The Preserving the American Dream conference in Houston this past weekend was a lot of fun, but also pretty exhausting. I’ll have more detailed reports in upcoming posts, but for now here is an article about Houston’s housing market by a Federal Reserve Bank economist.
“Given that Houstonians had access to the same new types of mortgages as the rest of the country and that Houston has had greater population growth than other large metros, we might expect price appreciation to be stronger in Houston than elsewhere,” says the article. “However, the opposite has been true.”
The reason? Houston’s lack of zoning and its large supply of land available for development allowed builders to respond to easy credit by increasing the pace of construction. Slow and unpredictable permitting processes prevented builders in many other regions, including Florida and the Pacific Coast states, from similarly stepping up production.
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While some cities and regions have further delayed construction by imposing adequate public facilities or concurrency ordinances, Houston allows developers to create their own municipal utility districts. Through these districts, the developers install the sewer, water, and other facilities needed by their developments and charge the property owners over time.
The result is that housing prices did not bubble, and they are not significantly declining today. As of the fourth quarter of 2007, in fact, they were still increasing. Anecdotal evidence from local realtors and developers indicates that the tightening credit market has soften the demand for homes under $200,000, but homes above that price are still selling well.
Whatever correction Houston faces, says the article, “takes place in the context of prices that are squarely in line with local construction costs and without the painful supply-induced downturn under way in many other markets.” This leaves Houston relatively immune to the ups and downs of housing prices experienced in regions with planning-induced housing shortages.
Antiplanner,
There have been some criticisms of MUD’s, but overall I like them. Chris Salvino and Jerry Tripps addressed the issue of MUD’s and of the costs of regulation in Houston at the conference, ergo go view the DVD’s with their talks.
Employing MUD’s as a method of infrastrucutre development allows for a pretty close matching of supply to demand for utility infrastrucutre. A huge benefit of using MUD’s to the residents who live in them is that if you have a problem with water, sewer, etc, you will get a response far more quickly from the MUD than you will if you happen to be a hapless resident of the City of Houston. You will often get someone out to fix the problem within one day if you are in a MUD verses having to wait days or weeks if you are dealing with City of Houston Public Works and Engineering. There have been instances of MUD’s getting into financial trouble, but most are in good shape.
What traditionally happened for decades would be that developers would build out on the suburban fringe, then the City would annex those subdivisions and assume the debts and liabilities of the MUD’s. Houston’s aggressive annexations of vast swaths of land have largely been kneecapped over the past three decades because in 1970, Congress placed Texas under the auspices of the Voting Rights Act, which implied, amongst other things, that annexation could not be used as a tool to dilute minority voting strength. Since that time, there have been two prominent and hard fought annexations, of Kingwood and Clear Lake (both affluent suburban areas), along with cherry picking annexations of shopping malls and what not.
As far as the costs of Houston’s regulations verses those of other cities, what Mr. Tripps brought to the table was his experience in building the exact same structures (i.e. an apples to apples comparison), both in Houston over time and in other cities. He showed the audience the time length in Houston has increased in recent years because of increasing regulation. Nonetheless, the time to get through permitting and vetting is still lower here than elsewhere.
There were not many people in the audience when these men spoke, as there were other interesting talks, but do go through what these men had to say.
Houston’s lack of zoning and its large supply of land available for development allowed builders to respond to easy credit by increasing the pace of construction.
Credit might not be so easy if the market for single-family home mortgages were operating according to the whims of the market: the federal government has been subsidizing mortgages of single-family homes for decades through the mortgage interest tax write-off.
I would have to disagree with rationalitate about the subsidy of mortgages. Allowing taxpayers to pay less tax because of home mortgage interest expense is hardly a subsidy since the money was theirs to start with. I know it’s a perception thing but we don’t often say we subsidize children or medical care because of the tax breaks we give on those expenses. Do we look at charitable giving as subsidized?
It also doesn’t make sense to bring that into this comparison. The tax break is available across the country not just in Houston. The point here is the adverse effect of restrictive zoning and constriction of land supply by planners and government officials. It seems pretty clear to me this is a solid argument against them.
Off subject I saw Thomas Sowell recommended Randal’s book for college students home for the summer. He sees it as an antidote to the indoctrination they receive in college. Some real world thinking to bring them back to to earth.
Given that this particularly institutional arrangement (tax write-offs for mortgages) is directly targeted at the buyers of single-family homes, and that the write-off doesn’t apply to developers of multi-unit buildings (at least I don’t think it does), the tax break has the effect of raising the number of families who have mortgages in single-family homes. Presumably, some of these people might otherwise decide to rent and live in multi-unit buildings. So, philosophically you can look at it however you want, but the practical outcome is a skewing of the microeconomic calculus of individuals towards taking out mortgages on single-family homes to the detriment of other housing options.
An owner of a multi-unit building operated as a rental business does get to deduct the cost of interest as a business expense and also gets to deduct a depreciation expense.
I would not characterize this choice of home ownership as a detriment to other options any more than choosing one investment is detrimental to another. The market (absent of outside influences) would adjust to provide the right amount of each type of housing. In either case a tax deduction is available to the property owner.
In Oregon we even have a renters credit that actual does subsidize rents since it is a direct tax credit not a deduction.
I would think it reasonable to assume the mortgage tax deduction is not there to subsidize housing but to please an interest group that votes. With homeownership being the best vehicle for financial security I see the deduction as good for society in general.
Rationalitate & Steve Plunk,
I don’t see why the home mortgage interest deduction gives any preferential treatment to low density single homes vs. high density apartments. The deduction is the same whether you buy a $200,000 single family house in Houston or a $200,000, 400 sqf apartment in San Francisco.
That being said, the mortgage interest deduction does gives preferential treatment to people who own their dwellings (whether homes or apartments) vs. people who rent. Sure, some states have a renter’s credit but the federal government has none and in most cases I know the tax effect of the renter’s credit is miniscule compared to the mortgage deduction.
In that context, I do not support the mortgage deduction. I would rather see it eliminated in return for lower tax rates for everybody (No! certainly not in exchange for an even bigger government budget). One may just want to live in a $200,000 RV or a boat, as opposed to a house or apartment. Why does the government (/ the public) have any say on that by establishing economic incentives for one choice vs. the other?
Other than preferential treatment of buyers vs. renters the other main effect of the mortgage interest credit is overall home price inflation. Just like the gas tax holiday will have little effect on gas prices (since supply is limited), the mortgage interest credit has limited effect on dwelling affordability, particularly in areas where housing supply is restricted by planning. Home prices inflate and neutralize the tax benefit. Perhaps an economist can explain that more eloquently. I just perceive the concept intuitively as a scientist.
So, why am I not campaigning to abolish the deduction? Because I’m afraid that eliminating it will only lead to a larger government budget since it is very unlikely that politicians and government bureaucrats would offset the increased tax revenue with an across the board reduction in taxation.
Ettinger, I see what you are saying. The interest deduction does lead to landlords having lower costs and implies lower rents because of that. We could throw in a lot of things that have an effect on rents like property taxes for example. Higher property taxes are passed on to the renters and lower taxes result in lower rents. I don’t see a huge advantage for owners other than long term gains.
In my particular case I get no deduction for my mortgage interest since it is lower than the standard deduction. Now that’s not the usual case but many long time homeowners are in the same boat. No advantage at all for us.
I certainly agree eliminating the deduction would not serve us well by giving more to the government. So let’s keep the mortgage deduction and add more deductions! It’s our money to begin with.
An owner of a multi-unit building operated as a rental business does get to deduct the cost of interest as a business expense and also gets to deduct a depreciation expense.
That is, if they have a mortgage on the property. If not, there’s nothing to deduct.
I would not characterize this choice of home ownership as a detriment to other options any more than choosing one investment is detrimental to another.
But one investment/purchase is detrimental to all others. Given the limited availability of capital, land, and other inputs, every economic decision is bound to affect all others. This isn’t taken as a bad thing under ideal market circumstances, but when the decision is made based on government-driven incentives (as tax-minimizing decisions are), then it becomes a distortion in the free market.
I don’t see why the home mortgage interest deduction gives any preferential treatment to low density single homes vs. high density apartments.
Given the difficulty in renting out single-family homes (you have to provide many more services, whereas in an apartment building, you gain from economies of scale – you can employ a full-time maintenance person, for example), a rental arrangement is more likely to occur in a multi-unit building rather than in a single-family home. Furthermore, people looking to obtain mortgages on single-family homes have traditionally (I don’t know if it’s the case today) had many more federal financing options available to them, meaning they’re more likely to take out a mortgage. And finally, real estate developers are less likely than the average homeowner to take out a mortgage in the first place, meaning they’re less likely to have a mortgage whose interest they can deduct as a business expense.
AP: I see your point, but in any case,
The main issue remains: House in San Jose $800,000, house in Houston $180,000. Whether on top of that San Jose may also experience minor (+-20%) boom and bust cycles seems like a minor detail comapared to the main issue of affordability.
If anything, the volatility allows investors to pump more money out of a housing market, bacause, as I explained in the past, investors can move in and out of a housing market quicker than residents can. That is, investors can more easily buy low and sell high while residents are tied to life cycle events like school years, finding new jobs etc.. Stability in housing prices levels the field, but, more important, affordability significantly improves everybody’s standard of living – except perhaps spotted owls.
Rationalitate: …a rental arrangement is more likely to occur in a multi-unit building rather than in a single-family home.
Fair enough.
…and as I said I do not really support the prerferential treatment of buyers vs renters.
In practice, in my case, this relative inability of renters to get tax discounts, limits the amount of rent I can charge on the houses I do rent. So, if my wallet were my only criterion for political choices, I would support expansion of tax credits to renters, so that other taxpayers can also subsidize my rental income.
Ideologiclly, I’d rather see the mortgage interest deduction abolished in return for equivalent lower tax rates across the board (that, of course, would include lower rates on my rental income although in this case the effect for me would be more diluted compared to direct expansion of preferential treatment to rents).
But I;m weary in proposing it because, as I said, I have my doubts that we would get an equivalent general tax rate cut.
By the way, I think it’s very misleading to say that Houston lacks zoning. Before 1999, the city required that single-family plots occupy 5,000 sq. ft. of land. Apartment owners have to have 1.33 parking spaces per bedroom. Commercial buildings also have onerous parking requirements. It might seem like a minor issue, but in most suburbs and suburban-style areas (likely 90%+ of Houston has suburban-style density), parking takes up more space than actual buildings. For more on the details, see this article from Planetizen entitled “Zoning without Zoning.”
“I don’t see why the home mortgage interest deduction gives any preferential treatment to low density single homes vs. high density apartments.”
So I can pay a dollar less in taxes for every 3 I spend on my mortage –or– I can deduct 0 more for whatever I can pay in rent….. you don’t see the advantage of owning? You’re paying those taxes either way.
IIRC some states do allow you to do a similar deduction based on your rent.
“By the way, I think it’s very misleading to say that Houston lacks zoning. Before 1999, the city required that single-family plots occupy 5,000 sq. ft. of land…..”
Very good point, Raionalitate. We should be careful not to call less / different planning + zoning a lack of zoning or planning.
“With homeownership being the best vehicle for financial security I see the deduction as good for society in general.” — Best? On average across the US it’s no better an investment than municipal bonds. Not the sort of vehicle I’d want to count on for my retirement unless I love ramen.
So I can pay a dollar less in taxes for every 3 I spend on my mortage –or– I can deduct 0 more for whatever I can pay in rent….. you don’t see the advantage of owning? You’re paying those taxes either way.
Yes, I admitted, that if you (correctly) assume that high density correlates with rental while low density with ownership, then there’s indeed an indirect preferencial treatment for low density as a consequence of preferential ownership given to ownership.
BTW, If new urbanist planners get their way, then we will be owning as much (if not more) high density as we do low density. The high density – rental correlation will disappear.
One may just want to live in a $200,000 RV or a boat, as opposed to a house or apartment. Why does the government (/ the public) have any say on that by establishing economic incentives for one choice vs. the other?
As long as it has a toilet and a kitchen you can deduct the interest on a boat or RV. There is no government incentive to own one over the other (or a mobile home or a house).
Oh, one more thing. I own a condo in a high density development as my primary residence and I deduct my mortgage interest and my property taxes just like my friends who own homes on lots. I also own rentals and I deduct mortgage interest along with every other expense PLUS I deduct depreciation which, with the exception of this year, has never actually been an expense.
johngalt, It is interesting that you can immediately get a tax rebate on depreciation but you don’t immediately get taxed on appreciation. How does capital gains tax take inflation and discount rates into account. Or does everything kind of just balance out in the end. IMHO getting rid of accountants and economists would make life so much simpler.
With homeownership being the best vehicle for financial security I see the deduction as good for society in general.
I think everyone here probably realizes the absurdity of that statement in light of the latest downturn in housing prices in America. But what’s interesting to note is that it’s places with the most sprawl – the Sun Belt – where homeownership has been the poorest “vehicle [ha!] for financial security.”
Ettinger: BTW, If new urbanist planners get their way, then we will be owning as much (if not more) high density as we do low density. The high density – rental correlation will disappear.
I once read that even in Germany (you always talk about Europe as the New Urbanist nightmare come to life), roads and parking lots take up far more space than buildings. I think the ratio was something like 2:1, but I don’t remember exactly.
Germany? Is that a comparison to buildng footprint or living space.
I really don’t remember. Probably building footprint.
Because 2:1 does not seem that much if the 1 is 3-5 story appartment buildings.
Kevin, you get to deduct depreciation even when your property is APPRECIATING. If you sell the property you have to pay back that deduction though (recapture). I agree, it would be simpler if they got rid of all these rules, deductions and loopholes and just lowered the tax rate.
I really don’t remember. Probably building footprint.
Most American municipalities rule-of-thumb ROWs for roads at 14-20% across the entire city. This city is 17%, one before that in WA15%. Parking ratios for commercial usu end up being ~ 1 stall:250 sf floor across the city, so that is 240sf parking:250 sf floor. Of course, commercial and employment vary widely so rules of thumb here vary too. Further,
Commercial properties, esp in suburbs, usu. have 35-40% building footprint on the lot (there’s your 2:1), unless you are doing a garage, where you get a larger building footprint, and thus more income; an aside, most developers don’t want to carry the extra paper for the cost of a garage, so they ask the politicians to pony up cash for their parking garage (~5-9x cost of surface parking per stall, usu 5-6x). Anyway, in central, large cities your bldg footprint may be far higher depending on parking – 60-80% wouldn’t surprise me a bit, esp. if there are many parcels just doing parking or economics says garages are good, esp. underground garages (like Seattle).
What I remember from living in West Germany was that in the small towns surrounding where I lived there wasn’t much surface parking – you had to go to the medium-sized cities for that. Larger cities had surface and garages. But this was when the wall was still up , so who knows now.
DS
But what’s interesting to note is that it’s places with the most sprawl – the Sun Belt – where homeownership has been the poorest “vehicle [ha!] for financial security.â€Â
If you mean that the relative absence of restrictions to new development in many parts of the Sun Belt, has not created an environment whereby we could retire by selling our homes to the next generation at artificially inflated prices, then indeed it’s a pity! Such a fair and economically productive way to finance retirement, forgone.
I guess we should support regulatory frameworks that create artificial shortages of other assets too. That way we would create a multitude of retirement (ha)vehicles.
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