A study from Demographia, a St. Louis public policy consulting firm, finds land use regulations have driven costs in some major metropolitan markets so high that new housing has become unaffordable for consumers despite low interest rates, a study from Demographia, a St. Louis-based public policy consulting firm, claims.
The initial Demographia Residential Lane & Regulation Index Report examined 11 markets across the nation. The company created an index where a 1.0 value means land and regulation equals 20% of the advertised new house price. For any house priced at above 125% of the construction cost, that amount over the mark is attributed to excess land and regulation cost.
There are six metropolitan markets (Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis) with a 1.0 value for a new detached house. This indicates that land use regulation is less restrictive and does not add more than normal to the price of new homes.
At the other end of the spectrum is San Diego, with an index value of 13.2. This translates into added costs of $220,000 to the price of an entry-level detached in that city as a result of its land use regulations, the report claims.
The index values for the remaining four cities studied for detached housing are 2.4 in Minneapolis-St. Paul, 3.9 in Seattle, 4.5 in Portland and 5.7 in Washington-Baltimore.
Regulations add nearly $30,000 to the cost of a new home in Minneapolis-St. Paul.
The report also attempted to put an index value on what it termed “attached housing,” that is duplexes, townhouses and low-rise condominiums.
There were only five markets with sufficient housing of this type to generate data, and of those five, St. Louis and Houston have a 1.0 index value.
San Diego is once again at the other end of the spectrum, at 7.7, followed by Washington-Baltimore at 5.7 and Minneapolis-St. Paul at 2.4.
In dollar terms, regulations added $125,000 to the cost of an attached house in San Diego, Demographia said.
The report states that even after the collapse in home sales prices in the last couple of years, “prices in some metropolitan markets remain well above prebubble prices and historic affordability standards.”
Wendell Cox, the principal of Demographia, states, “Excessive regulations have driven house prices up strongly in some metropolitan areas, where the American dream of homeownership could become a thing of the past.”
Meanwhile it is not surprising to him that households are flocking to areas where restrictive regulations were not adopted and thus costs are lower.
Demographia states smart growth and growth management regulations were adopted without any consideration of their long-term impact on housing affordability.
Therefore, “this massive loss in housing affordability was an unanticipated consequence of regulations that have imposed urban growth boundaries, building moratoria, excessively expensive development impact fees and bureaucratic processes,” said Cox.
The company said the 11 areas chosen for this initial index report were selected to provide a geographical and regulatory balance and because they had sufficient data. It plans to include additional areas in future editions, and is looking to cover all metropolitan areas with population over 1 million people.
