Could you elaborate on your claim of how lower interest rates might have increased my construction cost?

I didn’t say that lower interest rates would increase construction costs. What I said was that lower rates, looser lending standards, and greater liquidity in the mortgage market would increase home prices. I say this because (as TJ_98370 points out), most people base their home purchase decision largely on the monthly payment they can afford.

When banks were giving out relatively low-interest mortgages to anyone that could fog a mirror, demand skyrocketed, which put upward pressure on home prices. As rates got lower, rather than being able to buy a better house for the same monthly payment, people were instead only able to afford the same quality house for more and more total money (but the same monthly payment).

I believe that when Tim says “positive effect on home prices” he means lower prices.

Lesson 1 in Marketing 101 is that prices are dictated by what the market will bear. Cost associated with fabrication of the product is not the dominating factor when determining price.
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“It would seem to me that changes in mortgage rates (much lower in 2006 than 1989), lending procedures (much looser in 2006 than 1989) and mortgage market liquidity (much greater in 2006 than 1989) would have a pretty large positive effect on home prices, not a negative one.”

When I had a house built, part of my cost was the interest expense on the money borrowed during construction. If the rates at the time would have been lower, my interest expense would have been less, not more. I would guess that the same holds for lending procedures and market liquidity–both these reduce the cost, not increase it. I am not sure how my cost of construction would have increased by lower interest rates, independent of some other factor. I would have loved the bank if they would have lent me the money for free!!!

Could you elaborate on your claim of how lower interest rates might have increased my construction cost?

Maybe regulation causes more speculation. He doesn’t care. All he says is that regulated markets have higher prices. He doesn’t really make a claim on why that happens (except to say that it reduces supply).

The post of mine that you referenced was clumsily written. What I was attempting to say was that Mr. Eicher appears to believe that recent speculative demand had insignificant influence on real estate prices because he makes no mention of it, that I can find. The major point of his paper is that he apparently believes the largest influencing factor for increasing real estate prices is land use regulation (reduced supply) and most of his paper is dedicated to supporting that assertion. To me, his paper lacks balance because he does not address factors like speculative demand and he only made cursory mention of other influencing factors such as relaxed lending standards and low interest rates.

REDUCED SUPPLY = INCREASES DEMAND

um, nope. Supply and demand are independent variables.

I think you are implying is that regulation reduces supply and given constant or increasing demand, prices go up. Econ 101

The only problem with that is the fact that the housing stock in King County has grown faster than the population since 2000. So demand has been DOWN relative to SUPPLY. We all know what sposta happen then, don’t we?

Repeat after me:

SPECULATORS, SPECULATORS, SPECULATORS.

That’s the difference between the areas you named and Seattle, the # of speculators in the market, not land regulations. Both LA and San Fran have land use regulations and they are the most bubbly areas in the country.

“He appears to disregard demand as having any effect on prices. I really do not understand how his analysis can be accurate by just focusing on the supply side. Maybe I am missing something?”

yes here is what you are missing very easy to understand:

LAND USE REGULATIONS = RESTRICT SUPPLY, = REDUCED SUPPLY = INCREASES DEMAND = we all know what increased demand does

DONE

also economis said “Really all you have to do to refute this claim is to look at Florida. Practically non-existent regulation, yet far greater % runups than Seattle. Ditto the other super bubble areas like Phoenix, LV, CA Inland Empire and Central Valley. How obvious can you get?

???huh???? don’t this help support Mr. Eicher study

NO LANDUSE REGS. = OVERSUPPLY, = LESS DEMAND = LOWER PRICES

Over crowding in Seattle has been a problem since 1970, we were out of usable land by then. Now its off the Richtor Scale. Try getting through the I-5 [built in like 1960] through downtown Seattle at say, 730AM….lol….gridlock!

We can’t paper weasle our way out of this, nor can we afford mass transit [remember Proposition 1] , let along have land for it either, etc, etc

The answer, its depopulation. Its not the “F” word either. Think of the example Seattle would set for the global community emphasizing depopulation. Think of the example we set continuing on this path of denial.

See the proof:

http://www.populationconnection.org/Communications/Reporter/Fall2003/sprawl.pdf

He appears to disregard recent speculative demand as having any effect on prices. I really do not understand how his analysis can be accurate by just focusing on the supply side.

I agree, Garth. Notice that no where in that thesis does it claim that demand considerations have no effect on price run-ups…….

I had the exact same thought. He appears to disregard demand as having any effect on prices. I really do not understand how his analysis can be accurate by just focusing on the supply side. Maybe I am missing something?

http://seattletimes.nwsource.com/html/businesstechnology/2004183558_bizbriefs15.html

The fundamental problem I have is his assumption that it is possible to build a model to explain price behavior in <20 years of a real estate market when most of the price change have taken place in the last 3-4 years. I don’t see any mention of him testing the model over different time periods. I suspect he would find a much different result if he ran a 5 year model instead of a 20 year one.

Overall, the study seems to simply ignore the huge run-up in prices over the last few years while land use policies haven’t changed much.

Sounds like all the FED needs to do is let every last park be developed, and we can avoid recession?

What regulation does is decrease the elasticity of supply. This is precisely why the areas I mentioned led the RE crash – the supply was able to respond very quickly to the elevated prices. In more regulated areas the supply will grow less quickly. But grow it will.

RE prices cannot exceed historical price/income and price/rent in the long run, not matter what restrictions are in place on development.

And I’ll just finish with an easy shot – Japan has far more restrictions on development then you could ever dream of, and that did not prevent a 50% crash. It just happened more slowly.

I think it will be interesting to see how regulation affects prices with respect to historical means after a bubble pops. I suspect we would find the non-regulated areas were overbuilt and have lower than historial prices.

Often-cited reasons for the spectacular run up of US housing prices in the past 10-20 years include lower mortgage rates, creative mortgages, and income/employment growth. These factors, which may well contribute to increased housing prices, all relate exclusively to housing demand. Housing supply factors, however, are harder to quantify and are typified by opposing view points: environment vs. sprawl, builders vs. planners, parks vs. high-rises, and (most divisively) state vs. local growth management.

The data and methodology is some of the best real estate research I have seen.

For years the real estate industry has been trying to eliminate any and all regulations on development and now with professor Eicher study they have the proof they need to change some minds in Olympia. The whole thing smells if you ask me.

From the following excerpt from the Seattle Times article:

“Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.”

Here is the math error that struck me the most:

If $200,000 of the increase over the 17 year period (2006 – 1989) that is reported as fully due to land-use regulations is subtracted from the 2006 year $447,800 value, then the difference from the resulting value and the 1989 year value would have to be due to all other factors that influenced the price of a Seattle house over that period. The math would go like this: $447,800 – $200,000 = $247,800; and $247,800 – $221,000 = $26,800, which would be the amount of the increase due to all other factors that influenced the price of a Seattle house over that period. Problem is that when you just conservatively consider that on average a house in Seattle is re-sold every five years, and that the Seattle Realtor/broker commissions have been at least 5% per re-sale over that period, the increase in price required from that factor alone – just to pay the Realtors/brokers – would be more than $26,800. The math goes like this, (all done in inflation-adjusted $), for a 5% commission applied 3.4 times over the 17 years (3.4 five year periods in 17 years): ($221,000) x (1.05)^3.4 = $260,877; and $260,877 – $221,000 = $39,877 which is more than $26,800. So unless houses in Seattle have been on average re-selling less often than every five years – I think not – or if Seattle Realtor/broker commissions have been less than %5 per re-sale over that period – again I think not, then something is wrong with the math result presented in the Seattle Times article.

I would not attempt to dispute that land-use regulations are a factor that likely cause a positive increase in the price of a house in Seattle. However when an article like this one in the Seattle Times is published with a math error/disconnect as I have identified, it puts the whole article in question, and also elicits questions about the credibility of the newspaper, and the motive, and the timing of the article. Unfortunately for the Seattle area real estate consumer – these kinds of articles and questions are not new news to us!. My opinion is that this Seattle Times article is just another attempt by the old school real estate industry establishment to justify unrealistically high run-up bubble prices and their attendant fat sales commissions, at the expense of the consumer – by blaming it on something else – government land-use regulations rules. Boy what a nice target for everyone to concentrate on blaming…and not focus of other factors for the bubble prices. Well read my lips old school real estate industry establishment. I’M NOT BUYING IT !! Thank you for reading this comment. Look forward to seeing some responses to it.

At least, I think that is what he is saying.

” I can guarantee that land use regulations are not the main reason for the recent run up in prices. Without the recent 100% financing and pure speculation, land use issues would have contributed to a modest 5% or so appreciation.”

I couldn’t agree more.

I thought you knew something about Seattle real estate. The ZLL townhomes were basicly designed by the city. There is a specific zoning overlay for them to increase density and act as a buffer between really high density and true SFR’s. That’s why the price of dumpy SFR’s in certain areas climbed so high – not as houses, but as multi unit building lots. The city is also happy to have nonfunctional garages as it will promote transit. And they are open about that fact. Its even been in the press (the last place usefull information shows up). Why do they look alike; because builders know that’s what the city wants, and it is very expensive to try for something else.

People place a premium on their time, and convert that into a cost that they try to minimize. If you live closer to work, shopping areas, etc. the cost of travel times is minimized, and more time/money/resources are available for other activities.
Housing prices go up in urban areas because buyers put a premium on living closer to the core, and will spend as much as they can to live as close as they can.

Land use regulations are akin to shuffling pieces around on a game board. They may push the pieces (home owners) one way or another, but their impact on price is insignificant compared to the number of pieces on the board, and the number of spaces.

Detroit has plenty of land use regulations- and tons of cheap housing. Ellensburg is cheaper than Seattle because it’s a hour away, not because the land use regs are less restrictive.

In fairness to the professor, he’s taken on a worthy project, but the subject is one that- despite his best attempts, can’t really be isolated to single factors. He would have been better off to calculate the percentage of cost that can be ascribed to taxes and fees, hard numbers that are easily quantified. But to claim that $200k is the result of land use regs is absurd, no matter how well wrapped and pretty the presentation is.

And the GMA has not forced greater density in Seattle. That density would have come no matter what due to a city of Seattle’s size reaching the buildout point.

I can guarantee that land use regulations are not the main reason for the recent run up in prices. Without the recent 100% financing and pure speculation, land use issues would have contributed to a modest 5% or so appreciation.

And how will he explain a substantial drop in median home price without any lessening of land use regulations?

Would be interested in seeing if this group donated money to the University prior to the start of this study.

In fact look at Table 1 in the following, he has two price measures in time, but no WRLURI:
http://depts.washington.edu/teclass/landuse/Seattle.pdf

Maybe I just need to see a table or chart to get it. And no, the statistical charts in these papers (that I have seen so far), are not addressing this.

For example, Scotsman said:

For this to have any meaning, he would have to compare to several cities with similar demographics, economies, costs of living, etc. and then look at the differences in land use planning and regulation to extract any impact for those factors.

The study is not just of Seattle. In fact he ran the numbers for 250 cities, and broke down land use regulations into four different ‘types.’

Basically I am just saying that this guy’s study seems to be both in-depth and un-biased. He may be wrong, but not because he’s got an agenda or he just did a cursory analysis.

Buffalo should restrict zoning. That will pump up prices. Detroit, Cleveland, Saint Louis should follow suit.

Just my thoughts. Interesting concept, but misses a time correlation, which is necessary to make the leap that most readers make when interpreting the meaning of Eicher’s paper.

Observation is not the same as causality, correlation is not the same as causality

For this to have any meaning, he would have to compare to several cities with similar demographics, economies, costs of living, etc. and then look at the differences in land use planning and regulation to extract any impact for those factors. This is just a lot of fancy mental ping-pong with a pre-determined outcome.

Maybe he’s looking for a job with the NAR.

Washington Housing Prices Summary

Unless I am misunderstanding something, Mr. Eicher is completely disregarding the effect of speculation in the recent real estate market place. I also have a real hard time accepting his apparent assertion that lower mortgage rates and loose lending standards had the effect of lowering home prices in Seattle.

At least Mr. Eicher’s study was not funded by NAR.

Also, in many cases, the market is not constrained by a zoning envelope or UGA boundary, but rather the economics related to building type (in urban areas) and/or transportation cost (in rural areas)

Certainly regulation plays a role in construction costs, but if the study is arguing that it plays a central role, I would disagree.

You don’t need a PhD in economics to see the problem: the median home price in Seattle has risen by more than $200,000 in the last seven years, yet land-use regulation has not significantly changed since before that time. These are indisputable facts. Is the argument that the majority of the price increase is due to regulation?

If so, is the contention that land-use regulations passed nearly a decade ago are the primary driver of price increases today? How do you reconcile that argument with the fact that local population has barely grown since 1999?

I haven’t read the paper, but here’s what I’m guessing: the researcher probably normalized the data for increased nationwide demand for housing, then did a factor-by-factor comparison of the differences between the various cities. Thus, if you take the bubble-driven increased demand of the last decade as a given, you can make the argument that our prices would have been lower, had we not had such draconian regulation.

This may be true, but it is not the same thing as saying that our price increases are due to regulation. If I’m right, the proper interpretation of the results is that Seattle housing would be significantly cheaper today if we had less regulation (duh), because we’d just build more crap on the Sammamish plateau.