Issi Romem, buildzoom.com's chief economist has made a valuable contribution to the growing literature on the severe unaffordability of housing in a number of US metropolitan areas. The disparities between the severely unaffordable metropolitan areas (read San Jose, San Francisco, Los Angeles, San Diego, Portland, Seattle, Portland, Denver, Miami, New York, Boston, Sacramento and Riverside-San Bernardino) and the many more affordable areas in America are described in "Paying For Dirt: Where Have Home Values Detached From Construction Costs". Romem points out that: "In the expensive U.S. coastal metros, home prices have detached from construction costs and can be almost four times as high as the cost of rebuilding existing structures."
"Paying for dirt" refers to the ballooning land costs that now comprise an unprecedented part of house values, such as in the severely unaffordable metropolitan markets above. This has created an environment where affordability is impossible. In many of these metropolitan areas, a modest house commands an exorbitant price well beyond the financial capacity of most middle income households. Land has become so expensive that it doesn't matter what is built on it, whether the average house or a tent, the price will be too high. The market distortions are so great that Romem is able to show that, for example, the average house value in Columbus, Ohio, a delightful metropolitan area, is less than the average land value per lot in Portland (Oregon).
The research suggests that the variation in construction costs between US metropolitan areas pales by comparison to the differences in the land costs. In the most expensive housing market, San Jose, the average house value is seven times that of Buffalo, the least expensive. By contrast, the highest cost construction market (San Francisco) is only twice as expensive as the least (Las Vegas). The land cost differences are stark, exceeding a 40 times difference in San Jose compared to Buffalo or Indianapolis. In Indianapolis, new detached house construction in 2017 was 2.5 times that of much larger and more expensive San Diego.
The Research
Romem's research is similar to that of Harvard's Edward Glaeser and Wharton's Joseph Gyourko ("The Economic Implications of Housing Supply"), who separated US metropolitan areas into those with "well-functioning" housing markets and those without. In the well-functioning housing markets homebuilders could construct houses for what the researchers called the "minimum profitable production cost. Their list of high cost markets that are not well-functioning nearly matches Romem's list of metropolitan areas where land costs have risen most compared to construction costs. Romem provides estimates down to the ZIP Code level in major metropolitan areas, illustrating a substantial depth of analysis.
Consistent with Glaeser and Gyourko, Romem finds that "absent restrictions on housing supply, competition among developers tends to maintain average metropolitan home prices tethered to the cost of construction."
The Problem of Excessive Land Use Regulations
In the highly regulated metropolitan areas, promoters of the urban containment policies often hide behind the fiction of topographical or geographical barriers as having created the land scarcity. A particular favorite for this blather is the San Francisco Bay Area (which includes the San Francisco and San Jose metropolitan areas) that has driven house prices up so much. There is no question that topography and geography can create such a shortage, as this photograph of Maldives capital Male shows. But nothing in the Bay Area looks like Male (photograph above).
But San Francisco and San Jose are nothing like Male. In fact, the San Francisco Bay Area has enough land for development that millions of new houses could be constructed. San Francisco's urbanization is dense, with at least 15 more residents per square mile than the New York urban area (population centre). Its population, nearly one-third that of New York, lives in an even smaller one-fourth the land area. There would be no need for urban containment in the Bay Area if the topography genuinely limited development.
Toward A More Unequal Society
In a note, Romem says that "The stark differences in land value per home are driven largely by land use policy enacted in the expensive coastal metros since the 1970s, which has inhibited these cities' growth. These metro areas have gradually slowed down their outward expansion, i.e. they have had success in stemming sprawl, but they have failed to compensate through densification. As a result, the economic vitality of these metros has been channeled away from population growth and into housing price growth."
"Stemming sprawl" while maintaining housing affordability through higher densities is a time-worn theory. The record seems to indicate that it is more likely Santa will come down the chimney than density will solve the problem. There are no virtually examples of housing markets (metropolitan areas) where increasing densities has restored affordability. This is not to suggest there is no value to increased density, but rather that it is an all too convenient diversion from solutions that have a chance of working.
Appropriately, Romem puts this childish notion to rest that increasing densities "will reduce the land value component of homes simply by dividing a fixed land value over a greater number of units."
The bottom line is that the house price appreciation in the high cost metropolitan areas suppresses population by "selectively determining who can and cannot afford to live there" according to Romem. This policy outcome could not be more inconsistent with encouraging economic aspiration among middle-income households, who pay the price of the greater inequality imposed by public policy. Further, those effectively "zoned out" by these policies have greater financial challenges than their parents, who generally grew up in periods of greater economic growth and were not saddled with unprecedented student loan debt.
The financial and exclusionary challenges weigh particularly hard on the large number of disadvantaged African-Americans and Hispanics, especially those living in the most progressive cities, where pious pronouncements about affordable housing initiatives are boilerplate, but rarely amount to anything remotely substantive. In fact, distorted land and housing markets in the expensive metropolitan areas represent a colossal government failure.
Necessary Reforms
To the contrary, housing affordability requires well-functioning housing markets. It requires home values that have not become detached from construction costs. A minimum condition is that land use regulations not stand in the way of building low cost housing tracts on the periphery of urban areas. This does not require building on the monstrous size lots of suburban Boston, where zoning and other land use restrictions have made housing far more expensive and exclusive than it needs to be. The key is to restore the competitive market for land, so that houses on comparatively small lots, such as one-quarter or one-fifth of an acre can be built at the historic land costs (including necessary infrastructure). Glaeser and Gyourko found this factor to account for about 20 percent of final purchase prices (as did I).
Romem expresses a hope that things will improve. "The disparity between the appearance of homes and their price tags is more than a home buyer’s gripe: it is a telltale indication of restricted housing supply. Such restrictions – rules governing land use, installed by incumbent residents or their predecessors – are exclusionary by nature and amount to the gating of access to opportunity. Hopefully, this study has helped identify where gates must be opened."
Indeed.
Wendell Cox is principal of Demographia, an international public policy and demographics firm. He is a Senior Fellow of the Center for Opportunity Urbanism (US), Senior Fellow for Housing Affordability and Municipal Policy for the Frontier Centre for Public Policy (Canada), and a member of the Board of Advisors of the Center for Demographics and Policy at Chapman University (California). He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. He served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.
Photograph: Male (capital of the Maldives): Where there are genuine topographical constraints.
https://upload.wikimedia.org/wikipedia/commons/6/67/Male_maldives.jpg
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