykendahl, more and more Louetta). It's funny because the houses in these neighborhoods are every bit as nice as those built in Memorial and the Woodlands in the same time period. But which ones do you think are worth more now?

 
At 10:37 AM, March 26, 2008, Blogger Brian Shelley said...

Mike,

A reach?

Cities with high land-use regs also seem to have slow population growth, thus lower quantity demand growth. Some cities with low land-use regs seem to have high population growth rates, thus high demand growth. Yet, the low demand cities had higher price appreciation.

My explanation is that not only has the supply been limited, but the curve itself has become steeper (or inelastic). That is, that in places with slow demand growth the effect of changes in demand are more consequential than high growth in low reg cities.

If small increases in demand cause large increases in prices, then small decreases in demand would cause large decreases in prices.

Sure, the credit crunch is adding to the demand decrease, but why did it happen? Why did foreclosures suddenly go up when the same kinds of mortgages had been sold for several years with no problem? The answer, rapidly rising home prices mask foreclosures. Why would you foreclose when rising prices give you equity and a very liquid market lets you sell within days? They didn't have to foreclose, but when the price rise plateaued foreclosures started to reveal themselves.

Looking at S&P Case Schiller data home prices began to level off early in 2006. Looking at Countrywide Financial's stock (CFC), it hit an all-time high in early 2007 well after prices had already started to fall. If Wall Street didn't yet know that the subprime business was in trouble yet, but home prices were already beginning to fall in high-reg cities then the credit-crunch did not begin the home price decline.

What is your alternative explanation?

 
At 11:32 AM, March 26, 2008, Blogger Michael said...

Brian,

I think Mike's point is that modern zoning and land-use regulation have been around since the 1920's. Blaming them for what is happening now is, at best, a very tenuous argument. You have to connect a lot of dots - which I don't think you have done. Alternatively, you could explain the crunch with more simple explanations:

- Rising credit and fewer lending regulations allow more people to buy homes they can't afford in areas of the highest demand, paying less and less down
- Slow to zero wage growth for the middle class means that at some point this house of cards has to collapse

That's my alternative explanation. And using Ockham's razor, the simplest explanation wins.

Also note that in your argument you make no distinction between "high-reg" cities like San Francisco and Atlanta, where the outcomes and supply / demand curves have been totally different.

Also, you equate population growth with demand growth. I will give you that there is some correlation there - but keep in mind that this is a global economy where people move wherever they want. If I could find a $300k 1000 sqft condo in Manhattan, I would move there in a heart-beat. This demand is also part of the curve. Therefore I can hardly agree with the presumption that Boston, NYC, or San Francisco are areas of "low demand growth". Over the past 40 years they have been attracting the most creative, educated, and high-wage earners in the country, not to mention international investors. A lot of people would like to live there but cannot afford to do so.

-Mike

 
At 1:06 PM, March 26, 2008, Blogger Brian Shelley said...

Very simplistic indeed.

I would contend that Atlanta and NY are not high land-use reg cities. I don't know of a particular ranking, but any evidence to the contrary would be read.

I consider cities like SD, LA, SF, and Boston as low demand cities because their population growth is around zero.

I would also contend that the level of land-use regulation has not been static since the 1920's. I would contend that in recent decades it has become increasingly draconian. I would also contend that a supply ceiling does not cause a one time change in price, but merely accelerates the price upward as demand continues to rise.

 
At 1:08 PM, March 26, 2008, OpenID John said...

Tory,

I thought you'd be interested to see this adjusted ranking of metro areas by population density. When the cities are divided into chunks and weighted appropriately you get counter-intuitive results

For example, Houston is denser than Portland.

 
At 1:11 PM, March 26, 2008, Anonymous mike said...

"Cities with high land-use regs also seem to have slow population growth, thus lower quantity demand growth. Some cities with low land-use regs seem to have high population growth rates, thus high demand growth. Yet, the low demand cities had higher price appreciation."

You are taking one out of many, many variables and using it to reach the conclusions you want. The biggest thing that you and Tory ignore is geographical limitation. In the 50's and 60's, Los Angeles had regulations as well as high population growth without much price appreciation. Now, population growth is lower (percentage-wise) while appreciation is high. Why? Because they ran out of land!

By contrast, Houston and Dallas both have enjoyed high population growth with low price appreciation. How can this be? Is it because they don't have land use regulation? But Dallas has it. There goes that theory. Maybe it's because they both have unlimited land supply? I think we have a winner.

I will agree that excessive regulation hampers supply and can thus drive prices up. But part of the reason why these prices are going up is because the neighborhoods are more protected and, thus, more desirable. This is why people pay more to live in Memorial than in other parts of town with similar size homes - the area looks as good as it did thirty years ago, and it will still look just as good thirty years from now. There's not too many parts of Houston that you can say that about.

 
At 1:38 PM, March 26, 2008, Blogger Michael said...

Brian,

Check out page 46 of the following report which attempts to quantify the level of regulation across major US cities - you will see that NYC is highly regulated, as are the burgeoning cities of Phoenix and Denver. Meanwhile, less regulated cities include the rapidly growing Texas triangle (all of which have zoning except for Houston), as well as the less rapidly growing rust-belt cities of Cleveland and Grand Rapids:

http://tinyurl.com/2f2wqz

You are correct that they consider Atlanta to be a city that is regulated at an "average" level, but still at a higher level than Houston.

I am not disputing that regulation can raise prices. I am disputing that it is a major factor in the current housing bubble and credit crunch. The real culprit there was a lending and financial regulatory environment that allowed an unrealistic pricing climate to develop.

>>I consider cities like SD, LA, SF, and Boston as low demand cities because their population growth is around zero.

This does not necessarily make them low-demand. This can also mean that the supply curve is tighter.

-Mike

 
At 2:31 PM, March 26, 2008, Blogger Brian Shelley said...

"Mike" - According the Michael's link, Dallas actually has less land-use regulations than Houston. Thus the equal prices. D.C. also has no geographic limitations, yet is dramatically more expensive than other unbounded cities.

These are not just Tory and my arguments. Apparently, this economist agrees with us and an academic journal found fit to print his conclusion that almost half the price of homes in Seattle is based on regulation.

 
At 3:04 PM, March 26, 2008, Blogger Tory Gattis said...

John: Thanks for the link. Very interesting...

 
At 9:32 AM, March 27, 2008, Anonymous mike said...

So Dallas has zoning and Houston doesn't, but Dallas has less land use regulations than Houston.

Let me clarify: Dallas tells you what you can do with your land. Houston doesn't. But Dallas has less land use regulations than Houston.

Don't believe everything you read.

 
At 10:28 AM, March 27, 2008, Blogger Michael said...

Mike,

Actually, I have not read the entire study. But I think this study could be a sign that Houston's myriad set-back rules, parking requirements, etc. are more onerous, restrictive, and costly than the forms-based zoning that our neighbors like Dallas use (plus, our rules in Houston do not solve the problems we are interested in - they just create sprawl and parking lots, while allowing skyscrapers to be built in residential neighborhoods). Thus some simple zoning could be a win-win for homeowners, developers, and the environment.

-Mike

 
At 10:55 AM, March 27, 2008, Anonymous kjb434 said...

simple=zoning? That's hard to believe.


Countless project are going up that are utilizing the variance process to override many of these requirements that are being imposed by current regulations. Also, many of these regulations are put into place to hamper out of town competition. Developers, builders, and engineering companies are the sources of many of the regulations and often have first dibs in commenting on drafts to update them (one of the real reasons I believe zoning if ever instated will be watered down to be no different than todays current regulation). Our regulation system makes it fairly hard for non-native engineering companies to get jobs designing in the region. Out of town developers end up sending their business to local firms. Think of our current regulations as a way of preventing outsourcing that's very common in other communities.

I truly think any form of zoning force upon Houston will not alter anything in our current development pattern. An ordinance and accompanying policy enforcement will primarily be written by the community that has to use them. Sure, planners and civic group input will be taken, but any final ordinance will ensure not much has changed. Skyscrapers will still be built next to single family homes, sprawl will continue, and a CVS parking lot deep in the inner city will still be built.

With all that said, this is just another reason I'm against the time wasting of putting zoning into affect.

Just 4 years ago massive changes to drainage infrastructure regulation came about in Harris County and the City of Houston. In the end, nothing really changed except for increased documentation and accountability. Sure, the empirical data I use for designs was updated, but in the end many designs were not affected at all.

Much of the changes helped in streamlining the approval process versus hampering it. Any zoning enacted will be forced to produce the same results while pay lip-service to those that think that having zoning is a paradigm.

Yes, this a cynical view, but the last thirty years proved that change is resisted heavily and the process as is works very good.

 
At 5:43 PM, April 01, 2008, Anonymous Anonymous said...

Seattle is restricted by geography. There is also the desire of the locals to protect the environment.

These regulations may make housing more expensive, but many say it is worth it. Also, consider that regulations making housing more expensive does not really imply that the total absence of regulations will make it somehow cheaper. Without any regulations Seattle would likely resemble Hong Kong -- skyscrapers hemmed in by geography.

If you really think Hong Kong is an example of affordable housing then you truly are deluded. But I am sure it is great if you are a real estate developer (or one of their lackeys or running dogs).

 

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