Land-Use Regulation Makes Housing Expensive

Land-use regulation has added $200,000 to the median price of Seattle homes, says Theo Eicher, an economist at the University of Washington. This is a little greater than the amount estimated by the Antiplanner, which was $180,000, but since the Antiplanner was being deliberately conservative, the numbers are remarkably close.

As described here, Eicher’s study relied on a recently released database of land-use regulation in 2,730 U.S. cities that was compiled by Joseph Gyourko of the Wharton Business School. Eicher compared housing prices from 2006 census data with regulation and showed there is a strong correlation between the two. Eicher was only able to look at 250 cities, because census data were not collected in all cities in the Wharton database. When the 2010 census is complete, an even more detailed study should be possible.

Originally built in the 1920s for $2,800 (without the second story, which was added later), this house recently sold for $650,000. According to economist Theo Eicher, more than $200,000 of that price is due to land-use regulation.
Flickr photo by brewbooks.

Eicher’s actual paper includes data for all 250 cities, 123 of which overlap with the Antiplanner’s data. His estimates of the costs of regulation tend to be a little higher than mine except in California, Florida, and a few other places where they are lower.

One reason why Eicher’s numbers are usually higher is that his data are for cities while mine are for urbanized areas. There is a reason for this: he was looking at the cost of specific land-use rules and I was looking at the cost of regional growth-management planning. But you would expect that the central cities of a region would tend to be the most regulated, and since most of his cities are central cities, they would be more overpriced than the urban areas as a whole.

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.

I am more bothered by his numbers for California. The Antiplanner estimates that land-use regulation has boosted prices in the San Francisco urban area by more than $700,000, and in San Jose by more than $600,000. Eicher’s estimates are less than $400,000 for San Francisco and less than $300,000 for San Jose. I wonder if Eicher’s numbers fail to account for the effects of speculators who are attracted to real-estate markets whose prices are inflated by land-use regulation.

Eicher breaks down his numbers into costs due to state-wide regulations, growth management, the courts, and approval delay. He also has costs due to density, income growth, and population growth, but these are not included in the cost of regulation (though in many cases density should be).

Anyone interested in comparing Eicher’s estimates of the costs of regulation with the Antiplanner’s can download this spreadsheet. The first two columns show Eicher’s estimates for 249 cities. Columns D & E show the Antiplanner’s estimates for 381 urbanized areas. Columns F and G show Eicher’s estimates for the central cities in those urbanized areas, if he has any, and the differences between the two estimates.

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35 thoughts on “Land-Use Regulation Makes Housing Expensive

  1. D4P

    Eicher compared housing prices from 2006 census data with regulation and showed there is a strong correlation between the two

    So: correlation equals causality?

    In the final analysis, Eicher believes Seattle’s regulatory climate exists because its residents want it

    Interesting.

  2. rotten

    You’d think it’d be pretty much a no-brainer. I mean it’s supply and demand, if you have regulation you have less houses being built and assuming constant demand, prices will go up.

    Why do we even need a study for something so obvious?

  3. D4P

    I’m always surprised at the lack of responsibility assigned to developers, builders, and sellers.

    What are the mechanisms that force developers and builders to pass regulatory costs on to consumers? Seems to me that this is a voluntary choice they make, not something they’re forced to do.

    What are the mechanisms that force a seller to sell his/her home for (e.g.) $500,000 instead of $200,000? Seems to me that this a voluntary choice he/she makes, not something he/she is forced to do.

  4. werdnagreb

    There is a wonderful debunking of Eicher’s article at the sightline institute’s blog: (in 3 parts)

    http://tinyurl.com/2lzk8m

    http://tinyurl.com/35u7pl

    http://tinyurl.com/2shcvy

    Parts 2 and 3 do the actual number crunching, so they may be more interesting. Here are some quotes:

    Okay, let’s dig in. The third paragraph is the first place that really caught my eye.

    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 was the result of land-use regulations, says Theo Eicher [a University of Washington economics professor].

    Really? That would mean that nearly all — 88 percent to be exact — of the inflation-adjusted price increase in Seattle was due to regulation. That would be pretty surprising during a time when Seattle’s population increased by 66,000, the region’s wealth exploded, and a national housing bubble sent prices skyrocketing. But, okay, let’s read further..

    Maybe it is true that regulation is the cause of almost all of Seattle’s price increase. And maybe growth management is the prime culprit. Maybe without regulation Seattle’s median housing price would be around $250,000, roughly the price of a house in Provo, Utah.

    Let’s read on…

    Long building-permit approval times and municipal land-use restrictions upheld by courts also have played significant roles in increasing Seattle’s housing costs, Eicher adds.

    Okay, that’s a start, I guess. But then:

    Eicher explains that “the statewide growth-management plan gave King County few options but to require that landowners in rural areas that haven’t already cleared their land to keep 50 to 65 percent of their property in its ‘natural state.’ This forced greater density in Seattle.”

    Uh-oh, I smell trouble. Eicher appears to be referring to a small but controversial provision in the county’s Critical Areas Ordinances. This part of the CAOs weren’t enacted until 2004, and then they were subsequently relaxed a bit. They affect rural areas that are mostly far from Seattle and, for the most part, those places were already not exactly ripe for additional housing anyway. It’s very hard to see how they could have “forced” density into Seattle.

    But I’ve been curious about this stuff in the past, so Sightline wrote up a comparison study of home prices in regulated areas of rural King County. What did we find? That it’s too close to call. Depends on whether you like percentage growth or absolute growth — and even then the difference between strictly regulated properties and lightly regulated ones was small at best.

  5. rotten

    Well they’re going to sell it for as much money as possible in general. With less demand, there is less downward pricing pressure.

    Of course not all regulation will increase the price that much, but if it’s regulation that prevents the house from being built *at all*, you can bet that in a tight urban environment like Seattle, that will raise prices.

  6. D4P

    Sometimes I do, sometimes I don’t. If we accept that developers/builders/home sellers typically CHOOSE to sell for as much as they can, then it seems to me that the Antiplanner’s argument is not #1, but rather #2:

    #1: Land use regulations increase the costs of buying a home

    #2: Land use regulations allow developers/builders/sellers to sell their home for more money than they would otherwise be able to, and since they like money, they choose to sell for the higher price.

    In other words, there’s at least one intermediate step between regulations and selling price, which is the decision on the part of sellers to extract the maximum dollar amount a buyer is willing and able to pay, not to mention the decision on the part of the buyer to pay the requested price.

    Regulations can only increase the selling price if the seller allows them to.

  7. rotten

    This conversation is about the part of economics which describes the decisions that people tend to make under certain circumstances. Most normal people will tend to try and get as much money as possible when they sell something to a stranger.

    Do we really need to explain basic economics to you?

  8. Dan

    Selling it for as much money as possible’s result is called “equilibrium rents”. Rotten is correct. Humans charge what the market will bear, and humans pay it if they want to live somewhere badly enough.

    Equilibrium rents in the Puget Sound continue to rise because of the natural environment, Olympia’s dedication to attracting good jobs, the stable economy, the natural environment, the rich plethora of amenities in the Sound, the natural environment, the very high literacy rate, the natural environment…you get the drift. Wealthy people continue to migrate to Puget Sound because of UW Health, Swedish, Microsoft, Amazon, and the many knowledge economy companies moving to Cascadia.

    But more to the point of this post, I didn’t have any econ classes with him, but I did with a much bigger name than Eicher, and we would never look at nationwide numbers without getting down to robust comparatives, such as per foot price, and tease out costs of labor and material, as well as hedonic pricing.

    The closest amenity proxy we can find in Eicher’s paper is in tbl 2c (dependent variables for growth), where the highest t is for for ‘Income growth’ – this gets at rotten’s equilibrium rents and what I was explaining above [income growth drives demand for amenities and better housing and drives up prices too].

    Specifically, the demand factors in Tbl 2c have no hedonic or amenity factors, nor does he look at the standard literature for state-specific growth regulation or hedonic valuation – which is unfortunate, as one of his old colleagues is the standard referent and his neighbor to the south at UO is the standard referent for hedonics; doesn’t Eicher attend faculty parties or conferences?

    Lastly, Tbl 4b gets at what I’ve discussed many, many times here, and is derived from Glaser’s laments: folks asking local officials to increase zoning for large-lot single-fam drive up prices – almost three times as much as state-wide growth management and almost as much as state-side LU restrictions [impact fees being generally the major factor (impact fees are generally enacted to pay for growth in absence of taxation)].

    I hope this helps place the paper in context for those seeking explanations.

    DS

  9. D4P

    Most normal people will tend to try and get as much money as possible when they sell something to a stranger

    Then it seems to me the problem (if one exists) is ultimately the responsibility of “most normal people”, not the regulations themselves.

    The AP would have us believe that regulations give sellers no choice but to sell for a higher price. I believe that to be patently untrue. The seller is completely free to sell for less if s/he chooses to do so. S/he should not blame regulations for something that is ultimately her/his own personal decision.

  10. Dan

    Ah. I looked at Eicher’s CV. No wonder he didn’t have more explanatory variables or contact the big names in micro – he’s a macro guy. Hedonic and amenity factors are micro and micro papers have far more variables.

    Got it.

    DS

  11. Dan

    The AP would have us believe that regulations give sellers no choice but to sell for a higher price. I believe that to be patently untrue. The seller is completely free to sell for less if s/he chooses to do so. S/he should not blame regulations for something that is ultimately her/his own personal decision.

    Few make these decisions when selling to strangers, as that is against human nature. Sure, we’ll sell at a lower price to friends or family, but not to someone with a Realtor.

    DS

  12. D4P

    The fact that few people choose to sell for less doesn’t make it any less of a choice

    If you think housing prices are too high, then you’re part of the problem if you sell your house at the high price.

  13. rotten

    It’s hard to pin down the reason for costs to one single thing, to attribute it entirely to land-use costs is a mistake. But a little honesty and common sense would tell us that restricting housing in general will lead to higher costs. And so will general inflation, demand variables, etc. I have no doubt that zoning is another factor.

  14. StevePlunk

    D4P,

    I’m sure if you are playing a game with us or if you are sincere in your questions. Since I can’t be sure I’ll give you the benefit of the doubt and give some examples of why we charge what the market will bear rather than a lower price.

    Most people when selling a house will use the services of a real estate agent who’s interests are earning a commission. Higher prices earn higher commissions. Pricing according to the current market is an ethical responsibility to the client as well.

    Sellers also have responsibilities to themselves and theirs families. Taking less than market value could impoverish the seller. What if the seller’s children were entering college and tuition money is needed, or the seller’s wife had a medical condition with the accompanying bills, or the seller were approaching retirement?

    What I expect is your clever attempt to deflect blame just doesn’t work. The facts clearly support the conclusion that regulation has an effect on price. There is debate as to how much and whether it is worth it but I think we can all agree the effect is there.

  15. D4P

    Steve – You make it sound as if higher home prices are a good thing. They sound good for realtors, clients, sellers, sellers’ children entering college, sellers’ wives with medical conditions, sellers’ retirement nest eggs, etc.

  16. Dan

    But a little honesty and common sense would tell us that restricting housing in general will lead to higher costs.

    Sure. This is what Glaeser gets at: communities asking electeds to enact large-lot zoning to preserve home values restricts housing and increases prices. Also, another method is California saying in effect: ‘we have 30M people and who knows how many more can we accomodate with our stressed natural resources’.

    But the point is that simply saying ‘restricting supply’ doesn’t get it. Every time I ask the author here about the assertion that price rises are due to restricted supply, the crickets chirping hurts my ears.

    DS

  17. TexanOkie

    Here’s a question:
    Land use regulations have been around since the 1920′s, so why does the current speculation-driven housing cost increases fall entirely on land-use regulation?

    Is it possible, even probable, that the current speculation is driven by the growing fear of peak oil bringing our current dominant development patterns to their knees? This would in turn create intense demand for higher-density, more connected places, which generally have much higher values than single-family sprawl. The only problem is that the market seems to have over-anticipated peak oil and is now realizing such. Hence the slow-down.

  18. johngalt

    D4P, are you serious?

    Ok, how about looking at it this way…

    Let’s say that you would love to own my house. If I am willing to sell my $500,000 house for $250,000 who will I sell it to, you? I will have my choice of literally thousands of buyers. Do I just pick the first one that shows up at my door? Do I pick the one that looks like me? Do I pick the one who tells the best story?

    In most instances I would probably sell to a speculator because they would probably be most likely to contact me first since it would be their business to check listings every 5 minutes and they could get in their car and be at my house in 10 minutes where you are probably at work. They might have a very polished story and be excellent at “closing the deal”.

    After selling my house for $250,000, the new owner would most likely just turn around and re-sell it for $500,000.

    What did I accomplish? Did I lower housing prices or just make the investor $250,000 richer? Is what I did any different from selling for $500,000 and walking up to a stranger on the street and handing them $250,000?

  19. D4P

    john – Let’s say you DO sell your house for $250,000 to a speculator, who re-sells it for $500,000. The responsibility then lies with the speculator, who DECIDED to sell the house for $500,000 because s/he could.

  20. johngalt

    OMG,

    It is not the speculator it is the entire market, a market that has a lot of government intervention into it.

    No wonder there are so many problems in this country with the general lack of understanding of economics. D4P, you should read something like: Economics in One Lesson (and some others) — start with that one. When you are done come back and re-post here.

    http://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1203109796&sr=8-1

  21. D4P

    I actually have a degree in economics. I understand supply and demand. But I think it’s inaccurate to act as if agents in a market are subject to invisible forces that dictate their behaviors as if they have no choice or control over their own behavior. If I sell my house for the equilibrium price (where the demand and supply curves cross, or if you prefer, where the marginal demand and marginal cost curves cross), I do so because I CHOOSE to, not because the invisible hand makes me.

  22. prk166

    You’re right, at some level it’s technically a “choice”. But it’s a daft argument to make because you’re essentially arguing that no one has to do it…. but the reality is IF they are going to do it they need incentives to take on those risks because there is no guarantee of making money let alone even covering costs. So what you’re doing is essentially arguing no one has to do it. But if no one does then we don’t have housing (or office buildings or retail stores or any of that). IIRC even a moderately growing metropolitan area of 3 million people like Minneapolis / St. Paul needs something like 15,000 housing units built each year just to keep up with population growth. That’s not including dealing with shifting population patterns (e.g. people moving to Savage to be closer to their job with Seagate in Shakopee). Stop the building and you have 15,000 households each year looking for a home that don’t have one.

    Remember that regulations cost money. If a developer could simply buy the land, file the change and title, have an architect draw up plans, and then build it and lastly sell it it would be less expensive. The problem is in getting the projects approved by the city. There are all sorts of costs involved in that, primarily being time. For example, a recent condo project had to revise their plans years ago. Part of was in an area the city had designated as being historic. It turns out they couldn’t tear down the house and had to incorporate it into their plans. That has direct costs (the cost to restore and remodel the house (in this case up to commercial standards so it can house a restraunt), costs to change plans, etc). It also means that less condos are being built. There’s a chunk of land where another 5-10 condos could have been. That means less supply in the city and less units to which the costs of building and maintaining can be spread across.

    But the real kicker is time. This project took 5 years to complete. In that span of times we’ve gone from a housing market where you couldn’t go wrong to where nothing seems to sell. The risks are huge. And yes, they didn’t have to the project in the first place. But if they didn’t, that would mean 200-300 less housing units.

  23. Lorianne

    Smaller homes are nonstarters
    Developers cite restrictive zoning for lack of affordably priced homes

    http://www.boston.com/realestate/news/articles/2006/11/05/smaller_homes_are_nonstarters/

    The Anti-Planner is on the right track but not seeing the whole picture. Even without urban growth boundaries, restrictive zoning and land use laws push up the price of housing (and have for decades). In particular Minimum Lot Size restrictions push up the price of homes.

    Myriad other zoning and land use regulations (which have no other purpose than to generate a higher tax base and ration what kind of people can live in a place), push up the price of homes, infrastructure costs, etc.

  24. Ettinger

    I agree that this analysis is is somewhat obvious. I also agree that ultimately the actions of planners embody the desires of the public (or at least of the majority of the voting public).

    However, it seems to me that this analysis will help voters put their priorities in the right perspective. Because it all depends on how you ask the question.

    If you ask the typical suburbanite:

    “Do you want the hills next to your house to remain green?”

    The anwser will probably be yes and they may also gladly sign a petition to propose more land use restrictions in the next election ballot.

    However if you frame the queestion in terms of its impact:

    “Would you work an additional 3 years without pay to keep the hills next to your house green?”

    Then I’m not sure that you would get the same enthousiasm.

    Because having to pay an additional $200,000 for the average, say, Seattle resident means exactly that, working an additional 3 years without pay, that is, to simply pay the planning premium and its resulting housing supply restriction. Even if one has in mind to someday move, the residents of the place you will one day move to are equally promoting land use restrictions that will increrase the cost of housing in this new place you want to move to.

    Often people believe that it is always somebody else that will bear the burden of the regulations that they, as citizens, support and promote. This is not only unethical but it is also incorrect. Land use restrictions come back to affect the very voters that support and promote them, and in a very immediate way; an extra $200,000 on their houses, another 3 years of work, or retiring perhaps at 60 instead of 55. The impact on one’s life is staggering.

  25. aynrandgirl

    Why are you talking about minimum lot sizes as the sine non qua of restrictive zoning? The overpriced markets don’t have large lot sizes. If you’ve been to California, Portland, or Seattle you’d see that houses are being built on distressingly small lots. The proverbial postage stamp would be bigger. The restrictive zoning in question squashes sufficient increases in housing supply by either making development impossible, requiring an endless and very expensive approval process at the end of which you still might not get approval (in the mean time the city will happily take your property tax payments), or by diverting so much of the available land to “greenspace” and other non-remunerative uses that development becomes uneconomic.

    Don’t forget the direct monetary interest of the cities in driving up prices. Just wait until the city extorts a large cash payment (excuse me, solicits a donation) for a project that’s nowhere near your development and thus, ethically speaking, has no reasonable relation to it, though your project won’t be approved without your generous voluntary donation. Add “impact fees” on top of that. California cities get around Prop 13 by charging over $100k per house in impact fees, which are a pure cash windfall to the city because the developer is paying for the additional water, sewer, and electrical infrastructure on top of that. Then they turn around and charge extra property tax on the now inflated sales price.

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