The supply and demand for new housing

Check out these two stories, and connect the dots.

Seattle Times:

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

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[…]

This is a popular talking point for some conservative or liberatarian think tanks, and it is often employed when attacking a certain landmark 1990 bill:

A key regulation is the state’s Growth Management Act, enacted in 1990 in response to widespread public concern that sprawl could destroy the area’s unique character. To preserve it, the act promoted restrictions on where housing can be built. The result is artificial density that has driven up home prices by limiting supply, Eicher says.

I want to sidestep the politics here and take you to Erica C. Barnett’s recent column in The Stranger:

Growth management—which calls for concentrating growth in areas that are well served by transit, encouraging people to live close to where they work, and discouraging or banning new sprawl that promotes driving and harms the environment—isn’t working.

[…]

Growth management needs teeth to work. That means smaller growth-management boundaries, real limits or even a ban on growth outside those boundaries, affordable housing incentives in cities and inner-ring suburbs, sensible policies to encourage trip reduction, and land-use decisions that encourage tall, dense developments in cities and already dense suburban areas.

First, a few thoughts about that UW study:

The nearly 200k they reference includes lots of things you’d hate to see eliminated from your neighborhood. Without money for sidewalks, parks, or schools, our neighborhoods would suffer. Without a design review, folks would go nuts at the idea of another condo building and no means to influence its design, adn that’s something we value. Growth is supposed to pay for growth, even if it bumps up the sticker price on one of those crappy Quadrant homes.

Erica does get a lot of things right. Cities should build more within their own boundaries, so that the ‘burbs look a bit more like the good neighborhoods of Seattle. Anti-density NIMBYs here in town shouldn’t get to hog the housing agenda. Also, transit isn’t a panacea for sprawl. Then again, nothing is.

The people buying houses in and moving to places in Snohomish and Pierce counties are doing so because that’s where they can afford to buy a house. (I’m guessing that King County is omitted because even the shitty parts of it are getting pricey.) It’s supply and demand; not enough of the former and too much of the latter. Adam Smith is biting us in the ass.

We have constricted our housing supply. I don’t think constricting it further would have the effect Erica is looking for. People have proven to us that they will drive for hours (with the price of gas not a limiting factor until it nears 10 bucks a gallon) just to get a three bedroom ranch-style for less than 250k. Some folks will want to live in the city in a townhouse or condo, and some will want the picket fence. Can’t help that.

[As an aside: I’ve noticed that some NIMBY-types from Seattle lash out at sprawl in the ‘burbs while at the very same time complaining about condos in our neighborhoods. As a person who’d like to live in the city and NOT drive miles to my job, I find it odd that Seattle’s urban closed mindedness could be just another cause of sprawl.]

Comments

  1. 1

    ewp spews:

    There’s a social benefit to the regulations that contribute to the higher cost of housing. The article, and the study it’s referencing, is good information. People need to understand that nothing is free, and that every regulation we create has a cost, sometime intentional, and sometimes unintentional. Land is at a premium in Seattle. There are no large areas of undeveloped land just waiting to be subdivided and turned into the next new neighborhood. We’re losing affordable single family housing because in order to get your large, modern, new home in the city it requires tearing something down that already exists, which in most cases is a smaller, older, more affordable house. In order to make growth management work the urban areas must accomodate more growth, and the housing to accomodate that growth can’t all be aimed at the high-end condo market. This is where the City of Seattle has failed in it’s obligations under the GMA. Only 11% of the land in Seattle is zoned for multi-family development, and even within that small area of available land the City has imposed regulations and processes that drive up development cost. These are regulations and processes not imposed on the 75% of the city zoned for single family. Example: zoning only requires a single off street parking space for a house, regardless of size and number of bedrooms. However multifamily development, with the exception of a few areas of the city, requires a formula for parking spaces based on unit sizes, resulting in an average of about 1.3 parking spaces for each condo built. At approximately $25K cost per below ground parking space, that’s an added cost to higher density housing that’s not applied to low-density single family. There are also open space requirements, design review, infrastructure improvements, etc. placed on multi-family development that are not applied to single family. The bottom line is that we need to make informed decisions about what we require, understanding the associated costs, and how that will effect development trends. Will we be able to create affordable housing within the city limits, or will we fail and subvert growth management by forcing people of modest means to seek housing in places like Marysville and Auburn.

  2. 2

    spews:

    Ok, since I seem to be back posting here, I might as well post in my area of expertise.

    I’d be very interested to see where the $200,000 figure comes from. Certainly some of it comes from the cost of infrastructure, and this is reasonable. Roads, sidewalks, sewers, schools, fire and police stations, etc…

    Since new construction drives the need for this additional infrastructure, it is perfectly reasonable to add these costs to the price of a new home. The folks that own existing homes have already paid for their share, so taxing them for the additional costs seems unfair.

    Additionally, developers tend to look only at their own bottom line, and are less concerned about the overall community. That is the job of regulatory agencies, and it’s an important one.

    However… bureaucracy tends to breed bureaucracy, and I have seen situations where long delays add cost to reasonable and even desireable projects. A delay in a project while awaiting geotech reports is reasonable, but a delay in a project while a couple of different agencies wage a turf battle is not.

    Developers will complain loud and long about any delays and any additional costs, reasonable or not. That is unfortunate, as some of their complaints are valid, just as some of those additional costs are reasonable.

  3. 3

    ivan spews:

    Citing Erica C. Barnett on any subject whatever renders the entire post irrelevant. If that’s the level at which you choose to operate, I’ll just read some other blog.

  4. 5

    ewp spews:

    One of the problems we face in discussing these issues is the common retort “greedy developer”. As if we aren’t all engaged in activities that aim to make a profit. After all we do live in a capitalist society. But all too often when trying to explain the impact of a proposed regulation on the cost of housing, councilmembers and activists dismiss the concerns because they’re coming from a greedy developer.

  5. 6

    Jason McCullough spews:

    I find it more than a little incomprehensible that they imply only $20,000 of that price increase, at most, can come from the dotcom boom and Microsoft money.

    The total wealth of the area went through the roof over that period, so I’d expect matching house price increases just based on that.

  6. 7

    rhp6033 spews:

    What I don’t think was covered in the study was whether housing would really cost $200,000 less if the requirements were eliminated.

    First of all, the price reductions resulting from lifting development restrictions would only reduce costs of – new developments. It wouldn’t effect vertical development on existing sites much, because that whas the increased density encouraged through the Growth Management Act. Since there really isn’t any undeveloped raw land (potentially residential) left in Seattle, residential development will have to take place well outside Seattle – such as that currently occuring in Monroe, Marysville, Smoky Point, etc.

    Secondly, this won’t really have that much of an impact on prices, but just developer’s profits. We know that homes in California and many other coastal areas are selling for considerably more (500K ~ 1 Mil for an otherwise “average” house). If there is a big price disparity between the Seattle area and other coastal cities, you will see a big population shift northward (much like we saw in 1989, when prices doubled in a few months, until the next recession took hold). The market will even itself out. In the meantime, the only ones benefiting will be the developers (taking the diffence between the fair-market price and the reduced costs of development). The ones bearing the costs will be the taxpayers and public at large, as they have to spend large sums to expand the transit network and public works into new areas of development.

  7. 9

    jon spews:

    Somebody hit the reset button please. Life in Western Civilization has become both a joke and a nightmare. Get me outta here!

  8. 10

    ratcityreprobate spews:

    The devil is always in the details in these studies and quantifying the imputs is very imprecise. There is no question that zoning, building codes and growth management increase the cost of housing. But there is a cost in not having those tools and regulations and the UW study does not measure those costs. For example, when someone chooses to purchase a less expensive home in Sumner and commute to their job in downtown Bellevue more stress is placed on Hwy 167. The State is then forced to improve and/or expand Hwy 167 and our gas taxes are increased. The widow in Magnolia and the farmer in Moses Lake end up paying for that along with the commuter. A close look will show that growth increases the costs of various utilities and other amneties that we demand. The allocation of these costs quickly becomes too complex and subjective to be meaningful and renders the studies useless.

  9. 11

    ewp spews:

    @7 Your comment that the reduced cost will only enhance the developer’s profit assumes that its not a competitive market. If I can produce housing 10% cheaper because of reduced regulatory costs, then I have a choice of leaving my price high and pocketing the extra profit or reducing the sales price. Since there are many developers in this market I’d be wise to reduce the sales price to ensure that I can move the product in competition with the other developers.

  10. 12

    Aaron spews:

    The way I see it, if people are willing to spend $450K on a house including $200K of regulatory costs, they will be willing to spend $450K on a house including $50K of regulatory cost. The difference of $150K would just go to the private developer rather than the public good.

    Some might argue that if the developer could sell the house for $300K and make the same money due to a lower regulatory cost, they would. Bullpucky! In a supply constrained market, the sellers will sell for as much as they can until the buyers can’t buy. That amount will not change because some of the windfall is kept for public good.

  11. 13

    Aaron spews:

    @11: Wrong, because it remains a sellers market. Demand allows the high price, not the costs associated with meeting that demand.

  12. 14

    michael spews:

    2 got this right:
    ” Certainly some of it comes from the cost of infrastructure, and this is reasonable. Roads, sidewalks, sewers, schools, fire and police stations, etc…”

    New home buyers pay for a far greater share of infrastructure costs than they did in 1990.

    Also, were building bigger houses than we used to with more high end stuff in them. Granite counter tops and hardwood floors used to be the exception not the rule. Condo’s being built in downtown Tacoma are targeting the top 10% of the economy, their 300K price tags have nothing to do with the GMA, supply and demand (There’s an over supply and plenty of folks that want to live down town, but can’t afford to because of what the builders are choosing to build) or the cost of the land they are sitting on.

  13. 15

    michael spews:

    http://blogs.wsj.com/washwire/.....lenews_wsj
    February 12, 2008, 5:01 pm
    Builders Shut Off Campaign Cash

    Brody Mullins reports on money and politics.

    ImageUnhappy with the congressional reaction to the housing troubles, the lobbying outfit for the home-building industry has decided to stop handing out campaign cash. In a move unprecedented for an industry lobby this large, the president of the National Association of Home Builders said today that he’s suspending financial donations from its political action committee.

    Brian Catalde, the president of the NAHB, said the organization believes that over the past six months the Bush administration and Congress “have not adequately addressed the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward.”

    The home-builders PAC, which it dubs the ‘Build PAC,’ is one of the largest in Washington. In the 2005-06 election cycle, it handed out $3.5 million in donations. That made it the second-largest business PAC — and the fourth-largest non-ideological PAC overall behind the National Association of Realtors and two labor unions.

    Dropping out of the fund-raising business deals a blow to Republicans. Until recently, the home-builders had given about two-thirds of their donations to members of the GOP. Before suspending operations, the home builders had given 55% of their $868,000 in campaign cash to Republicans.

    The announcement came on a day in which six of the nation’s largest mortgage lenders, under pressure from the Bush administration, agreed to reach out to seriously delinquent borrowers and possibly give them more time to avoid foreclosures.

  14. 16

    ewp spews:

    @12 & 13 I’m afraid you’re wrong. Your assumption that any cost savings would simply result in higher profit for the developer would require a market that’s either controlled by a single developer or price fixing by the developers in the market. Both conditions do not exist here. There are numerous developers in this market all competing against one another. If it were possible to lower the price of a home and still achieve the desired return on investment, most, if not all developers would lower the price. Developers are always keeping tabs on the selling price of housing in the market they’re active in. Real estate development is one of the riskiest professions in which to try and make a living.
    Let me ask you this, if you needed to sell your home for some reason, and your break even price is $400K, would you price your home at $450K and let it sit on the market indefinitely or would you price it closer to $400K in hopes of selling it more quickly?

  15. 17

    Aaron spews:

    @16: sounds to me like you’re describing a buyers market, which most urban areas are not these days.

    $400K would be about my break even point, but were it for sale I’d sell my home for about $750K because there is enough money in the local economy so I’d have no problem getting that price.

  16. 18

    ewp spews:

    @ 17 What I’m trying to illustrate is that if one needed to sell, they will price the home at the lowest possible price they can to ensure that it sells. If someone doesn’t need to sell they can afford to price their home high and wait indefinitely to see if a buyer comes along. The reason for my example is that this is the situation a developer faces. The holding cost for unsold homes is huge. If you borrowed $25 Million to build a condo the monthly interest cost would be around $150K a month. A developer has to sell the homes as quickly as possible, otherwise the carrying costs will eat up their profit and put them in the red pretty quickly.

  17. 20

    uptown spews:

    So who’s paying for those roads to those suburbs in the middle of nowhere? Most of the commmuter rail lines out of London were paid for by the developers who wanted their customers to have easy access to the center of London.

  18. 21

    spews:

    @14 I think you are hitting on a little something here. While it is certainly more expensive to buy a SFH here in Seattle than most of the “burb” cities around, its actually cheaper to live in Seattle as well. Why? Well in many places (ie, Redmond, Bellevue, Tacoma) they simply aren’t building cheap affordable condos or apartments. Here in Seattle where people must live but prices are too high, things have worked themselves out as many SFH turn into multi-person units. I live at the top of Queen Anne, 1 min from a bus to downtown, a view of the olympics, and a safe neighborhood, and I pay less than I ever could elsewhere.

  19. 23

    Proud To Be An Ass spews:

    I have not read the article, but I remind all that we are coming off the crest of a ruinous speculative housing bubble. Did the study take that into account? Nobody above has mentioned it.

    @19: Who paid? Taxpayers. Suburban sprawl is highly subsidized–and with ‘peak oil’ considerations, may well be unsustainable.

    Look for a lot more of those with the bucks to move back to central core areas in major metro areas. It just makes sense.

    The poor will be condemned to the decaying suburban rings. Enjoy your chipboard mcmansion while you can.

    @21: Still some nice areas with nice views on Beacon Hill, too.

  20. 24

    Proud To Be An Ass spews:

    @18: That is correct. Ya’ gotta move the product. Nearly all real estate development is done with OPM (other people’s money).

  21. 25

    rhp6033 spews:

    epm: (at various): Like a lot of economic issues, absolutes don’t apply – it’s a question of degrees of variation, one way or another. Certainly anything which increases the regional housing supply has a downward pressure on prices (generally), but there are geographic limits – not everyone is willing to commute an hour a day, each way. Also, if you have a lot of developers putting a lot of product on the market at the same time, there will be some pressure to lower prices to move their product at bit. But in general, they will price their product at the highest price-point which will allow them to sell in a reasonable period of time. Who wouldn’t? But only in a buyer’s market will you see prices actually decline. And in the urban core, where their is little residential development possible without going upward (greater density), the GMA tends to encourage such development, rather than discourage it.

    What I will conceed is that to the extent the GMA makes each lot more valuable, there is more of a tendency for the developers to get more value out of each lot. Thus in Bellevue, where I work, you are seeing 1950’s ramblers being torn down to make room for 2.5 million dollar mini-mansions. A lot more lumber per square foot of lot space, but the same population density (one family). That means that there are no new “starter homes”, being replaced, for the most part, by condos. But unless the Republicans and anti-tax people are willing to approve massive tax subsidies to support extending public services even further into existing rural areas, I don’t see any solution to that problem. We can’t pretend that raw land exists in the urban core when it doesn’t.

    Of course, that brings up the biggest factor in housing prices in this area – water. The Seattle urban core is an hourglass shape, bounded by Puget Sound on the West, and Lake Washington on the East. Doing away with any number of regulations isn’t going to increase the amount of buildable land within that corridor. The real fight over the GMA is by developers who want to push development further east of Bellevue/Woodinville/Issaquah, north of Everett, and South of ?????

  22. 26

    rhp6033 spews:

    And as I mentioned before, if there is any significant downard pressure on prices (like a $150K drop due to regulatory changes), then it will act as a magnet to draw in money and people from elswhere on the west coast, raising the prices back to a level roughly equal.

  23. 27

    uptown spews:

    #22
    Do you know how old those rail lines in the UK are?

    Yes I do. They were built when rail was the transit choice of the masses (late 1800’s early 1900’s, that is also when many of the early suburbs were built up). As you got into the 20th century, government became more involved and the “new cities” were built along existing or extended commuter lines in the green belts surrounding London.

  24. 28

    uptown spews:

    Of course the whole argument about prices going up, ignores the housing/credit bubble. Looking forward to the professor’s update in a few years after prices have dropped back down, he can then argue that land-use regulations have killed demand for housing in King County.

  25. 29

    spews:

    Real Costs ….

    Studies like these pretend that prices exist in a closed universe. They do not. For one thing the true price must inlcude all expenditures related to housing inlcuding taxes and return from inflation.

    If I minimize costs to a builder by having the city put all infrastructure on the tax payer, the taxes go UP. If I allow building substandard housing then future value goes DOWN.

    Now, if I do very good urban planning, taking into interest the long term well being of the taxpayers who will own the rentals, condoes , or free standing houses, that should include the future value going UP.

    This is one reason I am concerned that much of the high density housing in Seattle is NOT well planned. I look at a development with the hexagenerian eyes of someone hwo loves cities and worry that a lot of the new development in Seattle, though high priced, is lacking in long term value.

    The lack of street level facilities, the lack of parks, schools, and destinations in SLU or the regrade may mean that these areas will not be desirable in 20 years. Does this mean that saving 200,000 may be foolish .. it just may if the cost to the purchaser amounts to say 40,000 a year in lost appreciation.

  26. 30

    Roger Rabbit spews:

    One thing, and one thing only, drives up housing prices higher: Plenty of high paying jobs. That, and that alone, is what’s behind Seattle’s growth and surging housing prices. There’s plenty of cheap housing in Cleveland, Buffalo, and Detroit.

  27. 31

    spews:

    @30 sure demand drives up prices, but so does limitted supply.

    Our geography limits the room for LA style sprawl.

    Also, hidden in the various arguements about transportation is a housing issue. For example, here on Cap Hill the Urban Planners are gping to opne a light rail station on East John. I am told they think the customers will be downtown workers who will live on Cap Hill so ..they say, thyere is no need for parking as there would be if the station were used to get to SeaTac.

    OK so far, except there is fart oo lilltle houseing in walking distance of E. John to make this feasible. SO … they believe that building the rail will cause new housing to go up on Broadway.

    I am skeptical. The rational for creating jobs down town, as opposed to the U District or SODO or .. for that matter Cap Hill itself, is anything but obvious.

    Put in its most crass light, the station on John is yet another choo-choo train intended to subsidize Paul Allantown!

    Not bad gift to the world’s 7 the? wealthiest man.