In recent decades, an unprecedented variation has developed in the price of new tract housing on the fringe of US metropolitan markets. Nearly all of this difference is in costs other than site preparation and construction, which indicates rising land and regulation costs.
Our first annual Demographia Residential Land & Regulation Cost Index estimates the price of land and regulation for new entry level houses compared to the historic norm in 11 metropolitan regions (Note 1). Metropolitan regions in which land and regulation costs remain at or below normal have an Index of 1.0 while those with land and regulation costs above normal will have an Index above 1.0 (Figure 1).
More restrictive land use regulation is variously referred to as "smart growth," "growth management" and other terms. More restrictive land use regulation is estimated to have added from nearly $30,000 (in Minneapolis-St. Paul) to more than $220,000 (In San Diego) to the price of a new home.
Economic research has associated rising residential land costs with more restrictive land use regulations. The table indicates some of the more important price increasing impacts of more restrictive land use regulation.
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More Restrictive Land Use Regulation: Factors that Can Drive House Prices Higher |
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1.. Increases underlying land costs |
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2.. Increases planning and development costs |
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3.. Raises financing costs |
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4.. Encourages more expensive houses. |
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5.. Increases construction costs |
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6.. Encourages concentration of market power and land banking |
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7.. Encourages land and housing speculation |
The Land and Regulation Ratio
For decades, construction costs of tract house on the urban fringe in the United States have represented 80% or more of the advertised house price. The balance of 20% or less has been for land and regulation costs and will be referred to as the "land and regulation cost ratio." In metropolitan markets with less restrictive land use regulation, the historic 20% or less land price ratio remains in place. The Demographia Residential Land & Regulation Cost Index assumes a 20% expected land and regulation ratio.
In some metropolitan markets, however, house prices have increased far more rapidly than in the rest of the nation. The greater increase in house prices and escalation of land costs above the historic 20% land and regulation cost ratio has occurred in metropolitan markets burdened by more restrictive land use regulations. Urban growth boundaries, limits on the number of houses that can be built, large lot zoning and excessive development impact fees and the like are regulation strategies that increase the cost of land for building houses. These land cost increases are not the result of more rapidly rising construction costs or underlying market forces such as consumer demand.
More restrictive land use land use regulation also creates obstacles to people buying houses, requiring them to devote more money to housing than necessary and increases their vulnerability to losses in the event of a financial downturn. This exposes mortgage lenders to increased risks of loan defaults. Finally, more restrictive land use regulation makes residential land development more dependent on politics, with the potential for greater influence through campaign contributions.
The first annual Demographia Residential Land & Regulation Cost Index estimates cost of land and regulation for new entry level houses compared to the historic norm in 11 metropolitan markets. Each of the metropolitan regions in which house prices have risen above normal have adopted more restrictive land use regulations. Conversely, in each of the metropolitan regions in which house prices have not risen above normal levels, there is less restrictive land use regulation. During much of the Post-World War II era, all metropolitan markets had less restrictive land use regulations.
Results
The overwhelming majority of new housing in the United States continues to be detached and is built near or on the urban fringe (Note 2). For new detached homes, the Index is 1.0 in six metropolitan markets (Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis). This indicates that land use regulation is less restrictive and does not add more than normal to the price of new homes (Note 3).
In the other five metropolitan markets, the land and regulation cost ratio has risen above 20%, resulting in a higher Index. The Index is 2.4 in Minneapolis-St. Paul, 3.9 in Seattle, 4.5 in Portland, 5.7 in Washington-Baltimore and 13.2 in San Diego. It is estimated that more restrictive land use regulation raises the price of the least expensive detached houses from nearly $30,000 (in Minneapolis-St. Paul) to more than $220,000 (in San Diego) than would be expected if these metropolitan markets had retained less restrictive land use regulation (Figure 2).
The metropolitan markets with more restrictive regulation have an average Demographia Residential Land & Regulation Cost Index of 5.9 for detached housing, while the metropolitan markets with less restrictive regulation average 1.0.
Housing Affordability: Through the Bubble and Bust
There is increasing concern about declining housing affordability across the nation. Even after the deflation of the housing bubble, house prices in some metropolitan markets remain well above pre-bubble prices and historic affordability standards. The housing affordability of the included metropolitan markets is illustrated by land use regulatory category in Figure 3. The Figure indicates the National Association of Home Builders-Wells Fargo Housing Opportunity Index for 1995, the peak of the bubble and early 2010, showing the percentage of households able to afford the median priced house. Similar affordability measures can be reviewed in the Annual Demographia International Housing Affordability Survey.
Future Editions
The 11 metropolitan regions included in the initial Demographia Residential Land & Regulation Cost Index were selected to provide a geographical and regulatory balance and because they had sufficient data from which to develop the Index. Additional areas will be added in future editions, with the intention of including all metropolitan regions with more than 1,000,000 population.
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Note 1: The Index was derived from a database developed of new house offerings by national, regional and local builders, using internet sites and published metropolitan home guides. The period covered is January through June 2010.
Note 2: In 2006, more than 85% of new single family houses sold in the United States were detached, according to Bureau of the Census data. Detached housing represents approximately 62% of all US housing units (including multi-unit dwellings).
Note 3: In each of the metropolitan markets with less restrictive regulation, the estimated construction costs were more than 80% of the house price. By using a 20% land and regulation ratio, the house construction cost was capped at 80% of the house price. In each of the metropolitan markets with more restrictive regulation, the estimated construction cost was less than 80% of the house price.
Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life
Photo: Will County, Chicago urban fringe (By author)
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Most people have no concept
Most people have no concept of how an automatic transmission works, yet they know how to drive a car. You don't have to study physics to understand the laws of motion to drive a car. You don't have to understand any of this stuff to use Macintosh.
Cabo Fishing
Recently I came across your
Recently I came across your blog and read along. I thought I would leave my first comment. I do not know what to say except that I liked reading. Nice blog. beds
I don't think the new
I don't think the new regulations are so bad. At least not in some cases. I moved to San Jose with my husband last year and we couldn't afford a new house so we went for an older one that wasn't so expensive. This house was a wreck so we had to demolish most of it. We called the junk removal San Jose firm to help us with all that needed thrown out. Anyway, after we managed to change the wiring and the pipes, scrape the walls and change the floors we drew the line and ended up spending the same amount we would have paid for a recently renovated house. So even if the new regulations have risen the prices of new houses, restoring an old one can also be expensive.
The Value of Desire
One explanation for why home prices in cities that have more restrictive land-use regulations (Minneapolis-St. Paul, Portland, San Diego, Seattle, and Washington, D.C.-Baltimore) are higher than such places as (Atlanta, Dallas, Houston, Indianapolis, Raleigh-Durham, and St. Louis) with less restrictive land-use regulations may simply be a function of desire, which translates into greater demand.
Would you rather live in Houston or in San Diego? Would you rather live in Atlanta or Portland? Where do more people desire to live? When one has a choice, one is willing to pay a premium to live in a more desirable place.
Who knows? That added factor of desire may be as a direct result of more restrictive land-use regulations. Or, in my opinion - it's not that more regulations make a place more desirable, it's that a more desirable place needs (and benefits from) more restrictive regulations in effort to direct its growth as constructively as possible.
-WrW
Self-Fulfilling
Wendell's got some good points. But it's not surprising that he found that ALL variation in home prices IS due to regulation, since his whole analysis is based on the assumption that ANY variation in home prices MUST be due to regulation. See my commentary here:
http://www.cp-dr.com/node/2810
Unfair Charactarization of Smart Growth
I think I can explain the San Diego situation, at least. There's a vast swathe of "land" in the metro area that is absolutely and completely restricted to development. It's because it exists beneath the Pacific ocean. To seriously point to land costs and pick out regulations as a determining factor you're going to have to control for physical geography and a bunch of other supply problems. That doesn't even get into variances in demand between different regional markets, which you dismiss with one clause of one sentence as a non-issue. Maybe people want to live in San Diego and that at least has some impact on housing prices.
But my bigger issue here is with blithely pinning all land use regulations onto "smart growth," when in fact the vast majority of land use regulations have the opposite effect (and intentionally so, in many cases) of pushing development away from urban centers. If you think it's hard passing an exurban subdivision of single-family homes through the entitlement process, try doing a multi-family infill project in an existing neighborhood. Minimum lot sizes, cumbersome set-back restrictions, minimum parking requirements are often instituted for parochial purposes, and anyone taking a truly regional smart growth approach will be opposed to these regulations.
I doubt your free market approach will ever square perfectly with a smart growth philosophy, but by dividing the lines so starkly between pro-development everywhere and pro-regulation everywhere you may not be seeing opportunities for cooperation in certain situations.
I agree...but is this a joke?
I get the message - restricting supply of land and driving up entitlement costs for housing derails the affordability curve. I don't think you'll find anyone who understands urban economics disagreeing with you.
However, I have to say this so called "land and regulation cost" index is complete hog wash. Instead of assuming that land and entitlement fees make up 20% of the list price of a new detached home...why don't you just put the actual costs into your index?? Seems like a round about and weak argument if you ask me. Just look up the affordable housing in-lieu fees, CEQA/EIR fees, impact fees and sale prices for any large scale development in CA and you'll find that they'll add up to way more than 20% of the asking price of new homes. And probably a bit less than 20% if you go looking at St. Louis.
My second "gripe" (and I like most of your articles) relates to your inability to recognize or at least acknowledge that "raw land" costs in San Diego or Seattle - irrespective of what regulations/anti-growth restrictions may be in place - will be and have always been higher than any market in the Midwest or Texas (with perhaps urban Chicago as the only possibly exception). Land costs are not fixed, they are simply a residual payment given expectations about a developer's return on equity, and the reflect the ability of households in the market to pay for new housing. If the home builder/developer can't meet a required hurdle rate while paying for land at a price that is acceptable to the existing land owner....the project simply won't get built. So thinking of land costs as "fixed" for lack of a better term just doesn't make sense to me. They will vary from region-to-region, far more than what is depicted on your chart irrespective of land use regulations.
Put it this way - if regulations were uniform across all of the cities you include in the Index, a home builder's ability to pay for land in San Diego will always be higher than St. Louis/Indy or Minneapolis for example. Stronger job growth and opportunity, the CA "hipster" factor, climate, just to name a new. It also has physical factors limiting the supply of land (topography, water supply, etc) that are not present in other metros you include that will drive up land prices.
I like the concept, but not the execution. Just my ramblings for whatever they're worth
The East Bay, SF California
The East Bay, SF California city I live in is a perfect example of what happens when your city is over-regulated and filled with people who subscribe to NIMBYism. Its a cute, small town with lots of charming older houses and a neat old downtown. Most who live here take pride in their town and are very active in the community. Many have children and moved here for the good schools. Yet at the same time even a starter home here is around $500,000, and this would be what I would consider a very small home in the rest of the country. Even a home in need of an enormous amount of work is over $400,000.
There is actually a local measure that prevents anyone from building multi-family dwellings or converting current single family homes into a duplex. Not only that but no new home can be built without a certain sized lot-meaning there aren't any lots big enough left to do so. During election season any mention of school related offices comes with an additional message to "protect home values" and so on.
Arguments are constantly made about protecting the quality of life by preventing overcrowding. Then the people making the arguments proceed to have 2-3 children. Ironic. My city is no different than any of the other Bay Area cities. Even after the housing bust there has been barely a scratch in home prices. They're a bit cheaper but still obscenely high and for the most part unaffordable. I've lived here for 11 years. As soon as I've saved up enough "California money" we're moving to Texas.