Monkey-brained Musings

Monday, August 01, 2005
Housing Prices and Land Use Costs

An article in Slate asks whether housing costs are being inflated by excessive land use controls. As evidence, the article cites the divergence between the theoretical market value of a new house based on the the price of land plus construction costs plus a reasonable profit for the developer from the asking price or actual sale price. One study (pdf) found that 71 percent of the units for sale in Austin in 1999 were valued at more than 140 percent of the construction costs only. For other Texas cities the findings were Dallas, 47 percent; El Paso, 28 percent; Houston, 27 percent; and San Antonio, 26 percent.

There are, however, some problems with this study. First, the numbers are from the height of the tech boom, and are now quite dated. Second, there seems to be an implied assumption that land values should be approximately 40 percent of construction costs. It is not apparent where that assumption comes from or how it might actually relate to the divergence in land values between the cities studied, such as San Francisco and El Paso. Accepting for the moment that 40 percent is a valid assumption, then we may also assume that a local market is in balance, and reasonably priced, if less than 50 percent of the houses are sold at less than 140 percent of construction costs.

On that basis, the housing in Texas cities, other than Austin, appears to be reasonably priced, if not a bargin. Actually, more than half of the houses were valued above 140 percent of construction costs in only in only 17 out of the 40 cities studied (42.5 percent). Not surprisingly, the worst offenders were in California: San Francisco, 96 percent; Anaheim, 93 percent; San Diego, 93 percent; and Los Angeles, 89 percent. However, it has long been recognized that the regulatory culprit most responsible for skewing California housing prices has been Proposition 13, the property tax limitation measure. Under Prop 13, local governments have had every incenitive to zone for commercial and industrial properties and have had little incentive to encourage housing construction due to the high demand housing places on governmental services.

All of this is relevant to Austin due to the impending bond election. Citizens and the city council have asked that the bond committee consider proposals to address affordability, and its fellow traveler gentrification. Two proposals have attracted the most discussion. One would involve the sale of bonds for an affordable housing trust fund. The other would seek to reduce the impact of regulatory costs and delays on housing construction.

Housing costs are greatly influenced by supply and demand. Housing costs are greatest in the Central City were demand is highest and the supply is limited. Costs are generally lowest in the suburban and rural areas of Bastrop, Hays, Travis, and Williamson counties where the supply of new construction is greater and the demand is limited. One of the surest ways to promote affordable housing is by promoting construction, keeping supply in line with demand. One of the reasons that Austin has become less affordable is because of the low rate of new construction that took place in the late 80s and early 90s during the bust. While newly constructed units, such as lofts Downtown, are typically priced above the average price of existing homes, units constructed today provide a supply of housing that will support a more affordable housing market in the future.

As a final note of caution, the studies upon which the Slate article was based were published by the Libertarian Cato institute, which generally sees regulations as the source of all evils.


Worth noting is that people like the Cato like to squall about regulations when its things like impervious cover and/or urban growth boundaries, but they typically remain absolutely silent when it comes to issues of multi-family vs. single-family, i.e., densifying via infill.

Most self-identified libertarians are really Republicans in the suburbs who don't like the religious parts of their party's platform. Keep that in mind and a lot of the cognitive dissonance in their platforms makes more sense (another great example is how much caterwauling there is about toll roads, which are a huge step TOWARDS the libertarian view of government).
Another major flaw in the Slate article is the equation of intensity of zoning laws with the length of the permit application process. There isn't necessarily a correlation between the two and, in fact, for the two states that I am most familiar with, Washington and Oregon, there is a negative correlation.

In Oregon, which has some of the most stringent land-use laws in the nation, the permit process is quite simple and fast. That is because nearly all decisions about land use and zoning are established in law meaning that permit officers and zoning boards have no real authority to grant waivers and that sort of thing. If the property is zoned for the use in question then getting a permit is pretty quick and easy. If it is not, then you simply aren't going to get a permit. Period.

By contrast, Washington has much looser land use laws at the state level meaning that local counties and zoning boards have a lot more discretion. In practice this means that the permit process is far more lengthy because anyone asking for any sort of variance needs to deal with a long hearing process and submit all sorts of documents and studies. What this means is the builders in Washington can often eventually get their way and get around local zoning, but sometimes only after years of process. Big corporate builders like Weyerhaeuser Timber Company (which builds a LOT of houses in the Northwest) get their own way but little builders sometimes don't.
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The scattered musings of Jeb Boyt, Austin Texas. A collection of the random bits that scamper through my monkey brain. This blog is my personal record. The opinions expressed here are my own and are in no way associated with any employer, board, commission, organization, or other entity that I may be affiliated with. So there.

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