Monday, August 22, 2005

How zoning regulations inflate the housing bubble

Slate magazine has a nice, short piece on how zoning regulations drive up housing costs.

If you live in central Dallas, and if you could magically add a quarter of an acre to your lot size, you'd add (on average) about $2,200 to the value of your house. (We know this from comparisons of similar houses on different-sized lots.) Do the same in central Philadelphia, and your house value increases by $8,400; in central Houston, it's more like $17,600. In that sense, central Dallas land is just about the cheapest urban land you can find in this country. Among large cities, only Atlanta, Boston, and St. Louis rank lower.

In theory, that should be great news for Dallas housing prices. But it's not. A house that costs $100,000 to build typically sells for $140,000 in Dallas, maybe $120,000 in Houston, and under $90,000 in Philadelphia.

They go on to explain that the reason the land is worth more in places like Houston is that it is relatively easy to get permission to build on it. Not so in Dallas and most other cities. Zoning regulations restrict supply, which causes prices to spike into bubbles followed by their painful aftermath, often including driving both jobs and residents away.

When you buy a house, you're not just paying for the land and construction costs; you're also paying for a building permit and other costs of compliance. You've got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc. ...

You can talk all you want about crazed speculators and bubbles in housing prices, but you still have to explain why competitive forces don't bring prices right back down. According to Glaeser and Gyourko, it's ever-expanding zoning laws that get in the way. If you want to lower prices, that's the bubble you've got to burst.

Our minimal level of development red-tape (and therefore strong housing market competition) is another hidden strength of Houston. Amusingly, it's one that we were mocked for for years (the largest city in the country without zoning), but now the shoe is on the other foot, with other cities wondering how they can pare back onerous development regulations without a resident revolt. Unfortunately, it's another one of those one-way slippery-slopes that are very difficult to go back from, similar to unrealistically low property tax caps.

I'm not saying Houston's perfect. There is a need for some historic preservation and directed development near light rail stations, but I think we're trying to accomplish these goals with a more thoughtful, lighter touch than the heavy-handed approaches of other cities. That, plus Mayor White's initiative to streamline the building permit process, puts Houston in a very good position going forward.


At 8:57 AM, August 23, 2005, Anonymous Anonymous said...

I don't own a house here in Houston (or anywhere) so the particulars of this don't really apply to me. You have, however, touched on an interesting aspect of Houston life that I am deeply proud of: so long as you don't mess with other people, for the most part, you are free to live your own life. It's a more relaxed way of living, IMO.

At 10:38 PM, August 23, 2005, Anonymous Anonymous said...

Whenever I see comparisons of housing prices between various cities that attempt to draw broader conclusions, I get somewhat skeptical for several reasons. A big one is simply that some cities have significant geographical constraints (like Lake Michigan or San Francisco Bay) that limit the supply of developable land, thus driving up the cost of development.

However, I think a very useful exercise would be to determine the effect of zoning vs. non-zoning on home prices within the Houston metro area. This would involve taking a few sample homes in cities with zoning (like Sugar Land, Missouri City, and League City) and compare them with comparable homes in the City of Houston and unincorporated areas of Harris County, Fort Bend County, etc.

These homes would have to be of similar square footages, similar access to major activity centers, similar available amenities, similar quality public schools, and all those other factors that would make for reasonable comparables.

A tricky issue to be mindful of is the presence of MUDs, which are rare in the City of Houston. MUDs essentially lower the up-front costs of a home's share of subdivision infrastructure costs, and then recover it over time through MUD taxes. So it might be best to choose homes that are not in MUDs.

I suspect what we'd find is that our metro area examples of zoning don't contribute much to the cost of a home. And it could be that they help a home hold its value over time, and maybe even make a home easier to sell by providing a level of assurance about what will happen (or not) on nearby property.

At 10:40 PM, August 23, 2005, Anonymous Anonymous said...

A tricky issue to be mindful of is the presence of MUDs, which are rare in the City of Houston

...but very common outside the city limits. [oops, forgot that part!]

At 10:45 PM, August 23, 2005, Blogger Tory Gattis said...

I can give you an example in our own neighborhood: Bellaire (zoned) vs. Meyerland (unzoned, although some deed restrictions). Bellaire houses cost substantially more, even with the same schools. Another example would be the big lot houses on Maple Street in Bellaire near 610. They would be worth a whole lot more if they could be subdivided.

At 6:39 AM, August 24, 2005, Anonymous Anonymous said...

Well, but that example also shows how complex this is. Bellaire is not exactly a developer's nightmare when it comes to zoning. Much of the added value of prices in Bellaire relates to the perception (true or not) of improved city services vs. the city of Houston, such as police, fire, library, community pool... Also, their property tax rate is about 1/3 less than Houston's, which adds to the desirability. Also, being a small city within a large city, residents in Bellaire probably feel that they have more of a "say" in their city government, and have more control over the direction of their city. Plus, they have good schools (we share middle and high schools, but not elementary I don't think). All of this drives demand, causing prices to rise. So to say that this is because of zoning, I believe, misses most of the actual key factors.

Now, with regards to your comment about subdividing the larger lots, keep in mind that subdividing a lot on our side of the city limits would be against deed restrictions, and would otherwise still have to go through an approval process in the City's Planning Department. So our deed restrictions act in the same way as their zoning on that issue. I'm wondering whether that would actually happen because it's not on the Houston side of the city limits. Tear-down/McMansion construction seems to be the trend in this general area, and I wonder if in the absence of regulation the trend would even be subdividing...

At 8:46 AM, August 24, 2005, Blogger Tory Gattis said...

All fair points. On your last question, I think the answer is yes - subdivision would be more popular. Look at the Montrose, Shepherd, and Rice Military areas. Rather than McMansions, they pack on 2-3 townhomes.

At 8:56 AM, August 24, 2005, Anonymous Anonymous said...

You might be right about subdividing being more popular in absence of restrictions in our area - I've been second-guessing myself about that.

From the standpoint of comparing our neighborhood with Bellaire though, "the question is moot" since deed restrictions and zoning (respectively) will keep that from happening, short of either a zoning change or an entire neighborhood voting to amend the deed restrictions. (hey, did you read that recent news item about entire blocks and neighborhoods selling together as a whole to developers for a big mark-up?).

At 9:06 AM, August 24, 2005, Blogger Tory Gattis said...

Yep. Saw that. Pretty clever.

At 2:12 PM, August 24, 2005, Anonymous Anonymous said...

RE: that article, I just dug it up from the New York Times archives and emailed the text to Tory. Send him an email if you want the article. I'll let Tory decide if he'd rather just post the whole thing here.


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