Housing Prices and Homebuilder Oligopoly

Competitive intensity of the homebuilder industry in the Washington-Baltimore area, 2006. Yellow indicates where 6 or more firms account for 90% of construction, dark blue indicates only two firms.

by James A. Bacon

What is driving up housing prices in Virginia, especially Northern Virginia? In the simplest terms, the increase can be explained by a sustained imbalance in supply and demand. Between population growth and rising incomes, the demand for new dwellings is outpacing the supply of new dwellings built. Then the question becomes, what is restricting supply?

My commentary on this blog has emphasized the role of local zoning codes, comprehensive plans, and NIMBYism in restricting the density of development where demand is greatest, in and near the urban core of Virginia’s major metros. But Jacob Cosman and Luis Quintero with the Johns Hopking University business school point to a different, though related, phenomenon: The consolidation of the home building industry.

Intensity of competition in 2015. Source:Cosman and Quintero.

“Our empirical results indicate that a higher degree of concentration in local housing construction markets leads to less housing production, a decreased rush to build more units, and greater volatility in prices,” conclude the authors in their paper,  “Fewer players, fewer homes: concentration and the new dynamics of housing supply.

The increase in market concentration (as measured by the number of home builders accounting for 90% of construction in local markets) between 2006 and 2015 led to the production of 150,000 housing units per year nationally. Without the home-builder consolidation, the authors estimate, housing increases would have averaged 2.4% annually instead of 5.5%.

How does decreased competition result in fewer houses built? The authors explain:

The real estate market cycle is driven by firms competing to build quickly to satisfy unmet demand and gain a first-mover advantage in a growing market. Interfirm competition generates a rush to build. As the number of market participants increases, this can result in overbuilding.

[Glenn R.] Mueller writes:

In a competitive capitalistic market, developers must speculate and start the process of planning development or building new products earlier than the actual demand materializes to edge out other developers who also want a share of the market. In the absence of collusion, this speculative behavior, along with the lump nature of real estate product, makes it easy to overshoot actual needs.

These findings demand yet another explanation: What is driving the consolidation of the home building industry? Write Cosman and Quintero:

Larger homebuilding firms benefit from production advantages relative to smaller firms. O’Holloran (2017) enumerates advantages including economies of scale, the ability to handle design and development in-house, the potential for joint ventures with government and industry, brand name recognition, and financing packages for consumers. Large firms benefit from bulk purchases that lower the cost of materials, superior access to capital markets, and land inventories that allow for less costly production of new housing. … Porter (2003) suggests that larger firms’ access to more patient capital through corporate bond markets and greater staff capabilities makes them better equipped to navigate local land use regulation.

Some of these advantages — in-house design capability, brand-name recognition, the ability to offer financing packages to consumers, and the ability to purchase materials in bulk — are not new. Those advantages have always existed. Therefore, they cannot account for the increased competitive advantage of large home builders since 2007. What has changed, I would argue, is the intensity of environmental and land use regulations, and the difficulty in getting permits to build new housing in localities where the demand for housing is the strongest.

Emily Hamilton with George Mason University’s Mercatus Center has documented the wave of new “inclusionary zoning” policies enacted by localities in the Washington metropolitan area since the 1990s.

Inclusionary zoning is only one category of local environmental and land-use regulation. There have been many others. One can have a conversation as to whether these added layers of regulation are justified or unjustified, but there can be no argument that they have occurred. Over time, the increased regulatory burden and increased difficulty in acquiring new lots to build on, has I would argue, has favored large firms with patient capital and in-house staff capable of navigating projects through the zoning process and inevitable NIMBY resistance.

In other words, when we’re looking for root causes of the consolidation of the home-building industry in the Washington region (which can be seen in the two maps atop this post), the most likely culprit is the proclivity of state and local government to impose layer after layer of new land-use restrictions and regulations.

Cosman and Quintero have added insight into the complex process by which increased regulation affects housing markets, restricts supply, and pushes prices higher. But let there be no doubt where the problem originates.

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18 responses to “Housing Prices and Homebuilder Oligopoly

  1. Why are there so few homebuilders and so much consolidation? The lower relative costs of regulation are perhaps one factor, but I don’t see any case made here that such things account entirely for the concentration. Isn’t it a power of the federal government to regulate markets to establish fair competition in industries that extend across states? Perhaps we need fewer regulations about land use and more restraint for capital– oops!

    I almost forgot that using our government to regulate the forces of capital is off-limits in this country now.

  2. Well I still ask – what are the tangible impacts of higher-priced/less affordable housing ?

    It’s not like we end up with vast areas of the cities with tarpaper shacks, like we see in 3rd world countries – right?

    Can we find a correlation between the number of people who commute to the exurbs verses “affordability”?

    I just don’t buy the “govt is causing it” idea unless we think it’s a monolithic problem in the entire country – that urban “governance” is messed up -everywhere.

  3. Someone who wants a single family home with a yard is not going to live in an apartment or townhouse unless they have no other choices – including commuting 30-40-50 miles to the exurbs.

    In my mind, that’s NOT a true “affordable housing” issue and if the amount of land available for detached single family homes is scarce – there is nothing that government can do about that -either short of
    rezoning currently zoned land for SFD to multi family.

    This issue is seldom precisely defined in discussions – and that it becomes a nebulous pretext for all manner of different folks and organizations agendas.

  4. This is a jumble of thoughts. All fast growing metros have housing shortages. Each and every one. Isolating this to the Washington Metropolitan area is a red herring. Go to Nashville and tell me how housing prices are working there.

    Why would consolidation increase price and limit supply? Many industries have consolidated over the years – telephone companies (after the 1996 deregulation’s peak), automobile manufacturers, airlines, oil and gas companies, etc. Is there another case where consolidation led to scarcity? Is it hard to find a new car to buy these days?

    The real issue is that new home construction is a loser for most communities. Fairfax County has a property tax rate of 1.15% of assessed value annually. In 2018 the average countywide home assessment was $549,630. That’s $6,320 per home per year in property taxes. Meanwhile, the average cost per student in FCPS is $15,293 per year. Even if Fairfax County kept all the money it raises in property taxes for its own schools (which it does not) a new home would generate property taxes equivalent to less than 1/2 of a single student per year.

    Existing residents of high tax, high “transferred out” communities don’t see new construction as positive in any way. The General Assembly has meddled in local matters to the extent of limiting construction impact assessments. Why not? Real estate and construction special interests float the General Assembly on a river of money. Existing residents also know that the incompetent state government will never build roads at a rate equivalent to growth. More traffic is solved in Richmond by more tolls not more road capacity.

    Most of Virginia is an economic backwater with growth lower than the US average since 2009. The few fast growing areas are increasingly seen as the hope for the runaway costs of state government in an economically underperforming state. However, that growth can only be funded with additional growth in the areas already growing too fast for our hapless state and local officials to handle.

    Of course people in places like NoVa resist new construction. It is an economic loser for everybody except those involved in real estate and construction.

    As far as I’m concerned NoVa has enough people and already contributes far more than its fair share to the rest of the state. Build more homes in NoVa so we can pay more for RoVa roads, cops, prisons and schools? I don’t think so.

  5. The land inside the beltway from Mount Vernon’s Potomac shoreline west to the span of the American Legion Bridge, all this land cries out now to become a true and great urban city, with all its great constituent, but highly varied and diverse, parts as any great city demands if it is to thrive.

    These are not ordinary times, they are extraordinary times, like possibilities that roll by every hundred years, if one is very lucky and blessed. Such great potential for change always requires major attitude adjustments among all citizens on that land, adjustments that can only be driven into reality by the vision, imagination, and skills of bold leaders, talents of very high caliber.

    Today’s presence of those talents on that blessed land is a great gift. Small unimaginative thinkers will waste it, if allowed. Don’t allow them to waste it.

    • I think it would be Mt Vernon’s shoreline north to the American Legion Bridge and then west to somewhere just west of Reston. The eastern boundary would be the Potomac River.

      That would include parts of Fairfax County, Arlington County, Alexandria, the City of Falls Church, the Town of Herndon, etc.

      Only way to do that would be to incorporate all the land into a single chartered city with constitutional protections like the protections Baltimore has in the Maryland Constitution. An autonomous region free from the greasy fingers of Richmond oppression. Put a cap on out transfers of funds raised through taxes inside the new city. Something like no more than 15% of what is collected inside the city is transferred out. Use the money not sent out to re-engineer the area for true urban life.

  6. re: ” $6,320 per home per year in property taxes. Meanwhile, the average cost per student in FCPS is $15,293 per year. Even if Fairfax County kept all the money it raises in property taxes for its own schools (which it does not) a new home would generate property taxes equivalent to less than 1/2 of a single student per year.”

    and if those single-family$500K homes become multi-family housing with kids – what happens to tax revenues?

    Is Fairfax held hostage to single-family-homes for the tax revenues it needs for schools?

    • Fairfax is held hostage to single family homes for a number of reasons, not the least being the incompetence of the General Assembly’s transportation efforts. Why would we want more density when it’s obvious that the political elite in Richmond have no interest in building adequate transportation for a dense urban area. Quality of life suicide.

      Reed is right – inner NoVa should be a single, large city instead of a hodge podge of small cities, counties and towns. It should have a constitutionally defined city charter in a manner similar to Baltimore in Maryland’s state constitution.

      • I’ve been to a few urban areas – probably not as many as DJ but a few:
        Seattle
        Portland
        Phoenix
        Salt Lake City
        Boise
        Albuquerque
        Houston
        Kansas City
        St. Louis
        Chicago
        Atlanta
        Charlotte
        Nashville
        Cleveland
        Cincinati
        …and about a dozen more up the east coast

        and I don’t see a whole of difference in traffic and transportation

        Each one has a beltway of sorts and rush hour is a mess.

        So I’d have to ask for more detail as to what exactly NoVa would do different if they could……….that would make it any better than all those other urban places….

        I just think that beltways fundamentally changed the way that cities develop…all of them….

        • I’ve been to many of those places and many more. The issue with NoVa / DC is that its traffic is routinely worse than other cities of a similar size. While traffic is often bad in fast growing cities it is worse in DC.

        • Let’s be honest. The basic plan in Virginia is pretty simple. Milk NoVa to support the other areas of the state. Hampton Roads seems pretty self-sufficient. They don’t get much of the NoVa largesse. Richmond is ridiculously overbuilt relative to its size. How anybody can justify a four lane “beltway” encircling that stunted city is a mystery to me. However, Richmond is the capital of plantation Virginia and has taken in far more money from the state than it should have taken since the hey day of the Byrd machine. Meanwhile, Richmond has remained an undersized and underperforming city – especially over the last 100 years as southern cities like Atlanta, Charlotte, Nashville, Austin, etc have prospered remarkably. Virginia has three urban areas – one is economically vibrant (NoVa), one is self-sustaining (Hampton Roads) and one is an economic disappointment (Richmond). We also have a wide swath of small town and rural areas that are economic basket cases (with a few exceptions like Charlottesville).

          Now, I don’t much care whether the people on this blog like the reality I have outlined or not. The elite of plantation Virginia have long been more than willing to ignore reality. Tomorrow is always another day in plantation Virginia.

          The question is how much you can drain the one economically vibrant area of the state before you kill it. I personally think we’re getting pretty close to killing the goose that lays the golden eggs.

          The answer is transparency although I doubt you’ll hear many of the Richmonders on this blog agreeing. The state knows how much money is raised in taxes and fees by region and it knows spending by region. Publish the data! This is what should have been happening all along. However, the wealth transferring Republicans don’t want this transparency. It would illustrate how rural counties fail to levy taxes at an acceptable rate while gorging on other people’s money. And it’s been this wealth transfer that kept the Republicans in power since the 60s.

          Virginia will become a Democrat controlled state – either this November or after redistricting in 2021. The real question is whether the Democrats will govern with transparency or just continue the Lil’ Abner politics of the Republicans.

          • I, too, would like to see more transparency regarding where state tax money comes from and where it goes. The K-12 funding formula is explicitly designed to redistribute wealth from wealthy localities to poorer localities. But I think you’d find a very different story for transportation funding. You keep harping on Interstate 295 — that was built decades ago. In the past decade, NoVa has soaked up more than its proportionate share of transportation dollars (not including dollars generated by regional taxes.)

            Everyone spouts a narrative that their region is getting screwed and someone else is benefiting. Not all the narratives can be true. It would be valuable to see the facts and find out who is right.

  7. Jim,

    There is another set of issues that have driven both the consolidation of developers and the cost of housing. That issue is the increasing regulatory burden on the state side. In the last twenty years, there has been a sea change in the level of state regulation of land development. The primary areas of increasing regulation are street standards and environmental standards, though the building code standards are also much more rigorous today. These may all be good and helpful changes (some are in my mind, and some not), but regardless of whether you believe they are good or not, they have definitely increased the cost of new housing and diminished the number of small homebuilders in the market.
    Stormwater regulations did not exist on the state level twenty years ago. Today, no matter the jurisdiction, land disturbances over an acre for a development require engineered plans. Road standards have increased in width, quality of construction and better geometrics. Building codes add a greater number of energy efficiency measures with each new revision.
    So, it is not just the zoning on the local level that is creating the cost, it is also the state regulatory framework. As someone who works in local government, I would argue that the increasing state regulations create a greater burden on rural localities, as one of the benefits of doing business in a rural area in the past was an easier regulatory burden. Small homebuilders have been leaving the marketplace altogether, or just focusing on home renovations and improvements.
    I have no empirical data to back any of this up- only my own and other local government practitioner perspectives on what we have seen in the last two decades. But, it truly is a radical difference in who is building homes, and what kind of homes that are being built in localities all over the state.

    Sara

    • Sara – how right you are on this very important point you raise. I hope to get into it in some depth before too long, since I see so much of it going on here where I live too.

  8. The reason I stopped reading this blog is because none of you address the root-causes of these problems: In this case, high immigration, which super-charges the demand for housing, rather than tearing up suburban Fairfax inside the Beltway for more housing for the “teeming masses” that the Elite insist must be brought in. We have an insane and WRONG elite and this blog won’t face up to that fact because it, like most “mainstream” Republicans and Libertarians would rather suck-up and not offend them. They NEED offending, in the same way that Saint John the Baptist and Jesus Christ offended the corrupt religious leaders of Israel. But then, I guess, corporate sponsorship would be scared off, now wouldn’t it? I suggest that this blog be renamed, “Bacon’s Demural.” Capitalists and Socialists have similar goals but differ a little in their methods. One wants The “incentivized” Market to take the lead on mass collectivization, while the other wants a hectoring, omnipotent, coercive state to shove people in the same direction. No thanks! Mark me as “none of the above.”

    Sincerely,

    Andrew

  9. But then, I guess, corporate sponsorship would be scared off, now wouldn’t it?

    Excuuuuuuse me, what corporate sponsorship are you talking about? Bacon’s Rebellion no longer has sponsors, nor has it been looking for sponsors. Indeed, our last sponsorship ended at Bacon’s Rebellion’s initiation.

    Andrew, if you want to argue that excess immigration is driving up Washington metro housing prices, that’s fine, Go right ahead. It’s an interesting argument and I’m open to hearing it. Indeed, I invite you to submit a column to the blog. The way to persuade me is to present your evidence and make your case, not to throw around loose accusations of shadowy influences from non-existent relationships.

  10. Andrew, if there is someone out there that I have not offended, please let me know who they are, because all of us deserve being offended from time to time. As regards immigrants, we are all immigrants and if we now stopped bringing more immigrants into this nation, it would grind to a halt for lack of folks willing and able to come close to filling competently the jobs America now offers and requires to stay strong.

    Indeed, without immigrants, America would die off for lack of young people, given that most of us whose ancestors have been here a couple generations typically are too self absorbed and selfish to reproduce enough children to keep our nation alive. Too much success over too long a period of time by one’s ancestors breeds self destruction of one’s tribe by reason of self loathing, lack of energy, and/or meaning in life. Without outside challenge, or perception of it, tribes turn on themselves finally.

    The only remedy to self destruction is constant change and challenge if a civilization is to be kept alert, alive, competent and thriving. Remember, American education in grades one through twelve reached its high point from 1940 to 1960 and has been falling apart ever since, failing everyone across the board, save for a lucky few.

  11. Insightful comments, DJR.

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