

Summarizing recent research, Bryan Caplan estimates, “It is very plausible that U.S. housing would be 50% cheaper under laissez-faire.”
Why do we not live in that less expensive, freer world?
“Because regulation is strangling housing supply, especially in desirable locations.”
“Yes!” I hear myself saying, no doubt in unison with more than a few readers.
Over the past year, mostly as a matter of curiosity and interest, I have kept tabs on a few housing markets across the country, including my local market. I am 23 and interested in buying a house in the next few years, so I want to have a sense of what is on offer in various areas, including but also beyond my own. If nothing else, it’s good to keep an accurate accounting of opportunity costs and available alternatives. Moreover, since housing is a major public policy issue, it’s good to be aware of what’s going on in markets outside our own immediate area.
In central Indiana, there are houses to be had, for sure. We’re still building new homes, and have been for years, mostly in suburban subdivisions. And people come. Good schools and jobs in the area fuel demand. It is true that for some the dominant style of these suburban developments is an issue. Even the custom homes in these parts tend to look like simply larger riffs on the familiar planned neighborhood “McMansion”—a design hodgepodge of different architectural styles and elements. But obviously, for many people, the aesthetic tradeoff (if in their mind there is one at all) is more than worth it, as evidenced by people continuing to flock to suburbs like Fishers, Westfield, Zionsville, and Carmel. Exterior style aside, a new or recently built house around here tends to be a very nice and comfortable house on the inside. High ceilings, lots of high-efficiency windows and insulation, bedrooms for each of the kids, granite countertops and spacious modern kitchens, ample grassy backyards, finished basements, two-to-four car garages. These features are all quite common in this market.
For even less money, one can find older ranch style homes that often have been updated with the latest appliances, durable floors, and sleek kitchens and bathrooms. Sometimes these have the added benefit of being situated on larger lots, in older and more-established neighborhoods closer to legacy businesses, restaurants, and entertainment. They tend not to have the square footage or open layout of newer homes, but for the childless family or budget-conscious buyer these refurbished single-story homes can be attractive.
I say all of this just to paint a picture of some of the main options available to someone looking to buy a home on the north side of Indianapolis for less than half a million dollars. A quick visit to a site like Zillow would help the interested reader understand the situation even better.
Of course, many people have no interest in residing in central Indiana and would prefer to live in a place like coastal California instead. This being another market I have followed out of curiosity with some regularity, I will paint another picture, and one that gets more to the core of the issues Caplan is talking about.
In coastal California, between Los Angeles and San Francisco, there are fewer houses to be had, and they are rather significantly more expensive and typically quite a bit older than the houses in central Indiana. Dollar for dollar, they also tend to be smaller, with older fixtures, floors, and appliances. Usually they do not have basements, and large garages are less common. However, these California homes have one thing that the nice new dwellings of central Indiana do not have, and that is a location near the ocean, in a mild climate, and near coastal towns and cities.
So far, so good. If this were the situation and California was simply out of feasible places to build new houses within, say, an hour of the coast, that would be the end of that—a basic supply and demand story. The market price of a widely demanded fixed-supply good would go up. And it can appear that this is what’s happening.
But as Caplan is passionate to show—and as I find worth echoing—this is not a basic, “natural” market outcome. That imagined band of coastal California I speak of is not some kind of island or isthmus that has become full and reached developmental capacity (there is always the possibility of re-development anyway). Rather, it is a space in which governmental forces and personal prejudices—as well as self-interests—have aligned to make it incredibly difficult to build new homes.
Here are a few of the main issues as I understand them. (Commenters, please do let me know if I have missed anything important.)
Zoning restrictions severely limit the available uses of private property in non-urban coastal California. I am familiar with one area where the minimum lot size to build a residence is 40 acres—and I am quite confident that this is an area that more people would want to live in, if they could. Imagine the benefits of reducing the minimum lot size to one acre, or half an acre, in a place like this.
Environmental regulation compliance costs and building fees and permits alone, even for a small single-family home, can approach $75,000 in a non-coastal designated area within an hour of the ocean. (My understanding is that a coastal designated area can be difficult to build in at all.) This atop the price of land and construction itself—and combined with the time-consuming nature of working with regulators and planners on a building project—all but prohibits middle-income people from settling new areas of the coastal land band.
Then there are the attitudes and outlooks that sustain the current regulatory and zoning status quo. Some current California property owners do not want new homes built for reasons of pure self-interest. Nice new homes close to the ocean (and coastal towns and cities) will make the older homes in those areas less valuable (and probably also depress rents). Though again, opportunities to spruce up and profit from older homes do exist. Wanting to live in a place that has “character” (or some other characteristic less common in new houses) is a rational preference that some people might pay a premium for, especially in a world with a lot of new development. But at present, voting property owners seem to fear new development more than they anticipate it creating niche market opportunities.
There is also a relatively common sentiment among coastal Californians—perhaps a product of coastal history and culture—that the areas in which they live have become “too crowded” and that there are “too many people and cars.” Some might add an environmentalist twist to this argument, but from the “build, baby, build” perspective, the basic problem remains. Lots of people have convinced themselves that more housing and more development will be bad for their regions and towns, no matter how it’s done. Current policy reflects their preferences. The dynamism a place like coastal central California could enjoy—that new construction and development have brought to central Indiana—keeps getting deferred.
These are broad-brush pictures, I grant. But looking at the two side by side, a couple things become clear. We can build nice, comfortable homes in America—just look at a place like suburban Indiana, or Cleveland, or Austin. But there are completely unnecessary restrictions on building in places where more people want to live, like coastal California, that actively get in the way of people being able to live the lives they want to lead there. And that is one silly—but also seriously frustrating—situation. Fixing it will require both opening and changing quite a few minds.
READER COMMENTS
john hare
Sep 3 2021 at 4:48am
In central Florida we bought a quarter acre lot this year for $20K. A couple of miles from a small town on a very bad road. It’s on a hill that is not swamp. (very important locally) We are looking at $20K or so in impact fees, required engineering (making what I have already done official), and various permitting and required costs.
Designed a 1/1 myself including structural details at 620 square feet. Building with cash flow as banks don’t like a 1/1 or small square footage. Will be doing the majority of the work ourselves. Expect the building to cost under $60K unless we hit more regulatory cost issues. So we expect to be in for just under $100K total. Just a few miles away in any direction there are places that would be double that at least.
Not sure how or if this is relevant to your article except to offer another perspective. Couldn’t do this one at all if we hadn’t searched hard for a property that would allow it, and had the capability of a lot of personal hands on.
Shanon FitzGerald
Sep 3 2021 at 12:47pm
Thanks for the comment, John. That is interesting to hear, and I am sure others will appreciate the Florida perspective as well. Best of luck with the build.
Christophe Biocca
Sep 3 2021 at 7:32am
To the list of regulatory limits you mentioned one must also add the existence of Urban Growth Boundaries. Every county in California is required by law to have them, and these basically disallow any kind of non-agricultural use.
Look at Gilroy and Morgan Hill on page 45 of this document, for example.
Cities get to grow their boundaries only as fast as they decide to (and can be subjected to lawsuits over the environmental impact of expansion, giving no-growth advocates leverage), and unlike in the 60’s no one gets to just start a new city in unincorporated areas, which had been the typical remedy for homes being too expensive.
Shanon FitzGerald
Sep 3 2021 at 12:57pm
Many thanks for this, Christophe. I didn’t know about Urban Growth Boundaries as a formal limit to development. I had heard that in Santa Barbara similar ends are accomplished through the limiting of new utility connections. But either way, city boundary expansion being under local control would seem to reaffirm the importance of changing lots of peoples’ minds about the nature and (truly net positive) impact of growth. New town/city incorporations would be great to see, also.
Thomas Lee Hutcheson
Sep 3 2021 at 12:27pm
The land use regulations we have are not well designed to off-set the hyper-local externalities of denser residential and commercial development experienced by landowners. This is compounded by the absence of dynamic pricing for metropolitan road and street use. Building codes also have not been updated to incorporate cost-benefit analysis of their provisions.
Shanon FitzGerald
Sep 3 2021 at 2:15pm
Well said that many density-related development externalities are hyper-local. You would think SF, with all its innovators and tech dollars, would be a good place to experiment with ideas like dynamic pricing and cost/benefit provisions in building codes. But obviously the reality is quite different. And now talent and jobs seems to be dispersing.
Bill Anderson
Sep 3 2021 at 12:44pm
The boom in Silicon Valley Tech stocks created a big demand for second homes near the coast. This has driven up prices.
Shanon FitzGerald
Sep 3 2021 at 1:01pm
Good point, Bill. One can imagine that a lot of people would have preferred to WFH somewhere along the coast, instead of in LA or SF, during the pandemic. Will be interesting to see how things play out in the months and years ahead, particularly if there’s a widespread “return” to cities and urban office jobs.
Alan Goldhammer
Sep 3 2021 at 1:09pm
The key to real estate is location. Having gone to grad school in central Indiana (IU), I know the area very well. Would I go back there and live? I’m not sure. I think living in proximity to a major university can provide a lot of cultural opportunities at relatively low cast. In the case of IU, there is a world class school of music with lots of free or inexpensive concerts and opera. It’s the only college in the US that has a full fledged opera house (I was there when it opened).
Yes, the coast cities in CA are expensive from a real estate perspective but I suspect you can find lots of inexpensive housing in the interior part of the state. This entails making obvious sacrifices (living in Fresno is not as appealing as living in Santa Barbara).
Where one lives also depends on job opportunities and I don’t know what central Indiana offers these days. It is different for older folks who have established roots and would have to leave behind friends when moving.
Shanon FitzGerald
Sep 3 2021 at 2:03pm
Thanks, Alan, and good points also. “Location, location, location.” There is a lot of cool stuff in Bloomington, including IU; if it weren’t ~90 minutes from my office at Liberty Fund I would definitely consider living around there. Unlike Fresno, it’s lush and green through the summer, with a lot of water around. The area has more interesting and varied terrain than Indianapolis, too, and better camping and hiking. (Glaciers didn’t flatten it out.) But ultimately your comment highlights the inevitability of trade-offs, or “sacrifices.” It can be difficult to find a place (at the right price point) where cultural, recreational, and employment/career opportunities overlap; even more difficult when you factor in family and friends, and events like covid which demonstrate how long-distance travel can become complicated, if not impossible for a time.
David Seltzer
Sep 3 2021 at 5:59pm
Shanon, excellent blog. I too am an IU undergrad. Brown County State Park is magnificent, especially in the fall. Lake Lemon is brilliant as I’m sure Alan would agree. I loved my time there.
Shanon FitzGerald
Sep 3 2021 at 6:20pm
Thank you, David! It’s a wonderful area, as celebrated in the 1979 film Breaking Away. I hope you get to make it back to Brown County this fall.
Henri Hein
Sep 3 2021 at 1:36pm
I lived near Sillicon Valley 1999-2017. I noticed that inland towns grew dramatically in that period. Tracy stood out. Aside from being on the freeway, it is not an attractive location, and nowhere near San Francisco or San Jose. Yet, its population grew from 33,000 in 1990 to 94,000 today. That’s Texas-like growth. I drove by there often on my way to the mountains, and seeing it mushroom out like it did was quite astounding. (It grew outwards, not upwards — land is plentiful there).
Shanon FitzGerald
Sep 3 2021 at 2:34pm
I appreciate the report, Henri. I didn’t know Tracy had grown so much in recent decades. One wonders how less naturally attractive places like that (apologies to any big Tracy fans out there) would fare under broader CA deregulation. Freeway access would remain a definite plus, so maybe it would become more of a warehousing and commerce hub.
Courtney
Sep 3 2021 at 2:34pm
I moved to Central Indiana from Las Vegas via Utah. Both of those housing markets were unattainable, despite following the central Indiana growth of multiple houses in small lots with mcmansion looks. I lived in Utah and watched Lehi grow as a town. It was originally undesirable, but many suburban neighborhood later, the houses have appreciated and they continue to build more.
The problem with this growth is the education has done down as the district had expanded and expanded, creating higher and higher overhead in administration. New schools were built to accommodate the growth in this area and now older schools are having to be torn down because they weren’t maintained. All maintenance money went to new schools.
Now, another problem is the roads. Talk to any local and they will tell you how the freeway is always under construction in Lehi. First it was 2002 Olympic. Then it was growth. Now it’s growth again. They are constantly making it wider, adding exits and new roads to try to accommodate all the people and cars.
And now? Water. Suddenly all that growth is making people look at the empty reservoirs and low rivers. There’s not enough water to sustain the growth. Towns are starting to limit building because of lack of water.
Is California overly cautious in their building with excess permits and regulations? Probably. But Utah (and Las Vegas) should be a cautionary tale of letting builders build without considering the other costs.
Shanon FitzGerald
Sep 3 2021 at 5:50pm
Thank you also for the report and comment, Courtney. In addition to school quality you highlight the intriguing and important issue of water. Since potable water is a basic life necessity, developers certainly have an interest in making sure there is enough of it around for homeowners (prospective clients) to actually use. Otherwise people will stop coming. Town officials and banks would share in this interest. But it sounds like in those parts of NV and UT fewer people, and few developers, were thinking about potential scarcity problems initially, perhaps because local and convenient water sources were previously sufficient. Until a certain level of growth. I am no expert in water detection, extraction, collection, or conveyance, but I do wonder about the possibility of getting water to some of these places from elsewhere, a la the Los Angeles aqueduct. Though I do have some mixed thoughts about that project. Water, and questions of potential Western US sources, is a complex issue that probably merits a separate post.
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