housing

What to Do About Gang Violence in Salinas California

Howard Ahmanson — Tue, 31 Jan 2012 09:23:54 -0500

Is there any connection between the fact that Salinas has the gang problem that it does, and the fact that Monterey County's restrictions on the building of housing are very strict? I can see why the inhabitants of the Monterey Peninsula might want to protect the coastal strip. But if they apply their policies to the whole county, it becomes very difficult to build any housing. I saw a proposal 40 years ago from Ralph Nader's think tank that would encourage the building of Italian style hill towns along the hills along both sides of the South Santa Clara Valley, thus leaving the lowlands along the river for agriculture; such a plan could be applied to the Salinas Valley as well. I don't have the expertise to draw the connection between restricted housing and the gang situation in Salinas, but surely the situation is worth looking at. What kind of novels would a John Steinbeck write, if he were growing up in Salinas today?

Things Aren't that Bad in Saginaw

Wendell Cox — Tue, 24 Jan 2012 23:05:30 -0500

Our 8th Annual Demographia International Housing Affordability Survey included the Saginaw, Michigan metropolitan area, which we noted had the lowest Median Multiple (median house price divided by median household income) among the included 325 metropolitan areas. This made Saginaw the most affordable metropolitan market, principally due to depressed economic conditions. Saginaw has been ravaged by the loss of manufacturing jobs and a generally declining economy because of its strong industrial ties to the Detroit metropolitan area.

D. Robertson of Freeman's Bay (Auckland, New Zealand) must think that things are much worse, as indicated by a letter to the editor in the New Zealand Herald on January 24 (The Herald does not post letters to the editor on its internet site). Robertson says that including and prominently reporting the result of Saginaw Michigan (population 297 in 120-odd dwellings) was inappropriate. Robertson makes a 99.9% error, having apparently confused Saginaw, Missouri (population 297) with Saginaw, Michigan. According to the 2010 US Census, the Saginaw metropolitan area has a population of 200,169. That would be substantial enough to qualify Saginaw as one of New Zealand's largest metropolitan areas if it were there.

Why Housing is So Expensive in Metropolitan Washington

Wendell Cox — Fri, 20 Jan 2012 10:57:25 -0500

Anyone familiar with housing affordability in the Washington (DC-VA-MD-WV) metropolitan area is aware that prices have risen strongly relative to incomes in the last decade.

However, a recent Washington Post commentary by Roger K. Lewis both exaggerates the contribution of higher construction costs and misses the principal factor that has driven up the price of housing: more restrictive land-use regulations.

Lewis compares construction costs in the early 1970s to current costs and finds that they are approximately 6 times as high. However, when the R. S. Means construction cost index for locations in the metropolitan area are adjusted for inflation, the increase is more like 15% (1970 to 2007).

Lewis also indicates that construction costs have risen faster than the "relatively flat income curve." In contrast, Census Bureau data indicate that median household incomes in the Washington metropolitan area have increased more than 30% since the early 1970s, after adjustment for inflation. House construction costs are the flatter of the two, not incomes.

While Lewis' focus is affordable housing, costs in this low income sector are impacted by many of the same factors that drive overall housing affordability (overall house prices relative to incomes).

Lewis does not consider the huge cost increase in the non-construction costs of housing. In the Washington metropolitan area, we have estimated that the land and the regulatory costs for a new house have been driven to more than 5.5 times the level that would be expected in a normal regulatory environment (see the Demographia Residential Land & Regulation Cost Index). The problem is that the restrictive land-use policies, such as the Montgomery County agricultural reserve, similar regulations in other metropolitan area counties and the large lot building restrictions in Loudoun County have driven the price of land up substantially, and with it, the price of housing. We estimate that more restrictive land use regulations have driven the price of a new house up approximately $75,000.

Not surprisingly, Washington's Median Multiple (median house price divided by median household income) remains more than a third above the 3.0 historic norm, at 4.0, even after the burst of the housing bubble. So long as governments in the Washington, DC area continue to strictly ration land for development, higher than necessary costs will continue to plague both housing affordability and affordable housing.

How Phoenix Housing Boomed and Busted

Leith van Onselen — Sun, 06 Nov 2011 22:55:54 -0500

When analysing the US housing bubble, four states stand-out for the way in which home values rose into the stratosphere before crashing and burning: California, Nevada, Florida and Arizona (see below chart).

Since I covered three markets were covered in previous posts at Macrobusiness (see above links), I now want to analyse the Arizona housing market – with particular emphasis on its largest city, Phoenix – to determine why prices bubbled and then burst in such a violent manner.

In the lead-up to the crash, Phoenix’s economy was booming. New jobs were being added at a fast pace and per capita incomes were growing strongly:

With confidence riding high on the back of seemingly solid fundamentals and rising asset prices, along with easy access to credit, Arizona households borrowed heavily. Per capita debt accumulation surged in the mid-2000s to levels far in excess of the national average:

But Phoenix was living on borrowed time. With the national economy turning south in the wake of the sub-prime crisis and the collapse of Lehman Brothers, Phoenix home prices, which had already been falling gradually, began to slide fast. After home prices peaked in May 2006, it took another 18 months before Phoenix’s unemployment rate began rising:

The rest is history. Home prices continued falling, unemployment kept rising, and nominal per capita incomes fell for the first time in at least 40 years.

And the pain is widespread, with around one in seven mortgages 90 days in arrears – well in excess of the national average:

So what went wrong? Could anything have been done differently to prevent the housing bubble/bust?

Certainly, if credit was less readily available, households would have been constrained in their ability to bid-up prices. But easy credit was only part of the problem. Another key driver of the rampant price escalation and then collapse was the way in which land was supplied for housing.

Throughout the 2000s, Arizona was one of the fastest growing metropolitan area in the United States with more than 1,000,000 population (see below chart).

However, despite there being ample developable land on the urban fringe to accomodate this population growth, the actual quantity of land available for development was heavily restricted on two counts:

The State of Arizona passed statewide planning laws in 1998 and 2000, which included the implementation of high impact fees on new development and urban containment devices. In a 2006 study of land-use policies in the 50 largest metropolitan areas of the US, the Brookings Institution ranked Phoenix as ‘growth management’, which is the same ranking as Florida and California.
The overwhelming majority of potential developable land in Arizona is either owned by the state and federal governments, preserved for conservation, or otherwise off-limits to development.

On the second point – the lack of available land for development – the below graphics highlight the land supply situation in Phoenix.

First, a pie diagram, extracted from the Arizona State Land Department Annual Report, showing how only 17.5% of land in Arizona is privately owned:

Second, a map showing the lack of developable land around Phoenix:

There is evidence that the Arizona State Land Department, whose mission is to “optimize economic return for the Trust beneficiaries”, heavily restricted sales of land to the market in an effort to maximise revenues, causing builders and developers to bid-up land price in period auctions to ensure their supply of land for construction (called ‘land banking’).

Whereas the price of land for housing sold for around $40,000 per acre immediately prior to the bubble, at the peak average land prices fetched nearly $200,000 (see below chart).

And with the state rationing the supply of fringe land, average residential land prices rose throughout Arizona:

Obviously, this land price inflation was a principal cause of the house price escalation as well as the delayed supply response to the rapidly growing population and rising house prices (see below chart).

Had land around Phoenix been freely available for development, developers would likely not have paid such high prices for the land sold by the state government and Phoenix home prices would never have risen to such heights or crashed as violently.

Phoenix is yet another example of where excessive government interference in the supply of land has combined with easy credit to create a speculative bubble followed by a painful bust.

This piece originally appeared at Macrobusiness.

Leith van Onselen writes daily as the Unconventional Economist at MacroBusiness Australia. He has held positions at the Australian Treasury, Victorian Treasury and currently works at a leading financial services company. Follow him @leithVO.

Housing Bottom? Not Yet.

Jeff Speakes — Thu, 06 Oct 2011 19:14:35 -0400

Weakness in housing activity and in housing prices continues to be a major drag on the overall economy. My colleagues at California Lutheran University's Center for Economic Research and Forecasting have long maintained that the home ownership rate (HOR) needs to fall back to its historical norm of 64% before housing can recover. Their view has been that the attempt to increase the HOR by loosening credit standards contributed to creating financial instability. In a classic case of unintended consequences, the attempt to improve the home ownership rate contributed to rising home prices which ended up lowering affordability for first-time buyers.

A rising home ownership rate has been a major goal of public policy for several decades under both Republican and Democratic administrations. The rationale was multi-part. First, it was believed that communities are stronger where home ownership is greater. Second, building equity in a home was viewed as the primary path to improving a family’s financial condition. Finally, lower home ownership among minorities was felt to be an indicator of bias.

Policies directed towards increasing the rate of home ownership included subsidizing first time home buyers, reducing required down payments, and streamlining the application process. Weaker underwriting standards increased the effective demand for housing and helped propel a boom in housing activity and home price appreciation between 1995 and 2006. The overall HOR rose from 65% in 1990 to 69% in 2006 which was applauded on both sides of the political aisle.

However, rising home prices eventually reduced affordability and, along with excess supplies of housing due to overbuilding, led to a peak and then a decline in housing prices. The price decline eventually set in motion forces that generated severe losses to mortgage investors and homeowners alike. The underwriting pendulum shifted from easy to tight, and effective demand for houses plummeted. Millions of people have lost their homes, and many more have zero or negative equity in their homes. The homeownership rate has now declined from 69% to 66%, and appears to be headed lower.

Another fundamental indicator of housing weakness is the large number of delinquent mortgages and the implied backlog of future foreclosures. Of course, as the foreclosure backlog is worked through, the result will be a decline in the home ownership rate, as newly foreclosed-upon home owners become renters. Thus, this issue is not separate from the HOR issue.

The large number of vacant homes is also a measure of housing market health. During the period of 2002 through 2005 the housing industry massively overbuilt. The degree of overbuilding can seen by comparing the rate of household formation (about 1.1 million new households per year during this period) with total housing starts, which is the number of new units (including rentals) completed each year.

This number exceeded two million units per year during the boom. Since the end of the housing boom, total starts have fallen dramatically to around 600,000 per year. If the rate of household formation had remained at 1.1 million per year, then the surplus developed during the boom would have been eliminated by now. However, an important yet obscure statistic maintained by the Census Department, the Vacant Homes For Sale (VHFS), remains at more than one million above its long-term average. What is going on?

I suspect that the rate of household formation dramatically declined following the crisis and subsequent recession because more young adults returned to their family homes, and because multiple families are occupying the same housing unit.

The problem of too much housing stock and too few households will not be resolved purely by a lower home ownership rate. It will be resolved by rising household formation , even if the new households are renters instead of owners. What we need is more people. One strategy to accelerate the process is to streamline legal immigration and to lift or eliminate quotas on the number of people who can legally come to this country.

Jeff Speakes is Executive in Residence at California Lutheran University, and Lecturer in economics at the University of Southern California.

Australia Central Banker: Higher House Prices a "Social Problem"

Wendell Cox — Sun, 28 Aug 2011 13:11:54 -0400

Glenn Stevens, the Governor of the Reserve Bank of Australia expressed concern about the growing gap in housing affordability in the nation to a parliamentary committee on Friday. Stevens raised questions about the cost and supply of housing, asking:

"How is it that we can't add to the dwelling stock for the marginal new entrant more cheaply than we seem to be able to do," he asked.

According to an article in the Perth Western Australian ("High price of homes 'stealing future'") Stevens went on to say that key State and local government issues around supply, zoning, transportation and infrastructure seemed to be making a simple block of land more expensive than was necessary.

Virtually all of Australia large urban areas have implemented urban containment policies (called "urban consolidation" in Australia and "smart growth" in the United States). The result has been to increase house prices from 2 to 3 times the historic norm relative to incomes. These price increases are consistent with the overwhelming economic evidence of a strong association between urban containment policies, especially those that ration land for development through devices such as urban growth boundaries.

The Chairman of the Reserve Bank of New Zealand has identified a 10-times "across the urban growth boundary value" difference per acre in Auckland, which is similar to findings in Portland, Oregon.

Stevens concluded his housing comments noting that: "There's a very big inequality between generations building up and I think that's a social problem as much as any economic point."

New Zealand Leader Focuses on Association between High House Prices and Growth Management

Wendell Cox — Sun, 28 Aug 2011 12:27:43 -0400

ACT Party leader Donald Brash, who served from 1988 to 2002 as the Governor of the Reserve Bank of New Zealand (similar in function to the Federal Reserve Board) has noted the poor housing affordability in New Zealand and its connection to growth management policies (called by various names, such as "smart growth," "growth management," "compact cities," "densification" "prescriptive land use regulation" and "urban consolidation").

In an August 25 speech Brash said:

"It is impossible to avoid the conclusion that the interaction of the RMA, the Local Government Act and local government staff all over the country has produced a major obstacle to improved living standards.

One of the ways this has happened is through the way in which this interaction has pushed the price of housing well beyond the reach of far too many New Zealanders – or more accurately, has pushed the price of residential land well beyond the reach of far too many New Zealanders.

We know, from the annual surveys undertaken by the Demographia organisation, that housing in our major cities is now among the most expensive in the world, relative to household incomes. And why? In large part because too many local governments have quite deliberately limited the supply of residential land.

Arthur Grimes, now chairman of the Reserve Bank, found that the effect of the Metropolitan Urban Limit imposed by the Auckland Regional Council had increased the price of land just inside that Limit by some 10 times compared with the price of land just outside the Limit.

This is absolutely nuts, in a situation where New Zealand is one of the most under-populated countries in the world, and where Auckland is one of the most densely populated cities in the world – in terms of people per square kilometre, Auckland is more densely populated than Vancouver, Melbourne, Portland, Adelaide, Perth or Brisbane.

I’m delighted that one of the first projects of the newly-established Productivity Commission is to look into the affordability of housing."

The finding of a 10-times "across the urban growth boundary value" difference per acre in Auckland, is similar to findings in Portland, Oregon.

Dr. Brash had previously written (the "Median Multiple is a measure of housing affordability, with higher number indicating less affordable housing. It is the median house price divided by the median household income):

"... the one factor which clearly separates all of the urban areas with high Median Multiples from all those with low Median Multiples is the severity of the artificial restraints on the availability of land for residential building"

Land Use Regulation Blamed for High Hong Kong House Prices

Wendell Cox — Wed, 20 Jul 2011 23:45:26 -0400

The Wall Street Journal reports that growing concern about Hong Kong's high house prices has led the special administrative region's Chief Executive Donald Tsang to promise an overhaul of housing and land use policies in the fall.

Chou Hong-Wing, a real estate professor at Hong Kong University told The Wall Street Journal that "Hong Kong isn't short of land." Chief Executive Tsang indicated agreement, saying that the only way to solve the problem in the long run is tackling "market demand and land supply."

A broad array of economic research has documented the higher house prices that occur where there land supply is overly restricted. In a survey of seven nations, Hong Kong was rated as the most unaffordable market in the 7th Annual Demographia Housing Affordability Survey in January, with a Median Multiple of 11.4 (median house price divided by median household income). Sydney and Vancouver, both with stringent land rationing (smart growth) programs ranked second and third, at 9.6 and 9.5 respectively.

Adelaide Land Prices Top Sydney

Wendell Cox — Mon, 18 Jul 2011 13:05:44 -0400

The median price of serviced (improved) lots for new houses in Adelaide is reported to have risen above that of far larger Sydney by the Housing Industry Association of South Australia. Housing Industry Association of South Australian Executive Director Robert Harding attributed the high price of land to government policies that have limited the supply of land available for building. Nearly all thousands of square miles of land around Adelaide are off-limits to house building due to state government restrictions.

Adelaide is the slowest growing major metropolitan area of Australia, yet has some of the worst housing affordability among larger metropolitan markets. The 7th Annual Demographia Housing Affordability Survey found median priced Adelaide housing to be 7.1 times median household incomes, ranking the metropolitan area eighth most unaffordable out of 82 with more than 1,000,000 population.

Before the adoption of its strong smart growth (urban consolidation) land use restrictions, median house prices in Adelaide were one-half or less the present level (Figure). By comparison, new houses can be purchased in much of the United States for less than the median price of an empty lot in Adelaide ($180,000), though not in areas that have adopted smart growth restrictions.

Home Ownership and the American Dream

Jacob Langenfeld — Thu, 24 Mar 2011 10:26:38 -0400

What defines the American Dream? A new poll by Big Builder reveals that one answer to this enduring question may be home ownership. A major portion of the American population (59%) believes that they are living the American Dream. Respondents distinguished owning a home as the second most important factor of the American Dream, just behind raising a family.

Another statistic in this poll seem to suggest that this trend may be more stifled as the younger generation of Americans (18-29 year olds) come to the crucial decision of buying a home. Still, 49% see home ownership as a “sound investment,” while 49% of this age group call it “too risky.” Perhaps the effect of the weak economy has been especially evident in this age group.

Some interesting contradictions also arise in these statistics. For instance, 58% of those who believe the housing crisis is a chronic problem also recommend buying a home. Furthermore, 75% of respondents claim to not have benefited from any federal program to assist in ownership (such as mortgage interest deduction), yet 71% confessed to taking the deduction. The pollsters have considered that perhaps the government’s assistance in home ownership may be unclear for many Americans.

A final statistic worth mentioning is that 58% of Americans believe that fulfilling the American Dream is influenced mostly by their own skills and hard work than by the current state of the economy. The ubiquitous American Dream still runs on hard work and the pressing notion of owning a home, it would seem.