Monday, February 18, 2008

The House That No One Built

Some years ago I applied for a job at a university in an expensive California coastal city. In academic job interviews, you spend the whole day being shuttled from one person to another, sometimes a potential future colleague, sometimes someone in the chain of command. During the course of this interview, I met with the dean of the particular college in the University where I would be employed. He began by noting that professors there were expected to engage a lot with the surrounding community, and to use their talents to address community problems. He then said that the biggest problem that they faced was the housing crisis -- housing was phenomenally expensive, and most of the people who did the most difficult labor could now not dream of buying a home there.

So he asked me what I would recommend the local government do about it. I told him that to me, as an economist, it sounded like there was a shortage of housing. So I told him, if I were a housing entrepreneur determined to provide a lot of housing cheaply, I would probably have to economize on land, which is very expensive there. I asked him how easy it would be for me to build, say, a tall building full of relatively inexpensive condominiums -- say, 10 stories with 10 small condos to a floor. He told me it would be difficult if not impossible, because most of the local building codes flatly prohibited something like that. I told him that was why housing was so expensive. In this locality, as in much of the West Coast, and in fact in many wealthy communities all across the land, existing homeowners have captured the regulatory apparatus, and rammed through regulations limiting the amount of land that can be used for housing, requiring minimum lot size when housing can be built, limiting housing density, etc. All of this prevents housing entrepreneurs from responding to what is clearly an unmet social need. The dean sort of smiled indulgently at me, probably saying to himself that this is the way those crazy libertarian economists talk, and saying that the kinds of solutions I proposed were impractical.

Alas, making housing easier to build is ultimately the most practical response. Anything else glosses over the root problem, which is that many communities have chosen other goals (open space, preserving views, keeping the riffraff out, and so on) that conflict with housing affordability. And now, an economist at the University of Washington has come up with an estimate of what these regulations do to the cost of housing in Seattle that is frankly staggeringly large. The Seattle Times summarizes his findings:

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 — twice the financial impact that regulation has had on other major U.S. cities.

"In a nationwide study, it can be shown that Seattle is one of the most regulated cities and a city whose housing prices are profoundly influenced by regulations," he says.

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.
Long building-permit approval times and municipal land-use restrictions upheld by courts also have played significant roles in increasing Seattle's housing costs, he adds.


This means that regulations increase the price of housing in Seattle by over 80%. And of course, the housing shortage that results leads to calls for ever-more government regulation - requirements, for example, that multi-unit housing have a certain percentage of units set aside for low-and moderate-income people. This in turn raises the expected cost (opportunity cost, in terms of higher purchase prices foregone when you build here and not somewhere else) of building the housing, causing housing to be even less desirable to build in the first place, given that property owners can do other things with their land, and builders can target other less restrictive markets.

Such regulations are frankly a criminally hostile act against both current low-income residents, and potential future residents, who are affected by these policies but never get much chance to influence them. This is why decisions about how much housing to build, and where to put it, should generally not be voted on to begin with. Voting allows us to promote public decisions in a way that does not require us to take account of the consequences of our choices on other people. Transacting through the price system, on the other hand, requires us to take account of these consequences. While he does not cite a source, the economist Thomas Sowell in one of his books says that prior to the advance of aggressive zoning, housing in coastal California was not much more expensive, after standardizing for size and so on, than it was in other parts of the country. But once people figured out that they could use the state to preserve their interests while damaging the interests of others (inadvertently, not that it matters to the others), and raise the value of their property besides, this changed. Land-use regulation has messed up the market for housing in the places where it is most intensively used, in the same way that most kinds of regulation mess of most kinds of markets.

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