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Why Are Homes So Expensive?

by Economist
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Economist
#1
Feb14-08, 01:26 PM
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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/htm..._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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mgb_phys
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Feb14-08, 01:50 PM
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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.
Astronuc
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Feb14-08, 02:01 PM
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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.

Evo
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Feb14-08, 02:06 PM
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Why Are Homes So Expensive?

Doesn't apply in the midwest either.
EnumaElish
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Feb14-08, 02:24 PM
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Quote Quote by Astronuc
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.
TVP45
#6
Feb14-08, 02:47 PM
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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.
CaptainQuasar
#7
Feb14-08, 02:59 PM
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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.
Astronuc
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Feb14-08, 03:18 PM
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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!
turbo
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Feb14-08, 03:32 PM
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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.
BobG
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Feb14-08, 04:54 PM
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Quote Quote by Economist View Post
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/htm..._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?)

Quote Quote by TVP45 View Post
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.
Astronuc
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Feb14-08, 05:02 PM
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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.
mgb_phys
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Feb14-08, 05:18 PM
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Quote Quote by Astronuc View Post
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 lenght left on the free hold.
Economist
#13
Feb14-08, 06:02 PM
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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.
Evo
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Feb14-08, 06:18 PM
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Quote Quote by Astronuc View Post
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. 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.
Astronuc
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Feb14-08, 07:15 PM
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Quote Quote by Evo View Post
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. 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.
TVP45
#16
Feb14-08, 07:20 PM
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Quote Quote by Evo View Post
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. 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.
Evo
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Feb14-08, 07:21 PM
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Quote Quote by Astronuc View Post
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.
TVP45
#18
Feb14-08, 07:26 PM
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Quote Quote by BobG View Post
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.


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