Zoning - The Hidden Cost of Homes There's interesting article at Slate on the impact of zoning laws on housing prices. I largely think this effect is non existent. Why? Because permitting and zoning is a variable expense, as a home builder get experience in the specific local market, they will be able to minimize and reduce the overall zoning example through institutional knowledge of the process.

"Elementary economics tells you that in a competitive environment, the price of a new house should equal:

the price of land + construction costs + a reasonable profit for the developer

But in most cities, that sum is not even close to what buyers are paying.

Take Dallas, for example. If you live in central Dallas, and if you could magically add a quarter of an acre to your lot size, you'd add (on average) about $2,200 to the value of your house. (We know this from comparisons of similar houses on different-sized lots.) Do the same in central Philadelphia, and your house value increases by $8,400; in central Houston, it's more like $17,600. In that sense, central Dallas land is just about the cheapest urban land you can find in this country. Among large cities, only Atlanta, Boston, and St. Louis rank lower. In theory, that should be great news for Dallas housing prices. But it's not. A house that costs $100,000 to build typically sells for $140,000 in Dallas, maybe $120,000 in Houston, and under $90,000 in Philadelphia.

Aha! say the commentators. Housing prices must be driven by something other than fundamentals. Speculators, of either the rational or the irrational variety, are the obvious culprits.

Here's what's wrong with that analysis: Housing prices have to make sense on both the demand side and the supply side. No matter what you do or don't believe about the ability of crazed demanders to bid up prices, you still have to explain why competitive suppliers don't bid those prices right back down. In other words, if the housing market is so tight that builders are making a fortune, they ought to be flooding the market with new houses—and driving down prices."

So what's the magic ingredient driving up home prices?

Edward Glaeser of Harvard and Joe Gyourko of the University of Pennsylvania have computed these mystery components for about two dozen American cities. They speculate that the mystery component is essentially a "zoning tax." That is, zoning and other restrictions put a brake on competitive forces and keep housing prices up."

If the theory is correct, that length of time should be a good but imperfect predictor of the mystery component in housing prices. The data largely support this theory. About half of all cities are rated 2 (on a scale of 1 to 5) in terms of how long it takes to get a permit; these are, without exception, the cities with the lowest mystery component in housing prices. Cities rated 3, 4, and 5 all have higher mystery components. (A bit disconcertingly, so do the three cities—Minneapolis, Chicago, and Anaheim—that are rated 1. Peculiar as these exceptions are, there are at least only three of them, and we should expect some anomalies given that Glaeser and Gyourko's measure of zoning costs is rather crude.) You can talk all you want about crazed speculators and bubbles in housing prices, but you still have to explain why competitive forces don't bring prices right back down. According to Glaeser and Gyourko, it's ever-expanding zoning laws that get in the way. If you want to lower prices, that's the bubble you've got to burst.

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Labels: californiahousingprices, hiddencostofhousing, permits, zoning

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You say tomato, I say tomato. I love how a reporter can take a look at the same numbers I am looking at and come to completely different conclusions about the California real estate and mortgage market. In an article the Whittier Daily News, a reporter asks,

"Bubble? What bubble?
Economists have been predicting the end of California's housing boom for months, but the California Association of Realtors said this week that prices and sales will reach record levels in the second half of 2005.

In its mid-year housing forecast, CAR predicted that existing single-family home sales will reach 633,490 units this year, a 1.4 percent increase from last year's record of 624,740 units."

First off a little basic statistics here. In a pool of 630,000 items, a difference of 9,000 is not significant. Furthermore this is a prediction by an entity that has a interest in continuing to make sure the housing boom and housing prices stay high. Look at the source. Additionally 30 year fixeds are nearly a point lower than they were last year. This means despite a drop of 1% in interest rates, total sales are predicted to remain flat (as 9,000 homes out of a pool of 630,000 sold). That's more telling. Each drop in interest should correlate to a 10-15% increase in home sales (at least that's what it meant traditionally).

A little daylight begins to creep into the article as Jack Keyser from Los Angeles County Economic Development Corp.," says buyers are starting to dig in a little.

"We're seeing more and more signs of buyer resistance to prices,' he said. "And we're hearing the regulators growling at lenders to be a little more cautious about some of the loans they're making.'

Kyser pointed out a serious anomaly in the market.

"Ordinarily, with the market as strong as it is, with demand as high as it is, you would see builders rushing to get more homes on the market,' he said. "But it's not happening. We're not building enough new homes, especially in the affordable sector.'"

Good point. At the current prices roughly 17% of Californians can afford to buy a home in the state. The boom cannot be sustained. I on the other hand do not predict a sudden deflation in California ala 1987 (remember that folks? Remember when every one was upside down on their homes? A slow sliding back down a more sustainable level as interest rates slowly rise. I suspect the fed will stop raising around 5.5%.

Labels: CaliforniaAssociationofRealtors, californiahomeprice, californiahousingprices, californiamortgage, CAR, Whittier

  ¶ You say tomato, I say tomato. 0 Comments

The Affordability Gap Apparently the FDIC is finally noticing that housing prices are raising faster than personal incomes. As the article notes, "In California, prices rose 22 percent and incomes 4.8 percent; in Nevada, home prices surged 28 percent while incomes rose 4.7 percent, the FDIC said." This creates a condition where innovative loan products (40 year mortgages, no money down, interest only) are proliferating. As I noted in a previous post, 61% of mortgages in California are interest only. This creates a condition where people are being approved for loan amounts they could not previously qualify for under the assumption they will be able to re-finance or sell their home. The unintended consequence is that people often buy much more house than they can afford, thinking their home will appreciate or they can sell. Another classic quote from the article;

"The FDIC and other banking regulators are studying the correlation between new adjustable-rate mortgage products, including interest-only loans, and higher home prices.

The studies are designed "to understand the extent to which these new credit factors may be contributing to home price growth," said Barbara Ryan, associate director of the FDIC's division of insurance and research."

I don't think it takes a lot of research to find that these two are related. I do find it amusing that they are just now looking into it. Too little, too late. When the gap between incomes and housing prices continues to grow like this, it can only mean long term problems for the real estate and mortgage markets.

Labels: californiahomeprice, californiahousingprices, californiaincomegap, incomegap

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