Build, Baby, Build By Bryan Caplan

Ed Glaeser makes the case for housing deregulation for Brookings:

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. In a recent paper with Joseph Gyourko, we characterize the

distribution of prices relative to Minimum Profitable Construction

Costs across the U.S… We base our estimates on an “economy” quality home, and assume

that builders in an unregulated market should expect to earn 17 percent

over this purely physical cost of construction, which would have to

cover other soft costs of construction including land assembly. We then compare these construction costs with the distribution of

self-assessed housing values in the American Housing Survey. 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… 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. In 2005, at the height of the boom, almost 30 percent of American

homes were valued at more than twice production costs.

We should blame the government, especially local government:

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.

The top alternate theory is wrong:

The primary alternative to the view that regulation is responsible

for limiting supply and boosting prices is that some areas have a

natural shortage of land. Albert Saiz’s (2011) work on geography and housing supply shows that

where geography, like water and hills, constrains building, prices are

higher. He also finds that measures of housing regulation predict less

building and higher prices. But lack of land can’t be the whole story. Many expensive parts of

America, like Middlesex County Massachusetts, have modest density levels

and low levels of construction. Other areas, like Harris County, Texas,

have higher density levels, higher construction rates and lower prices… If land scarcity was the whole story, then we should expect houses on

large lots to be extremely expensive in America’s high priced

metropolitan areas. Yet typically, the willingness to pay for an extra

acre of land is low, even in high cost areas. We should also expect

apartments to cost roughly the cost of adding an extra story to a

high-rise building, since growing up doesn’t require more land.

Typically, Manhattan apartments are sold for far more than the

engineering cost of growing up, which implies the power of regulatory

constraints (Glaeser, Gyourko and Saks, 2005).

Which regulations are doing the damage? It’s complicated:

Naturally, there are also a host of papers, including Glaeser and

Ward (2009), showing the correlation between different types of rules

and either reductions in new construction or increases in prices or

both. The problem with empirical work any particular land use control is

that there are so many ways to say no to new construction. Since the

rules usually go together, it is almost impossible to identify the

impact of any particular land use control. Moreover, eliminating one

rule is unlikely to make much difference, since anti-growth communities

would easily find ways to block construction in other ways.

Functionalists are wrong, as usual:

Empirically, there is also little evidence that these land use controls

correct for real externalities. For example, if people really value the

lower density levels that land use controls create, then we should

expect to see much higher prices in communities with lower density

levels, holding distance to the city center fixed. We do not (Glaeser

and War, 2010). Our attempt to assess the total externalities generated

by building in Manhattan found that they were tiny relative to the

implicit tax on building created by land use controls (Glaeser, Gyourko

and Saks, 2005).

What’s to be done? State governments are our least-desperate hope:

The right strategy is to start in the middle. States do have the ability

to rewrite local land use powers, and state leaders are more likely to

perceive the downsides of over regulating new construction. Some state

policies, like Masschusetts Chapter 40B, 40R and 40S, explicitly attempt

to check local land use controls. In New Jersey, the state Supreme

Court fought against restrictive local zoning rules in the Mount Laurel

decision. If states do want to reform local land use controls, they might start

with a serious cost benefit analysis and then require localities to

refrain from any new regulations without first performing cost-benefit

analyses of their own.

It will be a great day when constructing new housing regulations is as big a bureaucratic nightmare as constructing new housing is now!