What's Driving the High Cost of Homes in Major Cities?

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In summary, new research has shown that government regulation plays a significant role in driving up housing prices, making it difficult for middle-class residents to afford homes in major cities like Seattle. This analysis, conducted by a University of Washington economics professor, found that good intentions have inadvertently led to a $200,000 increase in home prices. This finding is supported by a nationwide study on the impact of land-use regulation, highlighting the need for more informed regional policy debates. Other factors contributing to high housing prices include limited land for development, speculation from buyers, and the cost of materials in areas affected by natural disasters or military bases.
  • #1
Economist
New research proves what many economists have thought all along, that government regulation greatly increases housing prices. Ever wonder why poor people are increasingly pushed out of some major cities such as San Fran, Seattle, etc? Well here's the answer.

http://seattletimes.nwsource.com/html/businesstechnology/2004181704_eicher14.html

Backed by studies showing that middle-class Seattle residents can no longer afford the city's middle-class homes, consensus is growing that prices are too darned high. But why are they so high?

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

Eicher's $200,000 conclusion doesn't surprise Kriss Sjoblom, staff economist for the Washington Research Council, a nonpartisan organization that examines public-policy issues.

"It's actually pleasing," Sjoblom says, "that we finally have data that allows us to show things we thought were there all the time."

A UW professor for 13 years, Eicher is also the founding director of the UW's Economic Policy Research Center. Its goal is to provide analysis that will inform regional policy debates.

Eicher says the research center long wanted to analyze the impact of regulation on housing prices, and found a way when researchers at the University of Pennsylvania developed the Wharton Residential Land Use Regulatory Index. Based on a survey of more than 2,500 U.S. municipalities, it provided the first nationwide analysis and comparison of the effects of land-use regulation.
 
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  • #2
Supply + Demand.
There is always arguements that if all that green belt / parks / forest / farming land was given up to build houses then the price would magically drop - this is usually put forward by developers.
 
  • #3
The regulation may apply in Seattle and some other places, but in our area, there are hundreds of new homes being built. However, builders don't want to do anything for less the ~$350K, so even old houses are expensive. The other factor is that people are moving from more expensive areas like NYC/Long Island and Westchester county, and they pay premium prices for real estate, so naturally, they are charged premium prices.

Another factor maybe cheap credit/ARMs - as in the subprime mortgage crisis, and that's not regulation, but poor or crooked business practices.
 
  • #4
Doesn't apply in the midwest either.
 
  • #5
Astronuc said:
Another factor maybe cheap credit/ARMs - as in the subprime mortgage crisis, and that's not regulation, but poor or crooked business practices.
Plus the ordinary sort of speculative greed -- betting that house prices will continue to climb up.
 
  • #6
Come to Pittsburgh. You can buy a nice 1200 square foot house in a good neighborhood for less than $120,000. If you'll settle for a 70 year old house in a working class neighborhood, you'll pay $45,000. Only the new, 2000 sq ft +, fancy homes went sky-high (and back down). If people gamble on the price of their over-valued home continuing to rise, I don't see that as much different from playing the slot machines - sooner or later the casino (bank) always wins.
 
  • #7
I think you're being a bit loose with your use of the word ‘proves’, Economist. And I'm pretty sure that developers not wanting to build low-income housing, as Astronuc points out, has more of a detrimental effect on poor people than zoning and city planning efforts that provide them with neighborhoods which have parks but not steel mills or junkyards or chemical processing plants.
 
  • #8
I visit San Diego periodically, and there it's simply limited land for developement. Some of the people I know just sell their place for two or three times what they paid, and buy something bigger. The churning keeps the prices rising.

I saw a lot that must have been 1/8 acre on a steep hillside. It was an irregular quadrilateral with one side about 20 feet and the other 50 feet, with may 100 or so feet along the street. The lot dropped about 20 to 30 feet. I imagine that a three story house would be possible, with the garage on top, and windows on three sides, or a four story house with living space above and below the garage, but the practicality of the lot was very questionable. The asking price for that lot was $800 K, because the houses nearby where over $1 million. Where I live, most of those houses would be less than $300-400K. It's all about location, location, location!
 
  • #9
We bought our little log home on almost 10 wooded acres for less than $90,000, and we have a nice private location on a back road.

If you insist on building or buying a hew home, right now, you are competing with the construction of military bases and (still!) the rebuilding from hurricane season two years ago - so even though some material prices have leveled off, they are still significantly higher than a few years ago. My cousin and her husband built a nice new place last year, and they had to seriously scale back their plans and leave out a lot of space/features, etc because of the huge jump in materials prices since they first had the plans drafted.

Another reason that housing can be expensive is speculation on the part of the home-buyer. They're generally optimistic about the appreciation of real-estate values and will over-pay because they think they'll recoup the money down the road, and because until they've got the place paid off, they can deduct the mortgage interest (on their primary home, of course) when they file their federal tax returns. Deductions for mortgage interests and forgiveness of capital gains taxes on the sale of one's primary home are among the few features of the tax code that working people can benefit from.
 
  • #10
Economist said:
New research proves what many economists have thought all along, that government regulation greatly increases housing prices. Ever wonder why poor people are increasingly pushed out of some major cities such as San Fran, Seattle, etc? Well here's the answer.

http://seattletimes.nwsource.com/html/businesstechnology/2004181704_eicher14.html

An ever increasing population causes increases in housing prices. Or, at least the belief that real estate can only go one direction increases prices. A good economy that results in very rapid growth results in the poor being priced out of the market, more government housing regulations, and higher property taxes (people are going to move there no matter what, so why not rake in the tax dollars?)

TVP45 said:
Come to Pittsburgh. You can buy a nice 1200 square foot house in a good neighborhood for less than $120,000. If you'll settle for a 70 year old house in a working class neighborhood, you'll pay $45,000. Only the new, 2000 sq ft +, fancy homes went sky-high (and back down). If people gamble on the price of their over-valued home continuing to rise, I don't see that as much different from playing the slot machines - sooner or later the casino (bank) always wins.

An ever decreasing population decreases home prices. Pittsburgh population profile The population within the city limits have decreased from about 424,000 in 1980 to about 325,000 in 2003. The population in the entire metropolitan area has declined from 2,394,811 in 1990 to 2,358,695 in 2000.

Considering population should grow at least some, especially if you want a housing industry, the metropolitan's rankings provide a more realistic assessment. They dropped from 13th in the nation in 1980 to 20th in 2000, with the population within city limits dropping from 30th to 54th over the same time span.

The poor aren't priced out of the market, because living there almost means you will be poor if you aren't already.
 
  • #11
When IBM laid off about 20,000 people in our area more than a decade ago, the housing prices dropped significantly by 10% or more. Builders just stopped building, and went elsewhere.

Now people are moving into the area, and whereas builders would build homes for about $200K more than a decade ago, they don't want to build for less than $300-400 K now. If they build bigger houses, even better.

I don't see how young folks can start out unless they rent in a small one-bedroom apartment.

One local developer wants to build high density housing/apartments which means cramming people together in as small an area as possible.

Another developer built and sold houses, but apparently retained ownership of the land(lots)! Not sure how that works.
 
  • #12
Astronuc said:
One local developer wants to build high density housing/apartments which means cramming people together in as small an area as possible.
Normally developers don't want to build this but use it as a bargaining technique with city councils. They want planning permission to build two 4bedroom 2 garage houses on a small suburban lot, they know the zoning board will try and restrict what they can build so they suggest a low income high-density social housing project instead.
And then when the local residents object the developer 'gives in' and puts in permission for the pair of $500,000 houses he wanted to build.
If you have any further problems it's usual to suggest that the alternate housing would be ideal for the homeless, drug addicts or recently released prisoners - this usually ensures you get the permits.

Another developer built and sold houses, but apparently retained ownership of the land(lots)! Not sure how that works.
It's common in apartment blocks - you normally pay a small ground rent and have a freehold for 99years. It can make it tricky once there is less than a typical mortgage length left on the free hold.
 
  • #13
Interestingly, you all seem to be discarding the article. I'm not asking anyone to take my word for it. Rather, read the article, read the study, then see if you still think Dr. Theo Eicher is incorrect.

Some of the variables you guys mentioned above probably do play a role. However, the question in research is often, how big of a role does it play? Dr. Eicher found that the regulation accounts for approximately $200,000 of the median home. That's a pretty big effect. I imagine if you took all the alternative explanations you guys are spewing and added them all up, they probably wouldn't even account for a quarter ($50,000) of the effect of regulation.
 
  • #14
Astronuc said:
Another developer built and sold houses, but apparently retained ownership of the land(lots)! Not sure how that works.
When I had a home built in the Clearlake Area outside of Houston, Exxon owned the land. Not only did they retain mineral rights (it's very rare that any homeowner will get the minerals rights to the property they buy), but they also stipulated that if oil was found on my property, they had a right to drill in my yard, through my house if needed. We're talking about a lot that was a 10th of an acre. :bugeye: The salesperson assured me that Exxon had carefully excluded the possibility of anything of value underground already, but just in case... I basicaly owned a few feet of topsoil.
 
  • #15
Evo said:
When I had a home built in the Clearlake Area outside of Houston, Exxon owned the land. Not only did they retain mineral rights (it's very rare that any homeowner will get the minerals rights to the property they buy), but they also stipulated that if oil was found on my property, they had a right to drill in my yard, through my house if needed. We're talking about a lot that was a 10th of an acre. :bugeye: The salesperson assured me that Exxon had carefully excluded the possibility of anything of value underground already, but just in case... I basicaly owned a few feet of topsoil.
Evo, as the land owner, I think you would have been entitled to some royalties for use of your land if Exxon did explore there.

In Texas particularly, mineral rights have not been sold with the property, but retained by some earlier deed owner, and that may be the case in many Western states. The railroads established in the west had large grants.

IIRC, we have mineral rights to our property.

When I lived in College Station, there were some houses in the area that were demolished in order to put in an oil rig, which then sat among several houses in a neighborhood.

Since then directional drilling enables rigs to be located some distance from dwelling.

I Colorado, some folks have found oil exploration companies setting up on their property with very little warning.
 
  • #16
Evo said:
When I had a home built in the Clearlake Area outside of Houston, Exxon owned the land. Not only did they retain mineral rights (it's very rare that any homeowner will get the minerals rights to the property they buy), but they also stipulated that if oil was found on my property, they had a right to drill in my yard, through my house if needed. We're talking about a lot that was a 10th of an acre. :bugeye: The salesperson assured me that Exxon had carefully excluded the possibility of anything of value underground already, but just in case... I basicaly owned a few feet of topsoil.
We have the same situation with coal and natural gas. It requires no stipulations; every deed in PA contains a clause to the effect that the deed does not/may not convey title to minerals. Our saving grace is that they do require a permit to dig from above; from below, well it's their coal mine.
 
  • #17
Astronuc said:
Evo, as the land owner, I think you would have been entitled to some royalties for use of your land if Exxon did explore there.
Nope, it's clearly spelled out, you get nothing, or you don't buy.
 
  • #18
BobG said:
An ever increasing population causes increases in housing prices. Or, at least the belief that real estate can only go one direction increases prices. A good economy that results in very rapid growth results in the poor being priced out of the market, more government housing regulations, and higher property taxes (people are going to move there no matter what, so why not rake in the tax dollars?)



An ever decreasing population decreases home prices. Pittsburgh population profile The population within the city limits have decreased from about 424,000 in 1980 to about 325,000 in 2003. The population in the entire metropolitan area has declined from 2,394,811 in 1990 to 2,358,695 in 2000.

Considering population should grow at least some, especially if you want a housing industry, the metropolitan's rankings provide a more realistic assessment. They dropped from 13th in the nation in 1980 to 20th in 2000, with the population within city limits dropping from 30th to 54th over the same time span.

The poor aren't priced out of the market, because living there almost means you will be poor if you aren't already.

The areas I spoke about were in suburban areas where the population has grown slightly. I take your point about fast vs gradual growth; I don't take your point about being poor (I actually took that as a cheap shot). My point is that, without wild speculation, there does not need to be such wild housing price swings.
 
  • #19
For the six decades between 1940 and 2000, median housing prices were between 2 and 3 times median household incomes. In the years since 2001, housing prices in some areas went up to 4 or even 5 times median household incomes.

The housing bubble was not caused by increasing population, nor was it a natural phenomenon, nor an unavoidable one like inflation. The housing bubble was caused by speculators, pure and simple. We're currently in a correction, and we'll be back into the 2-3x "comfort zone" before long. It's unfortunate for the people who bought right at the top of the bubble, but, well, the writing's been on the wall for almost a year now. There's an old saying on Wall Street: "When the secretaries get into it, it's too late." The same applies to housing. When there are dozens of TV shows about house flipping, and every soccer mom in the country is trying to buy a rental property, the market's shot.

- Warren
 
  • #20
The rate of foreclosures is increasing rapidly in many parts of the country. A house purchased one year ago is no longer worth what was paid for it.

A lot of people were stupid and used sub prime mortgages to buy more house than they could afford. Add to that the number of speculative buyers and we have a big problem.

The latest expression being used here is "neutron ARMS" (adjustable rate mortgages). Three years later the house is still there but the people are gone.

With the falling home prices people who did buy within their means can not sell without losing money. This makes relocating for a job change a nightmare.

One local realtor has even started running a foreclosure bus tour. The houses are supposedly selling at "fire sale prices" This will probably start another round of speculative buying.

In some areas of Florida it is impossible to give a condo away. In the meantime my nephew in LA just paid $380,000 for a 1100 sq ft townhouse.:rolleyes:
 
  • #21
edward said:
The latest expression being used here is "neutron ARMS" (adjustable rate mortgages).

LOL. :tongue2:
 
  • #22
edward said:
T
With the falling home prices people who did buy within their means can not sell without losing money. This makes relocating for a job change a nightmare.
Unfortunately, I'm not seeing that drop in prices here yet. They've come down a bit, but people seem to just be sitting on houses they can't sell rather than dropping the price. :grumpy: I'm patiently waiting. I can see the writing on the wall, though. They're starting to offer tasty incentives to buy, like covering a lot more of the closing costs (sellers will often pay them, but only after you negotiate for it...the "motivated sellers" are now offering closing costs up front). It's not yet enough though, because I know the market is still on the downslide, and I want to wait until it's closer to the bottom before I buy.
 
  • #23
When we bought this place, it obviously had to be a private sale, since the house did not conform to FHA guidelines that would qualify it for a loan. I looked over the place, offered less than the owner wanted, without talking to his broker, and made him agree to pay for the title search and all closing costs, and I chose the lawyer to handle the sale. My wife and I showed up at the attorney's office (a lady that we've known for years) and I sat on the stone steps outside her office while things were signed inside (due to my physiological collapses with exposures to fragrances), and when everything was settled, I wrote a personal check for the total due. The real-estate agent protested, and the attorney said "Shut up and take his check!". Deal done. It felt great to downsize out of a big suburban place to a tiny cabin in the woods. Best move we ever made. The garden spot has been a god-send, and the 3-fold increase in the cost of heating oil in the last few years makes wood heat look like the best choice we ever made.
 
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  • #24
Moonbear said:
Unfortunately, I'm not seeing that drop in prices here yet. They've come down a bit, but people seem to just be sitting on houses they can't sell rather than dropping the price.

Housing prices have not generally fallen in more than six decades. People find it hard to accept that it's even possible.

- Warren
 
  • #25
chroot said:
Housing prices have not generally fallen in more than six decades. People find it hard to accept that it's even possible.

Yeah, as a non-homeowner I have to say that many people who are homeowners (present company excepted, I'm sure) have a serious complex about the decision to buy a house. When I've mentioned that I don't want to buy a house in the last decade or so lots of people, even complete strangers, have gotten incredibly rude and pushy insisting that it's utter madness and only a complete fool wouldn't buy a house and actually tried to twist my arm into buying a house. Even at the point when every media outlet was saying the housing bubble had burst and the subprime crisis was coming. Who's laughing now, b▒▒▒▒es?

I almost wonder if these mortgage companies put something in the water that makes people obsess this way.
 
  • #26
Taxes? This is not new; you are only garunteed death and taxes in life. taxes will always rise.

Mineral rights? So what, I lived in clear lake myself, exxon will never drill. why? they can drill in friendswood along I-45 where the gas fields exist.

Prices? Prices rise every year. why? taxes rise every year.

Why are homes expensive? Location. Location. Location. I believe this is what realtors hammer out. If you live next to a school, you pay for the school. If you live next to a hospital and a park, you pay for the hospital and the park. If you live on a lot in a trailer 50 miles away from the nearest resident, you pay for that.
 
  • #27
chroot said:
For the six decades between 1940 and 2000, median housing prices were between 2 and 3 times median household incomes. In the years since 2001, housing prices in some areas went up to 4 or even 5 times median household incomes.

The housing bubble was not caused by increasing population, nor was it a natural phenomenon, nor an unavoidable one like inflation. The housing bubble was caused by speculators, pure and simple. We're currently in a correction, and we'll be back into the 2-3x "comfort zone" before long. It's unfortunate for the people who bought right at the top of the bubble, but, well, the writing's been on the wall for almost a year now. There's an old saying on Wall Street: "When the secretaries get into it, it's too late." The same applies to housing. When there are dozens of TV shows about house flipping, and every soccer mom in the country is trying to buy a rental property, the market's shot.

- Warren

Your point about 2-3x is an excellent one that I had forgotten. 2.5 was indeed the local maximum when I bought my home 31 years ago, and the real estate agent simply wouldn't show me anything outside that window since he knew I could not qualify for a mortgage. The house I bought was $500 over the maximum (imagine $500 being a barrier lately!) and I had to convince the seller to drop the price that much since "side deals" were closely watched then.

The end result is that we have weathered two job losses and a major illness without losing our home. It really was what we could afford. As we became more financially secure, we added on.

When I was in the army, I played way more poker than I should have. But, I learned the old card player's adage: Don't gamble more than you're prepared to lose.
 
  • #28
Part of what created the housing bubble was people living far beyond their means and getting insane loans that we are now all paying for.

When I heard of people getting interest-only loans, I knew it was about time for the market to crash. What a bunch of dipwads.
 
  • #29
Last year, I heard an interview on radio with a large real estate broker in Boston and she was bragging that she was able "to get people mortgages that they couldn't afford." And, she seemed to think she was being helpful.
 
  • #30
CaptainQuasar said:
Yeah, as a non-homeowner I have to say that many people who are homeowners (present company excepted, I'm sure) have a serious complex about the decision to buy a house.

Yeah, I have a lot of friends out here in CA that are either in the real estate profession, or have invested heavily in real estate as a way of amassing the fortune they feel is due them.

I have had numerous painful conversations with these people over the last year, telling them exactly why I felt buying a house was not a wise decision. They wanted to show me properties, offer me 105% financing (you know, to pay off the credit card debt they assumed I had, like nearly every other American), etc. I know people who were literally making $60k a month simply showing houses, and didn't think for a minute the gravy train was nearly out of steam. It was headed for a brick wall, of course.

I continually explained that to make a house profitable, you have to be able to get 6-8% appreciation per year, just to cover the tax, interest, and maintenance expenses. I explained over and over again how the market did not appear capable of delivering that kind of appreciation right now. Maybe in three to five years... and I'll have my pocketbook ready.

- Warren
 
  • #31
chroot said:
I continually explained that to make a house profitable, you have to be able to get 6-8% appreciation per year, just to cover the tax, interest, and maintenance expenses.

The one point they do have is that you can count doing away with any rent you might pay as an alternative on the plus side of the balance sheet along with the appreciation. But you're definitely right that that frequently still is not enough to offset the many costs.
 

1. Why do home prices continue to rise?

There are a few factors that contribute to the increase in home prices. One major factor is the law of supply and demand. As the population grows, the demand for housing increases, causing prices to rise. Another factor is the cost of construction materials and labor, which can also impact the price of homes. Additionally, low interest rates and government policies can also influence home prices.

2. Are homes more expensive now compared to the past?

Yes, homes are generally more expensive now compared to the past. This is due to inflation and the increasing costs of land, materials, and labor. In some areas, the rise in home prices may also be attributed to gentrification and the influx of wealthier residents.

3. What role do location and amenities play in home prices?

Location and amenities can have a significant impact on home prices. Homes in desirable locations, such as cities with strong job markets or near popular attractions, tend to be more expensive. Additionally, homes with desirable amenities, such as a pool or a view, may also have higher prices. However, the overall condition and size of the home also play a significant role in determining its price.

4. How do economic factors affect home prices?

Economic factors, such as interest rates, inflation, and job growth, can greatly influence home prices. When interest rates are low, it becomes easier for people to obtain mortgages, which can drive up demand for homes and lead to higher prices. Inflation can also impact home prices as the cost of materials and labor increases. Similarly, job growth can attract more people to an area, increasing demand for housing and driving up prices.

5. Are there any solutions to make homes more affordable?

There are a few potential solutions to make homes more affordable. One option is for the government to implement policies that encourage the construction of more affordable housing. This could include tax incentives for developers or subsidies for low-income homebuyers. Another solution is for individuals to consider purchasing homes in less desirable areas or to look for homes that need some renovations, which may be priced lower. Additionally, increasing the supply of homes through new construction can help balance out the demand and potentially lower prices.

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