The Politics of Sky-High House Prices

In Reason magazine's Joel Miller examines the ways the government causes increases in the price of owning a home. He finds that permit delays "of six months can add nearly $7 per square foot to the price of a house.

"Examining 45 metropolitan areas around the country, Glaeser and Gyourko studied the time it takes builders to apply for and receive a permit for a 'modest-sized, single-family subdivision of less than fifty units.' They found that in the areas where zoning is strict and approvals are slow, the price goes up considerably. Permit lags of six months can add nearly $7 per square foot to the price of a house.

That's more than $10,000 added to the cost of a 1,500-square-foot home. Double that for a 12-month lag." Or how about environmental policies? One California developer had to pay mitigation fees of $3.8 million because there were 40 garter snakes on the land -- that's $93,950 per snake and a cost that gets passed along to homebuyers.

"Today's trendy regulations are affordable housing mandates. But as Miller reports, a Reason Foundation study found the Bay Area's attempts to provide affordable housing by requiring developers to sell a percentage of new homes at prices below market value have backfired, triggering significant decreases in new home construction and increasing the price of new homes by $22,000 to $44,000."

Full Story: The Politics of Sky-High House Prices

Comments

Comments

Bogus economics

Developer sell new homes for the highest price the market will bear. If the market value of a new home is, say, $500,000, a builder is going to charge $500,000 to the homebuyer. It doesn't matter how much it costs to build.

If permit delays or other governmental regulations increase the cost of construction, the homebuilder will have to spend less on buying land in order to make the same profit. So regulations have the effect of driving down land values for development land.

The core argument here is that zoning restrictions drive up housing prices by restricting supply. This may very well be a factor in high priced areas, but there is no data on housing construction here to back that argument up. The fact is that annual housing construction is running at almost double the rate it was in the early 1990s. In New York for instance the rate of housing construction is the highest in decades.

Re: Bogus Economics

Actually, developer's just pass all of these costs on to the buyer. However, to pass on the increased costs they are basically forced to build luxury housing, or at least upper-end housing, as this is the only type of residential building that will keep their profits intact and justify the higher risk (as they can only charge what the market will bear). Landowner's now this, so land prices actually go up. Plus, given that all these rules and regulations make it harder to develop, this actually lowers the supply of land, making any developable land just that much scarcer...and that scarcity drives prices up (which, in turn, makes luxury housing the only buildable option). Developers can't just magiacally make landowner's sell their land for the less than market value...what idiot landowner is going to go that?

This is all fine and good in a period of rising housing prices, as developers can speculate on prices rising and pay for the increased costs upfront to pass onto the buyer later....and any housing is good for supply issues, even luxury housing. But once price appreciation starts to moderate, developers can't factor in appreciation and most projects don't pencil out anymore as the full costs won't be able to be passed on...then you get no building at all. Which sounds good if you're into the whole luxury housing is even thing, but no building equals no supply increase, which will eventually (with a time lage of course) just raise the existing housing prices and rents even more (which really sucks for people who already don't own a home...ie the future). And it's not like the rules and regualtions are going away, so most developers couldn't build lower priced homes ina zero appreciation scenario even if they tried....barring a catastrophic price decline. Once price apprecition gets rolling again the whole process just starts all over and all you get is more lurury housing and even higher prices.

Funny how you compare New York now to the early 90's, which was the one of the worst residential real estate markets since the depression...of course there will be more housing construction now compared to then.

Re: Bogus Economics

Well, I don't think that this depiction of the economics of real estate development is very accurate.
Let's just look at some facts: last year, more housing units were completed in New York City, the highest cost city in the country, than at any point in previous 30 years. There were more permits issued for new housing units than any year since 1972. (You can look these facts up in the annual Housing Supply Report published by the city.) If it were the case that development regulations were preventing developers from increasing the supply of housing, then why is it that so much housing is being built?

Re:

You're talking about Manhattan and implying that it's the same in the entire country, which it isn't. Everything in real estate is local, and in Manhattan, because of the good economy, prices are still appreciating enough to build luxury housing (and you'll notice it's all luxury condos as only they can justify the high land costs) and the game is still affot for developers. However, once price appreciation slows or stops (for any variety of reasons) many of the projects that have had permits pulled just won't even get off the ground as the developers will just cut and run rather than gambling. Housing is starting to slow in many places around the country...just watch the homebuilder reports as they come out reporting declining slaes in places like CA.

Re: bogus economics

The figures I gave are for the entire city, not just Manhattan, and there is a ton of construction going on all over the city at all price points. Here is a place with a highly regulated environment for developers and the highest construction costs in country, yet the market is still producing new housing at a rapid rate. Doesn't that seem to disprove the argument that imposing expensive regulations on developers necessarily leads to less housing construction? You don't need to strip away all development regulations (as Reason magazine advocates) in order for the market to respond to demand for housing.

Re:

Sorry, I thought you were just talking about Manhattan. And no, it doens't disprove the argument, just because some housing is being produced doesn't mean that demand is being met...how much more hosuing might be produced without these regulations? Is there a historical undersupply of housing in New York? Are middle income homes for the average family being built? We're coming off a the lowest interest rates in history (and still low rates in real terms) and a global liquidity bubble that has turned to real estate as the investment of choice so the high costs might be worth the effort because at this point they can be passed on. The question is going to be what happens when this all slows down?

Admittedly, I don't know New York as well as the CA markets, and what I'm talking about is definitely happening here, which is why the Bay Area is has an even more expensive for-sale market than New York.

re:

The market is so robust right now, I really don't think you would see much of an increase in the amount of housing built in New York it we slashed development regulations. What regulations do you think are significant barriers to housing development?

At least in the current market, regulations that affect the cost of development are not the problem for developers in high-priced areas like NY or CA. The problem is the amount of housing developers are permitted to build under zoning regulations. I'm sure you would agree that in SF, for instance, developers will build every housing unit they can get a permit for. You are not going to see any increase in the number of units built by reducing what it costs developers to build. I would however agree that easing zoning restrictions on the amount of housing that can be built in places like SF could lead to more construction.

Plus, you're still assuming

Plus, you're still assuming that those 1972 through 2004 numbers were high in absolute terms.

Re:

I just added a new comment to reply to stop the silly ever-narrowing column thing. New York must be doing a better job than I think, because when I look at a list of the most unaffordable places to live (relative to income), they're all in California (and I have a sneaking suspicion it might have a lot to do with the environmental review process here as compared to ther places such as NY, but I digress).

I agree with you on the zoning idear, in that all the units that can get produced will/are getting produced at the moment in these high cost areas. The problem as I see it is in the type of housing that is being produced, almost everything is now luxury housing as many of these rules have made it virtually impossible to build for the middle class. Affordable housing requirements, CEQA delays, long and unsure permitting processes all add the cost of housing either directly or indirectly through increased risk/opportunity costs and all must be passed onto the home-buyer because no profit = no development (and if you don't build anything you're outta business). The only way to account for this is to build luxury housing because the profit margins are higher and can account for the inherent risk. The lower margins associated with more affordable housing are just too risky for developers to take the chance on...it sucks, but that's the way it works (for full disclosue I work for a CA developer). So no middle class housing gets built anywhere near anything worthwhile....which is really a killer for places like CA which is hemmoraghing middle class residents. Of course, these rules are just one factor along with things like zoning, demographics and the like, but financially, they're a big deal.

You aksed what I'd get rid of, and it's not a question of getting rid of any one thing per se (as I'd like to get rid of many of the rules because I think the increasingly unaffordable housing in my state is killing CA's future, especially my generation ie younger folks jsut starting out in life) but even some streamlining and sureity would help. Building permits and the environmental review process can take multiple years and are of an unknown quantifiable cost...just getting a definite timeline (90 days for a permit versus three years) would make a huge dent. Small tweaks like that would be huge and are all I can hope for at the moment. I'd be happy to explain any and all of my reasons for them.

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