Many people believe that the main reason housing is expensive in coastal California is that land is so scarce. As the saying goes, “They’re not making any more land.” That view is plausible. It’s also incorrect.
Two economists who study US housing are Ed Glaeser of Harvard University and Joseph Gyourko of the Wharton School. Some years ago, they did a study that used a clever method of separating the effects of scarce land from the effects of restrictions on building. They looked at houses that were comparable in size, amenities, and location but that differed in one main respect: one had much more land than the other. If scarcity of land were the crucial factor, then a house with much more land should sell for a much higher price. But that’s not what they found. Instead, a house with a quarter acre of additional land sold for only about $10,000 to $20,000 more. But, they found, a quarter‐acre empty lot on which building was permitted often sold for over ten times that amount. That means that the key driver in high house prices is not scarcity of land but scarcity of building permits.
This is from David R. Henderson, “How to Make Housing More Affordable,” Defining Ideas, September 23, 2021.
And:
In the past two months, moreover, the California legislature has moved quickly to reduce even further state and local restrictions on building. Last week, fresh from defeating the recall election against him, Governor Gavin Newsom signed Senate Bill 9, a bill that abolishes single-family zoning. The bill allows homeowners to subdivide their lots and/or to convert homes to duplexes. A homeowner could conceivably split a lot into two lots and allow a duplex on each lot, effectively increasing the number of housing units by 300 percent.
It’s difficult to know how much new housing will result. One limit is that SB 9 exempts single-family lots in historic districts, fire hazard zones, and rural areas. Still, that would seem to leave lots of lots (pun intended) in which homeowners can add housing units. Slate reporter Henry Grabar, who is skeptical about how many new units will be built, writes, “On millions of parcels, the possible revenues from a duplex just aren’t high enough to justify the investment.” But Grabar also points out that governments in California grant permits for only a measly 100,000 units per year. If even 500,000 homeowners decided to build an additional unit each year, that would increase by 500 percent the annual number of new units built.
I also go after the “more mansions don’t help the middle class” argument and the “we can get more housing with price controls” argument.
Read the whole thing.
READER COMMENTS
john hare
Sep 25 2021 at 5:02am
I’m in Florida.
One of the ways of restricting building is through requiring “engineering” on all construction. So it’s an extra time and financial hit on new anything. One problem being that the “engineering” is mostly no more than cut and paste of details that have been in the building codes for decades. So a new house has the same structural details as hundreds of thousands of others, but has been “engineered” adding months and thousands to each unit. One of the results is the rise in track building and the reduction in smaller custom homebuilding. The track builders can have the “engineering done once and repeated thousands of times for the same model. Custom houses are basically towards high end only compared to just a couple of decades back.
My personal and immediate beef with this is that I am going through the process of trying to reach permitting stage on a modest house for myself and my wife. Being in the concrete business, I designed a concrete house of 620 square feet that could handle a tornado. One of the problems we are facing is that engineers are doing quite well stamping plans with detail pages of the “engineering” that hasn’t changed in quite a long time. Several so far are definitely not interested in actual verification of of the structural details on my unit. Quite interesting on most plans is the “trusses by others” and similar cop outs.
I have reduced the needed structural analysis to 4 simple reinforced concrete beams. Several decades of experience, my college major, and some online structural tables tell me the structure will be overbuilt for wind, fire, and energy efficiency. I will eventually find an engineer to check the design, but it is just one more restriction. Incidentally, I expect to be able to build the structure for just a bit more than a conventional block and truss unit, but only after getting some engineer to do his job. I expect the price of the engineering to be a substantial portion of the construction cost.
TMC
Sep 30 2021 at 11:51am
The regulatory portion of homebuilding has gotten a lot worse.
You might take queue from ‘“trusses by others” by buying the concrete beams precast. I had to build a bridge over a creek for my house build, and the vendor provided the engineering documentation. Only issue I had with my engineered trusses was that the inspector thought his one day class trumped the truss engineer’s expertise.
Alan Goldhammer
Sep 25 2021 at 9:20am
There is a nuance to this. In our suburban DC neighborhood there is very little vacant land and the parcels that are getting developed are for large homes that sell for $1.5M and above. I think we can all agree that this is not ‘affordable’ housing in the traditional sense. We had a meeting of our citizen association’s exec committee last week and one of the members was bemoaning the lack of affordable housing which reduces diversity (that is clearly an opinion that was not widely shared).
One of the parcels being developed right now will have 17 single family homes at the above price point (some will go for more as that is just the starting price). Say they did move to building duplexes on the parcel. Depending on the size of the duplexes, maybe they can fit 30 housing units on the parcel. In order for the builder to recoup the same profit from the duplex build, the unit price would be in the neighborhood of $850K as a starting price. This is what some older single family houses in the neighborhood are selling for. It’s still not very ‘affordable’ at that price point.
The other overlooked problem with increasing population density that we are experiencing right now is schools are quite overcrowded and there is not a good solution to this since there is no land to build new schools on. Many of the local schools have already been expanded on the existing property. Of course traffic congestion might increase with post-pandemic office opening in downtown DC.
Lizard Man
Sep 25 2021 at 3:25pm
Under the California law as described by Henderson, couldn’t the developer subdivide those 17 lots and then put up 34 duplexes, instead of 17. That would 68 units instead of 34 or 17.
The revenue from 17 units sold at $1.5 million each is $25.5 million. Divide that number by 68, and you get $375K per unit to match that revenue. Of course, building more units costs more money, but if the developers can sell those units at $600k each, their revenue would end up being $40.8 million.
If the developers really wanted to get creative, the duplexes could be 4 stories tall with a basement setup to be easily converted into a private apartment, which given rents in the DMV metro, might cover a substantial portion of the mortgage payments.
Alan Goldhammer
Sep 25 2021 at 5:51pm
They really cannot put up more duplexes than what I describe. Right now the single family homes are right up against the current zoning distance between homes and converting the lots into duplex will make for pretty narrow homes. If they did what you describe, they would be even narrower. Given the size of the land and the need to a new street, it will be difficult to build in parking even for the modest number of duplexes that I note. In our area almost every family has two cars. Creation of basement apartments would necessitate a zoning variance and I don’t see any way to add the extra parking for these dwellings.
The only way to increase the density would have been to move to townhouses but the developer never filed for that which would have necessitated a number of planning board hearings. We do have a nice townhouse development right in back of where this development is being built but those units sell from $800K to $1M depending on the size.
Lizard Man
Sep 26 2021 at 12:51am
I was just having some fun running the numbers, while still obviously being ignorant of the area of the land being developed.
As for the idea of basement apartments, that was more of a thought experiment of creatively skirting the rules, where renting out a room (that is really an apartment) would bring in an amount of rent disproportionate to the costs of building that extra space.
Of course following my suggestions would probably just lead to developers building new neighborhoods that look a lot like neighborhoods in DC. I suspect that is because that kind of development makes a lot of financial sense.
Alan Goldhammer
Sep 26 2021 at 10:56am
This has happened up in the King Farm development in Rockville, MD. It’s a mix of different types of housing and lots of row houses which can increase population density. I’m seeing a lot of this when there are large parcels of land to be developed. We have a large parcel about a mile from where I live that formerly was a large high end shopping mall. The mall was closed down maybe six years ago and there have been various development plans announced but no building yet. The County used this parcel in their bid for the second Amazon HQ but were unsuccessful. If they do build housing on the plot, there will be even more pressure on the schools as there could be a significant population density on the land. Builders do get taxed for this but if you don’t have land to build a new school, it’s a problem.
robc
Sep 26 2021 at 11:20pm
There is a good solution to the school problem — separation of school and state. Private schools will find a way, they may buy one of the duplex units and convert it into a school, if zoning will get out of the way.
The school cost may be high, but if you can afford the $850k duplex, you can probably swing it.
Frank
Sep 25 2021 at 10:12pm
I first read of the California law change on John Cochrane’s blog, and naturally rejoiced at the likelihood that more homes would be built, anywhere. However, the devil is in the details: While there is one hell of a lot of restriction left for existing property owners to capture a somewhat bigger contrived scarcity rent by building, what in god’s name could it mean that the new law does not apply in rural areas of all places? Protecting the rents of existing city dwelling land owners!
The hard to call liberalization is marginal, aimed at keeping the population constant. Fortunately, migration will settle the issue, one way or another.
Thomas Lee Hutcheson
Sep 27 2021 at 10:22am
This issue is confused by combining two different issues. One is that housing and residential development is unnecessarily constrained by the opposition of existing homeowners (effected through zoning regulations) because we do not have a good way to compensate for hyperlocal negative externalities (more traffic on my block if a high-rise goes up on the next street over). This makes housing in the down-zoned area more “unaffordable.”
Another is that when there is increased demand for housing in a neighborhood prices will rise and poorer residents will leave (be “pushed out”) leaving the area no longer as “diverse” as it was. The issue being that a) perhaps the poorer residents are adversely affected by the change and or b) that people enjoy a collective good in having neighborhoods that are income diverse.
The first is in principle pretty easy to fix with re zoning on cost-benefit principles. The second is much more complex.
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