by wasoxygen
Arguably, land use controls have a more widespread impact on the lives of ordinary Americans than any other regulation. These controls, typically imposed by localities, make housing more expensive and restrict the growth of America’s most successful metropolitan areas. These regulations have accreted over time with virtually no cost-benefit analysis. Restricting growth is often locally popular. Promoting affordability is hardly a financially attractive aim for someone who owns a home. Yet the maze of local land use controls imposes costs on outsiders, and on the American economy as a whole.
Housing advocates often discuss affordability, which is defined by linking the cost of living to incomes. But the regulatory approach on housing should compare housing prices to the Minimum Profitable Construction Cost, or MPPC. An unfettered construction market won’t magically reduce the price of purchasing lumber or plumbing. The best price outcome possible, without subsidies, is that prices hew more closely to the physical cost of building.
The distribution of price to MPPC ratios shows a nation of extremes. Fully, 40 percent of the American Housing Survey homes are valued at 75 percent or less of their Minimum Profitable Production Cost. This finding is not that surprising. Most homes are old and we are comparing them to the cost of building new housing. Most used cars also sell for much less than the price of building a new car. Another 33 percent of homes are valued at between 75 percent and 125 percent of construction costs.
But most productive parts of America are unaffordable. The National Association of Realtors data shows median sales prices over $1,000,000 in the San Jose metropolitan area and over $500,000 in Los Angeles. One tenth of American homes in 2013 were valued at more than double Minimum Profitable Production Costs, and assuredly the share is much higher today.
Historically, when parts of America experienced outsized economic success, they built enormous amounts of housing. New housing allowed thousands of Americans to participate in the productivity of that locality. Between 1880 and 1910, bustling Chicago’s population grew by an average of 56,000 each year. Today, San Francisco is one of the great capitals of the information age, yet from 1980 to 2010, that city’s population grew by only 4200 people per year.
How do we know that high housing costs have anything to do with artificial restrictions on supply? Perhaps the most compelling argument uses the tools of Economics 101. If demand alone drove prices, then we should expect to see places that have high costs also have high levels of construction.The reverse is true. Places that are expensive don’t build a lot and places that build a lot aren’t expensive. San Francisco and urban Honolulu have the highest ratios of prices to construction costs in our data, and these areas permitted little housing between 2000 and 2013. In our sample, Las Vegas was the biggest builder and it emerged from the crisis with home values far below construction costs.
California builders have faced an onerous Environment Impact Review process since the 1972 Friends of Mammoth Case. When environmental rules prevent building in highly productive, highly restricted coastal California, homes get built elsewhere, like Las Vegas and Houston. Carbon emissions per household are lower in coastal California than elsewhere in the country, primarily because of a benign Mediterranean climate (Glaeser and Kahn, 2010). California’s land use restrictions don’t eliminate new construction, they merely move it elsewhere, so it isn’t enough to have a purely local perspective. In California’s case, preventing local construction for environmental reasons only ends up increasing carbon emissions by pushing building to less salubrious climes.