Housing & Mortgage
Will Zoning Reform Knock Six Figures Off Future Home Prices?
The New York Times published a remarkable article about the housing shortage in October. It wasn’t remarkable for listing the increasing number of cities and states changing zoning laws to remove barriers to the building of more housing units. What set the article apart was a detailed look at one entrepreneur — and the suggestion that many, many more will follow — using California’s newly relaxed zoning laws to build multiple units on lots formerly limited to a single family home.
In San Diego, no less.
You’ll need to read well into the lengthy article to find this fellow, 34-year-old Christian Spicer, but it’s worth the time. As he freely admits, his real estate work formerly consisted of fixing up houses so they could be flipped at far higher prices, which of course maintains the number of housing units and makes them more expensive.
Now, he adds units, plunking a threesome of small homes in the backyard of an existing house, say, which both increases the supply and puts downward pressure on home prices overall.
Fixing the home shortage
As you read, you should ask yourself: Do you believe Spicer and others like him can build hundreds of thousands of housing units, or perhaps even millions, to cure the nation’s home shortage?
Or would you be more likely to bet on the crew that helped create the housing shortage — NIMBY (not-in-my-backyard) homeowners, who oppose multi-family development anywhere near their single-family homes, and the elected officials who have mostly been afraid to cross this powerful group?
Research by Joseph Gyourko, a professor of real estate and finance at the Wharton School at the University of Pennsylvania, and Jacob Krimmel of the Federal Reserve Board, suggests that as much as $400,000 of a quarter acre of residential real estate’s price may be a zoning tax, or premium, the cost of overcoming local and state rules, red tape, delays and the like. Nobody’s suggested that zoning reform would make that portion of a home’s value go poof; the shortage is too severe and, even if the likes of Christian Spicer are highly successful, it would take years to catch up to demand.
But, over time, whether the zoning tax survives or is vastly reduced could have a lot to say about the relative price of homes. Gyourko and Krimmel peg the quarter-acre (10,890 square feet) zoning premium at roughly zero in Cincinnati, whose average single family home sale price recently was less than $300,000. The Ohio city, like many in the Midwest, lost much of its population — declining from about 500,000 in 1960 to closer to 300,000 now — and is hardly in the business of scaring off developers.
Of major cities the researchers looked at in the research, these had quarter-acre zoning premiums above $100,000:
- San Francisco: about $400,000
- Los Angeles: about $200,000
- Seattle: about $175,000
- New York: about $150,000
- San Jose: about $100,000
Why zoning matters
The point here is not to poo-poo zoning. Zoning should cost money. It’s the price we all pay to live in communities that were not designed solely to meet the unfettered financial interests of private developers who build and (usually) leave. This journalist once lived in Phnom Penh, Cambodia, which lacked any discernible urban planning, resulting in shacks alongside skyscrapers, shortages of water and green space, and led to her lifelong appreciation of zoning.
But when the price of zoning begins to slide over $100,000 per quarter acre, “it’s almost certainly inefficiently high,” Gyourko says. He calls the housing markets in places like New York and San Francisco “distorted.”
Zoning appears in many forms, such as minimum lot sizes and density regulations, which in practice commonly forbid apartments and tiny homes. Zoning also can prohibit residential homes from commercial neighborhoods and vice versa. The net result is fewer available homes, and an artificially induced scarcity.
‘It’s hard to imagine’
Gyourko explains that, in a free market, a house would cost the price of the land plus the cost of construction, plus a little profit to the home builder. And you’d pay a bit more on top of that for the costs of the city expanding services (water, roads, education) to your new home and its residents. “It’s hard to imagine that those external costs are six figures per quarter acre lot,” he says.
If you believe zoning reform will be successful, then the upside in cities with severe housing shortages might be less than we currently expect. And relative to San Francisco and Seattle, cities with low or non-existent zoning taxes might seem better investments.
If you believe that Spicer et al. represent little threat to the powerful forces of NIMBY-ism, then, yes, it’s super expensive to buy a home in a city with a large zoning tax, but that could be a fabulous investment, as supply remains constrained despite the changes in the laws.
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