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Land-Use Regulation Makes Housing Expensive

Feb 15

2008

Land-use regulation has added $200,000 to the median price of Seattle homes, says Theo Eicher, an economist at the University of Washington. This is a little greater than the amount estimated by the Antiplanner, which was $180,000, but since the Antiplanner was being deliberately conservative, the numbers are remarkably close.

As described here, Eicher’s study relied on a recently released database of land-use regulation in 2,730 U.S. cities that was compiled by Joseph Gyourko of the Wharton Business School. Eicher compared housing prices from 2006 census data with regulation and showed there is a strong correlation between the two. Eicher was only able to look at 250 cities, because census data were not collected in all cities in the Wharton database. When the 2010 census is complete, an even more detailed study should be possible.

Originally built in the 1920s for $2,800 (without the second story, which was added later), this house recently sold for $650,000. According to economist Theo Eicher, more than $200,000 of that price is due to land-use regulation.

Flickr photo by brewbooks.

Eicher’s actual paper includes data for all 250 cities, 123 of which overlap with the Antiplanner’s data. His estimates of the costs of regulation tend to be a little higher than mine except in California, Florida, and a few other places where they are lower.

One reason why Eicher’s numbers are usually higher is that his data are for cities while mine are for urbanized areas. There is a reason for this: he was looking at the cost of specific land-use rules and I was looking at the cost of regional growth-management planning. But you would expect that the central cities of a region would tend to be the most regulated, and since most of his cities are central cities, they would be more overpriced than the urban areas as a whole.

Eicher says that regulation has increased housing prices in every city he examined. The smallest increase is about $21,000. By comparison, the Antiplanner found that growth management has boosted housing prices in only a little more than a third of the urban areas in the U.S.

I have to wonder if, for some places, Eicher is relying too much on his regressions. His numbers say that regulation in Houston has boosted housing prices by $49,000. But the median home in the Houston urbanized area is worth only $122,000. Taking out the cost of regulation leaves only $73,000. (Unlike most urbanized areas, which are mostly suburbs, the Houston urbanized area is mostly Houston, so these numbers are comparable.) That seems pretty low, but maybe it makes sense.

I am more bothered by his numbers for California. The Antiplanner estimates that land-use regulation has boosted prices in the San Francisco urban area by more than $700,000, and in San Jose by more than $600,000. Eicher’s estimates are less than $400,000 for San Francisco and less than $300,000 for San Jose. I wonder if Eicher’s numbers fail to account for the effects of speculators who are attracted to real-estate markets whose prices are inflated by land-use regulation.

Eicher breaks down his numbers into costs due to state-wide regulations, growth management, the courts, and approval delay. He also has costs due to density, income growth, and population growth, but these are not included in the cost of regulation (though in many cases density should be).

Anyone interested in comparing Eicher’s estimates of the costs of regulation with the Antiplanner’s can download this spreadsheet. The first two columns show Eicher’s estimates for 249 cities. Columns D & E show the Antiplanner’s estimates for 381 urbanized areas. Columns F and G show Eicher’s estimates for the central cities in those urbanized areas, if he has any, and the differences between the two estimates.

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Reprinted from The Antiplanner