The Politics of Sky-High House Prices

How government jacks up the price of owning your home.

Joel Miller from the July 2006 issue

(Page 2 of 3)

Edward L. Glaeser and Joseph Gyourko explored the problem in a paper prepared for the Federal Reserve Bank of New York, which hosted a conference on affordable housing in 2002. Glaeser, an economist at Harvard, and Gyourko, a professor of real estate and finance at the Wharton School of Business, wanted to find out whether the country was facing a shortage of affordable housing and what might be causing such a shortage. What they discovered was that the nation as a whole has no real shortage of cheap digs; it’s just that the cost of land and homes in certain areas has gone through the roof, mainly because zoning and other land use restrictions have made usable land scarcer.

Examining 45 metropolitan areas around the country, Glaeser and Gyourko studied the time it takes builders to apply for and receive a permit for a “modest-sized, single-family subdivision of less than fifty units.” They found that in the areas where zoning is strict and approvals are slow, the price goes up considerably. Permit lags of six months can add nearly $7 per square foot to the price of a house. That’s more than $10,000 added to the cost of a 1,500-square-foot home. Double that for a 12-month lag.

“Measures of zoning strictness,” Glaeser and Gyourko write, “are highly correlated with high prices.” In fact, “Almost all of the very high cost areas are extremely regulated.” In some places, especially California, the impact of these restrictions is dramatic. They’ve been instrumental in making housing prices in San Jose, 50 miles southeast of San Francisco, triple the prices in comparable cities elsewhere.

It’s not just zoning and growth restrictions. Environmental impact laws raise the purchase price of homes as well. Planners in California, for example, required developer Marvin “Buzz” Oates to pay more than $2,000 extra per acre of a Sutter Basin property because it was home to roughly 40 giant garter snakes. The total “mitigation” fee was $3.8 million—$93,950 per snake. On other projects, Oates says he lost millions of dollars due to delays prompted by concerns about the fate of fairy shrimp.

A February 2005 study by the U.S. Department of Housing and Urban Development identified complex environmental regulations as one of the factors raising home prices. “A number of trends indicate that since 1991 poorly designed environmental procedures and regulatory processes have become more significant barriers to the development of affordable housing,” says the report. “Major trends include the proliferation of national mandates, the increasing complexity of urban environmental regulations, layering of additional local environmental laws, and the misuse of environmental regulations by those opposed to affordable housing.”

Additional impact fees such as park, wetland, and transportation mitigation expenses add up quickly, as do the costs of permits and utility hookups. Add all those factors to a price tag, and prepare for sticker shock.

In Seattle and surrounding King County, Washington, home prices have jumped more than 10 times the rate of inflation in a single year. As in the San Francisco Peninsula, an influx of new homebuyers and a fast-growing economy are partly responsible, but a study by the Vancouver-based homebuilder Taseca Homes shows regulations play a significant role as well. “The company’s managers carefully itemized and tracked all the actual costs that go into some of the homes the company has built recently,” writes Paul Guppy of the Washington Policy Center, pointing to the results for one particular house. “They found at least $40,486 of this home’s $223,600 selling price can be attributed to government regulation and fees…an increase of 22 percent over the cost of building the actual house.”

Guppy says many of the rules that raise home prices are “good and useful, and serve the public interest.” But he also notes that homeowners are kept in the dark about these added expenses, which go beyond the sales and property taxes they already pay for city services. “The overall result,” he says, “is that for many working families, the dream of becoming homeowners is only pushed farther and farther out of reach.”

Critics of finance options such as sub-prime loans should ask why these instruments are so popular in the first place. Regulation-fueled price hikes are making it harder for many Americans to buy houses. As a result, many are turning to creative and sometimes precarious loan packages. With housing prices so high, an interest-only loan with no money down can jack up someone’s purchasing power by 25 percent, according to Brett Vratil, a realtor who works in Southern California. “Often that’s what it takes to get someone into a home in Los Angeles,” he told Bankrate.com last year.

But while the market is busy adapting to escalating home prices, the government is making the problem worse.

Winners and Losers

With housing costs far outside most people’s reach in San Jose, at one point the city offered affordable-housing subsidies totaling $180 million. The program barely dented the problem, because the city’s actual burden from increased housing prices came closer to $100 billion, according to calculations by Randal O’Toole, an economist with the Oregon-based Thoreau Institute.

Now those subsidies are long gone, and San Jose home prices are still rocketing. Glaeser and Gyourko conclude that benefits from subsidized housing are “trivial...even if well-targeted toward deserving poor households.”

Other solutions are even worse. Seeing that zoning laws have the power to destroy, city planners have decided to see if they can also restore. “Many local governments have turned to ‘inclusionary zoning’ ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable to people with lower incomes,” explain the San Jose State University economists Benjamin Powell and Edward Stringham in a 2004 paper for the Reason Foundation, the nonprofit that publishes this magazine.

Forced to sell these discounted homes, builders offset their losses by upping the prices on surrounding homes. “We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $22,000 to $44,000,” Powell and Stringham report. “In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.”