Housing Bubble Wonkery

Let us pause from gay-baiting fundraising letters, flat earther/scorched earther pronouncements, and blogger navel-gazing to consider some theoretical economics.

We’ve talked about the housing bubble at some length here at Bacon’s Rebellion. Today, Steve Landsburg, who writes an “Everyday Economics” column for Slate, speculated on the cause of the housing bubble.

While the cost of housing should be cost of land + construction costs + reasonable profit for the developer, there is a “mystery component” that is adding to the jacked-up prices being seen. Landsburg cites a University of Pennsylvania study that suggests this “mystery component” is a complex “zoning tax” that varies by locality.

Surprisingly, the areas included in the study omitted Northern Virginia, but did include Norfolk.

It’s thought provoking stuff for wonks and wonkabes.


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  1. Ray Hyde Avatar
    Ray Hyde

    That exact phenomenon has been studied many times. One way to do it is to compare the price of a house on a one acre lot with the price of the exact same house on a half acre lot. What you find is that, if you subtract the cost of the house, a lot twice the size is valued no where near twice as much. Now what you do is subtract the value of the half acre lot from the value of the one acre lot, and the difference is the value of a half acre of land. Then subtract that value from the value of the (built upon) half acre lot and what you get is the value of the hidden zoning tax.

    Another way to look at it is that the difference is the value of the right to build an additional house, which is not included in the cost of a house on one acre as compared to a house on a half acre.

    Proffers and impact fees affect the value of this tax and artificially inflate the value of everyones home, and therefor the cost of everyone’s taxes, not just the new construction.

    Many other studies have been done using different methodologies and they all come to pretty much the same conclusion: when houses are expensive in one location compared to another similar location (job and amenity wise, for example), then the difference is due to government interference in the market.

  2. Fredrik Nyman Avatar
    Fredrik Nyman

    I’m probably missing something obvious here, but why should there be a direct relationship between the price and size of a lot?

    At least in urban and suburban settings, zoning/permitted uses seem to drive the value; a lot that’s zoned commercial or mixed use is more valuable than a residential lot. A lot that can be subdivided is worth more than one that can’t. Utilities also count; a lot that has city water and sewer hookups is worth more than one that doesn’t.

    If I read the Slate article right, the stuff above would fall into the “mystery component” category, but I don’t see why it’s not obvious how these things have significant impact on the value of a lot.

  3. Yeah that slate article is weirding me out too…I don’t see how “cost of construction” factors into housing costs…especially in NOVA. The cost of construction is miniscule compared to the cost of the houses up here…

    And think of condos, for example. The cost of construction (per condo) in a 10 story condo building with 1 bedroom condos is almost nothing compared to the purchase cost of the condo.

    Housing is very much a supply and demand market. Costs don’t factor into pricing, as far as I know…it’s just what the market will bare…

  4. Fredrik Nyman Avatar
    Fredrik Nyman

    Paul,

    Good point. The price discrepancy between condos and other housing forms can probably (mostly) be explained by zoning regulations, too; that is, you can’t put up a condo unit unless the lot’s zoned for it.

  5. subpatre Avatar
    subpatre

    The manic market has a number of components that affect demand, supply, and both.
    -available cash from overall high incomes, made possible by a booming economy
    -low interest rates controlled by Mr. Greenspan et al
    -easy loans and innovative financing, promoted by banking firms
    -massive immigration influx, controlled (or not!) by federal policy
    These are issues beyond state or local control.

    State roadbuilding, state and local placement of job creation, and local zoning are the major factors that enable, create, and (to a large extent) price the market, the supply side. The study cited by Slate is urban, and though they looked at some ‘suburbs’, they missed doing it for the Virginia example.

    It’s obvious that large-lot zoning reduces the number of units available, which drives up the price. Every regulation restricts some proportion of the market, and the cumulative effect of dozens (or hundreds) can effectively reduce the supply. I’m suprised anyone’s suprised by this.

    Ray, proffers do not raise taxes. ‘Dunno how many times this must be repeated, it’s fact. Just like reassessments, they may provide an excuse for the governing body to raise taxes; but in and of themselves neither reassessment nor proffer raise taxes. If the governing body is honest (!) proffers and impact fees –at a minimum– clamp or reduce actual taxes.

    Fredrik – The Slate article (and the underlying research) is comparing apples to apples.

  6. Ray Hyde Avatar
    Ray Hyde

    Subpatre: we’ve been around on this before, but I’m still not sure we disagree. My position is that house X is worth Y dollars. Someone builds a new house, Z very like X but his sale price is now Y dollars plus proffers. Next assessment, house X gets re-assessed at X dollars plus proffers because that is what Z sold for: consequently he pays higher taxes in real dollars.

    Your point is, as I understand it, is that if officials are honest and have not raised costs, then they can subtract out proffers first or adjust the rates, and then taxes (in dollars) would not go up. I don’t believe we live in such a perfect world and what actually happens is that people wind up paying more because of proffers, that officials are disingenuously promoting proffers as a tax on the newcomers when they either know or don’t realize that it affects everyone.

    In the first case they are not being honest, in the second they are being stupid.

    Academic studies bear me out on this: proffers raise taxes for all. It is counterintuitive, but there it is.

  7. subpatre Avatar
    subpatre

    Ray – you totally misunderstand. New construction raises neighbors’ values, even more so with proffers. Market value has no effect on taxes until reassessment.

    Upon reassessment it’s illegal to leave rates intact to raise taxes that way. Paraphrased When any reassessment would result in an increase of 1 percent or more….shall reduce its rate to no more than 101 percent of the previous year’s levies. unless [here’s the kicker] B. The governing body may, after a public hearing, not at the same time as the annual budget, increase the rate above the reduced rate required in subsection A above. Notice of….

    Please read the statute. Then understand how D&Rs alike (Kaine and Connaughton are recent examples) use it as a cover to lower rates while raising taxes. The trick works as long as people are ignorant of what happened.

    Facts
    1)Cash proffers must be for improvements, not the general fund.
    2)Proffers don’t raise anyone’s tax.
    3)Reassessment cannot raise tax more than 0.99%
    4)A tax raise is solely the action of elected officials.

    I’d be interested in any studies you can cite. My math’s correct, but tax raising –and blaming someone other than those doing it– has never been counterintuitive.

  8. Ray Hyde Avatar
    Ray Hyde

    Subpatre: I agree with everyting you say except proffers don’t raise anyone’s taxes. Proffers will be reflected in the price of the home which will be reflected in the assessment (when it occurs) of nearby similar houses. Whether the tax rate is adjusted or not, the neighboring similar house will pay a higher tax than he would have paid had his assessment not reflected the proffers associated with the house next door.

    I’m searching for the references I have and I’ll supply them later.

  9. Ray Hyde Avatar
    Ray Hyde

    Subpatre: I even agree with you on blaming those who are raising taxes. If someone proposes raising impact fees it is necessary to recognize that those fees will affect everyon’s taxes. The studies i’m looking for claim that existing resindents pay more taxes in the aggregate than initially collected from the impact fees.

  10. E M Risse Avatar
    E M Risse

    SILLY GOOSE CHASE

    This is whole string is a silly goose chase–not even a wild goose chase.

    The discussion of a Shelter Crisis at Bacons Rebellion is about what is happening now, not in the last century.

    I do not know what Lansburg’s intent was in posting the item. Given the timing vis a vis the current talk of a housing bubble he may have be inclined to just promote the anti regulation/libertarian agenda.

    It is clear that Glaeser and Gyourko were intent (in 2002 using 1989 to 1999 daat) on showing that Cuomo and the Donkey Tribe were wrong to ask for more money for subsidized housing in 2000. Note opening and closing paragraphs. Also note where this “research” was published.

    It is clear more subsidized housing will not solve the Shelter Crisis but not for the reasons G&G cite.

    There is no question that land use controls impact housing costs but is it chicken or egg? Places with high value housing hire planners and lawyers to manage land use controls in such a way as to keep their jurisdiction (or part there of) exclusive and to keep others out.

    There may be merit in questions raised by G&G’s investigation. There is no way to tell from this agenda driven effort. They use “central city” numbers, not “urbanized area” numbers much less “within frontier of urbanizing area” numbers.

    The “Mystery” factors change for every unit, dooryard, cluster, neighborhood, village and community. They have less to do with the municipal jurisdiction in which the unit falls than those who only have municipal data would like to admit. That is why Bill Lucy’s and Dave Phillips work (and their forthcoming book Metromorphosis is so important).

    Lots of interesting comments and some on target but this does not get us close to catching the goose, finding if the goose egg is golden or to rally understanding the housing bubble.

    EMR

  11. Ray Hyde Avatar
    Ray Hyde

    EMR: You assume we are having a housing bubble, but that is not proven yet, and the only way it can be proven is if it breaks.

    I think you are right that the “Mystery factors” may include more price differences than just those imposed by the jurisdiction. By extension, your previous coment that they change at every unit may be technically correct, but I think it may be superfluous.

    Frederik asked why there should be a price correlation to lot size, arguing that it is obvious that permitted uses change the value of the lot. Well, of course.

    The point of my analysis above is that by comparing the sales of differing units and subtracting the value of the construction you can determine the value of the land plus the mystery factor. Then, by comparing these you can determine the cost of the mystery factor and the base value of the land.

    Even if EMR is right, about unit mystery factor changes, these would be mostly subtracted out along with the construction costs. In addition, many neighborhoods are fairly homogeneous, so unit and dooryard changes would not be great.

    If you then condict this analysis for different jurisdictions, you could determine which jurisdictions are efficient at running their permit processes and which were not.

    My guess is that jurisdictions that are not efficient will have higher housing costs, and higher taxes.

  12. Ray Hyde Avatar
    Ray Hyde

    Subpatre:

    “Larry D. Singell and Jane H. Lillydahl examined Multiple Listing Service house sale data for
    Loveland, Colorado, between January 1983 and December 1985.35 Their regressions of sale prices on
    housing characteristics, time variables, and fees revealed that the imposition of fees increased the sale
    prices of both new and existing houses. “

    from

    “An Examination of the Effects of Impact
    Fees on Chicago’s Suburbs”1
    by Brett M. Baden and Don L. Coursey2

    http://harrisschool.uchicago.edu/About/publications/working-papers/pdf/wp_99_20.pdf

    “As high impact fees on new development push up the prices of existing homes, some long-time residents may encounter difficulties paying the higher taxes that accompany higher assessed valuations. “

    http://www.heartland.org/Article.cfm?artId=9437

    I don’t care for Heartland institute “studies”, but it is one reference anyway.

    “If the property tax rate
    remains stable after the impact fee is imposed, the benefit the consumer receives in infrastructure
    will trigger higher property tax payments (because the value of the house increased).”

    http://www.law.nyu.edu/realestatecenter/publications/Been_impact_fees.pdf

    This has a better discussion of tansitional unfairness, income exclusion, sprawl promotion and other unfortunate results of impact fees. It also contains a good discussion of the factors to be considered when setting impact fees in order to limit the unfairness.

    “The impact fee is a membership fee for joining a city that has attributes of a club,…”

    http://www.strom.clemson.edu/opinion/ulbrich/proptax.html

    Ulrich has an interesting take on the fairness and distorions cuased by property taxes in general.

    “In response to higher fees, homeowners will choose to live in existing units longer, resulting in fewer removals and less new construction.” “A one standard deviation increase in the number of months of subdivision approval delay resulted in a 20-25 percent reduction in the number of permits obtained by builders.” “an MSA with 4.5 months delay in approval where growth management actions have been introduced through two different approaches will have about 45 percent less new construction than an MSA with a minimal 1.5 month delay and no growth management policies.”

    Christopher J. Mayer and C. Tsuriel Somerville, “Land Use Regulation and New Construction,” Regional Science and Urban Economics, vol. 30 (2000): 639-662.
    INDEX: growth management (local); urban development; urban sprawl; housing

    Is it any wonder that trickle down is not working and housing prices are rising in this market?

    I didn’t find the reference I was looking for, yet. It claims that because impact fees increase the price of new and existing homes and ultimately affects the assessments of all homes, that existing owners pay more in increased taxes than are collected by the fees.

    There is no free lunch.

  13. subpatre Avatar
    subpatre

    There’s no free lunch. Given a county with 100k population that has 8 schools (typically ~6 mortgaged), 5 sewer plants, and a 200 acre landfill. It has an 8% growth rate, +50k people in 5 years.

    With the extra people the county now needs 4 new schools, 2 more sewer plants, one new landfill. Without proffers all citizens pay for this equally. The only way to accomplish this is with increased taxes; ie. people who paid $1000 last year need to pay $1250 (or some similar increase) this year. New residents pay $1350 because the houses are worth a bit more. That is a tax increase.

    With one-time proffer of $2000 per new home the county has capital funds of $100 million. Thats short of real costs, but close. People who paid $1000 dollars last year pay $1000 this year, new residents pay $1080 because the houses are worth a bit more. That isn’t a tax increase.*

    There’s no free lunch. Services are per person or per house, and if new residents needed no (as in zero) infrastructure, proffers aren’t needed. Reality intrudes, because new residents require new schools, new water and sewer, trash disposal, and more roads or roadwork.

    * tax vs. assessments vs. tax rates
    Jurisdictions budget by total dollars, and the tax rate is derived from the budget. Our hypothetical county above had a budget of $200M and total assessed property of $40B. This means that come h*ll or high water, they will get $200M out of the 100k residents. The rate is set to get it.

    With 50% more residents, but little or no capital costs, the budget is $300M. Whether the total assessed value is $60B (no change in per house value) or $240B (all home quadrupled in value) that money will come from 150k residents. The rate is set to get it.

  14. Ray Hyde Avatar
    Ray Hyde

    Theoretically, I agree with you completely. Practically speaking, I don’t think that is what happens. Under the conditions you set, one thing that occurs is that existing residents get a capital gain on the backs of new residents. Then of course there is the question of who paid for the existing infrastructure, and how.

    I guess If you are going to be a new resident, make sure you buy an existing house.

  15. Anonymous Avatar
    Anonymous

    I’m with the, “no free lunch” crowd. The reason these areas have high house prices is because of their great services and geat economy. The reason other areas are raising revenue is because of all the new citizens using their services.

    When they don’t their existing citizens suffer these growing pains even more.

    There is no mystery, just history.

    Colin Flanigan

  16. This string is an example of how valuable this blog is. Excellent dialogue. I’m learning, I’m thinking. Thanks to all who have participated.

  17. subpatre Avatar

    ..existing residents get a capital gain on the backs of new residents.

    That’s backwards. Under a proffer system, additional required capital projects are paid for by those who added the need. Existing residents gain nothing.

    Without proffers, additional required capital projects are paid for by everyone. This mandates higher tax payments from existing residents; new residents get capital improvements on the backs of existing residents.

    To the best of my knowlege, cash proffers apply to developments; not ‘onesie, twosie’ houses. The gray area is small –often local– developers, who get levied the same as massive developments. It’s true that proffers can be misapplied or abused; but absence of proffers is abuse.

  18. subpatre Avatar

    Ray, practically speaking (from the Valley) taxes do rise with an influx of new residents. Proffers have nothing to do with it.

    New residents can –very roughly– be classified as other Valley folk and urban refugees from NOVA. New residents from similar counties have realistic expectations, the urban refugees are used to and expect the services they came from.

    Parks, public water and sewer, theatre, bike trails, curbside trash pickup, art centers, fire and rescue, symphonies, etc. are traditionally urban amenities. In the (former) rural areas these items are mostly absent, sparse, and/or privately funded.

    The Residents Formerly Known As Rural® don’t demand additional or reduced services; they’re ‘service neutral’. But urban refugees expect more services. No matter what their proportion, they create an influence for more service –and higher taxes needed to fund them.

    The other reason is under-estimation of real capital costs. Any school, sewer plant, jail, or road built today will cost more in constant dollars than it did a decade ago. Improvements built 5 years from now will be more (in constant dollars) than they do today.

    Classroom size is shrinking and programs expanding in schools; treatment requirements and septic accounting is becoming more stringent; prisoner space and amenities have doubled; and road impact studies and research are expanding.

    Inflation discounted, real costs are rising; rapidly rising. This affects almost every single item of a jurisdiction’s capital budget. In a stable population with stable demands, the occaissional added cost can be absorbed. In areas of rapid growth that require capital expansion, the effect is multiplied and will quickly exceed a (inflation adjusted) contingency fund based on past costs. Taxes must rise.

  19. Ray Hyde Avatar

    The capital gain idea is not mine, but the math is included in several different versions of the arguments provided in the references.

    Think of it this way, if a new resident attempts to buy an existing house, then that owner is going to demand a premium, becuase he know that when he turns around to buy a new house, he will have to pay the impact fee. That premium is a capital gain. That is what shows up in the new assessment, and unless the local government is very astute and honest, in new taxes.

    What we see is that assessments go up 20% and authorities reduce the rate 10%. The extra money is used to account for all the issues you mention.

    Another side of the coin is that under this plan new residents are assessed for all the costs they bring and get no credit for all the benefits they bring. Most economic analysts, as opposed to political ones, conclude that new residents add more value to the community than costs.

    Again, that is theoretical. In practice things may be different. We see the same problem with new residents who expect city level services.

    Again, I think we agree in most respects. While proffers do help the capital budget, I just think it is a mistake to think they mean someone else is paying in full.

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