Zoning Laws Inflate Property Values

[Subdude]

Maybe zoning laws are causing the real-estate bubble.

By Steven E. Landsburg

Posted Friday, July 29, 2005, at 3:40 AM PT

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.

Link to full article

[HeightsGuy]

That seems so low, are prices really that good for land in Dallas? Houston's also seems pretty low. I live in Shady Acres, and my land is appraised by the County at over 3 times the $17,600 figure cited below for inner-Houston 1/4 acre (~11,000 sq ft.). You have to double that to get Heights and Montrose land values. In fact, my land value is almost as much as the improvement value.

[The Great Hizzy!]

Wow. So new construction in Philly must be either very cheap or non existent. $100,000 construction selling for a $10,000 negative profit?

Wow.

[MidtownCoog]

Bogus.

My 1,700 sf. townhome in Midtown had land valued at $57,348.

[pineda]

and from the FDIC comes this report:

bust doesn't always follow boom

[N Judah]

What a great article...neighborhood associations and zoning councils are completely out of control in some cities. IT's the reason why the land around major BART stops is relatively undeveloped relative to what it *should* be if they really wanted to make use of their public transit. I think Kelo will be put to good use in those types of cities (at least I'm hoping)...

[kjb434]

Good article Pineda from the FDIC. Puts things into perspective.

My only fear as mentioned before in this forum is that now we have much more riskier lending offers that could contribute to some bust. I don't think it'll be that bad here in Houston though. It won't necessarily be to economic conditions, but more from home buying stupidity.

[dbigtex56]

excerpt from "That Hissing Sound" by Paul Krugman:

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Link to New York Times article (for limited time)

[kjb434]

I've always found holes in Paul Krugman's work.

There are entire websites that are focused on debunking his work. I find many of times his ideology blinds his view of the truth.

He's one of the only economists I found that believe that we are an economy that is in a complete downward spiral when every other economists from different ideological spectrum's disagree.

Just my view for what its worth.

[N Judah]

But in this case, do you think he's right? I think there's something to it. The coastal/blue states seem to have the most controlled development. Their ordinances and restrictions on development are consistently 'gamed' by those looking to increase the value of their homes artificially (i.e. by means other than 'sweat equity'). If I were a speculator, I'd look for those kinds of places to buy property.

[kjb434]

But if that bubble exists, you can lose big time from the over inflated price.

I feel that bubbles exist in certain over inflated markets. Houston doesn't seem to be in one and I'm happy for it.

[KatieDidIt]

But if that bubble exists, you can lose big time from the over inflated price.

I feel that bubbles exist in certain over inflated markets.  Houston doesn't seem to be in one and I'm happy for it.

<{POST_SNAPBACK}>

I am noticing some price decreases in the Villages. I think finally people are crying uncle and enough over million dollar ranches. So in a since, I think in some areas of Houston, the bubble is deflating.

[RedScare]

I am noticing some price decreases in the Villages. I think finally people are crying uncle and enough over million dollar ranches. So in a since, I think in some areas of Houston, the bubble is deflating.

<{POST_SNAPBACK}>

I have read that the high end market was a little soft, and has been for a year or two now. The entry level housing seems to be driving Houston's market. What I've read didn't seem to be suggesting a bubble problem as much as concerns over the economy, ie, not sure where it is going, so maybe we'll sit tight.

We'll see, since the economy seems to be moving in spite of roadblocks thrown in front of it.

[kjb434]

^^

Economy Good?

I agree about the high end market. I'm try understand where all these people are coming from that easility pay 800k or higher for homes.

[ferronsfunctionals]

But in this case, do you think he's right? I think there's something to it. The coastal/blue states seem to have the most controlled development. Their ordinances and restrictions on development are consistently 'gamed' by those looking to increase the value of their homes artificially (i.e. by means other than 'sweat equity'). If I were a speculator, I'd look for those kinds of places to buy property.

I think there is a delicate balance between too much and not enough zoning control. In Houston I think there should be more zoning control. With low interest rates all the builders are building houses rather than commercial real estate because they know they can sell it quickly. It makes sense for the developers, but I think it slows property values and urban development in general.