Developers build expensive housing because housing is expensive

Emily Badger has a great post at Wonkblog about why rental housing is so expensive in the District.

Along with explaining how the median renter has changed as more affluent households are looking to rent rather than own, she notes the ways in which land-use regulation can unintentionally spike prices:

Height limits, parking requirements and zoning restrictions all push up the cost of construction. So do lengthy design reviews and legal battles with neighborhoods opposed to new development. Developers must also build at the densities communities allow, and in the limited places where they allow higher density. And if a given parcel of land is only zoned for about five stories of apartments, those apartments may have to command $2,500 a month each to make the project profitable.

She’s exactly right. All of these regulations increase the cost of building new housing and cause a lot of potentially profitable units to never be built at all. But aside from parking requirements, however, none of these directly cause developers to build expensive, luxury units.*

Much luxorious
Luxury!

More importantly, focusing on luxury units reverses causality. Housing isn’t expensive because developers are building costly, luxury buildings. Rather, they decide to build luxury units because housing is so expensive to begin with.

If developers decided to build spartan apartment buildings–no granite counter tops, no decks, basic appliances, cement floors, tiny windows–these units would still be extremely expensive and out of reach for working-class renters. Wealthier residents are willing to pay for location, and they’re willing to pay more than lower income residents can afford.

Even if developers decided to forego the entire building itself and just sold a tent on a dirt lot, that unit wouldn’t be affordable in a prime location. In Shaw, for example, someone just paid $1.2 million for dirt without the tent because the potential value of building homes is capitalized into the land. In some of our leading cities, land (and the legal entitlement to build) is often worth more than the homes built on them.

Developers do, in fact, build nice units with lots of amenities, but this is simply catering to the people who have enough money to pay DC’s sky-high rates, not a cause of high rates themselves.

Regardless of the costs developers face, housing prices are still set by supply and demand. The regulations Badger pointed out are indeed drivers of rental prices in the District, but the mechanism is constraining supply, not luxury units.

 

 

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*As Donald Shoup has shown, minimum parking requirements cause developers to build fewer, but larger, units within a building of given size because providing additional parking spaces is not only costly, but also physically infeasible in many cases. Many jurisdictions require  certain number of parking spaces for each unit, rather than basing requirements on square footage. A developer may then build a suboptimal, but still profitable, building with larger, more expensive units (if the development moves forward at all).

DDOT isn’t going to introduce surge pricing in Chinatown …but they should!

“Holding parking prices at a fixed, hourly rate makes parking too cheap in times of high demand and too expensive in times of low demand. Which is why it’s nearly impossible to park near the Verizon Center on Friday nights and metered spots are deserted in off-peak hours. Varying prices based on when a driver reaches a spot can address both problems.”

Read the rest at Washington Post.

A real zoning rewrite would be awful for NIMBYs

I usually associate NIMBYism with people like the woman behind the failed push to ban booze on U Street or the guy fighting to keep 7-Eleven off 14th Street NW. But fighting every individual bar, building, or business near you is a fool’s errand unless you’re in it for the schadenfreude.  That brand of piecemeal NIMBYism, while sometimes effective, is for amateurs. The pros use something much stronger: zoning.  The listserv warriors and ANC gadflies have to attend a nearly-endless string of meetings, hearings, and public comment sessions to keep development away. But once you get your neighborhood zoned for single-family homes on large lots, no one is allowed to build anything near anyone, and development only happens downtown or where poor people used to live.

The Zoning Commission has spent the last few years working through what it called the Zoning Regulations Review. It was originally billed as a “comprehensive overhaul” of the zoning code, but it really makes a few minor revisions around the edges. While the proposed changes are technically open to public comment, I suspect all the important decisions have already been made.  Regardless, here are a few changes I would make if I were the zoning czar:

1. Eliminate Residential House (R) Zones

There’s no need for single-family zoning in a major city like the District of Columbia. Rather than protecting incumbent homeowners from having to look at buildings they don’t like, zoning regulations should allow large lot suburbs to give way to denser development. While this would likely increase land values, it would also decrease per-unit housing costs. This of course doesn’t mean that single-family homes would be illegal. DC residents would simply be able to convert their detached, single-family homes into row-houses or small apartment buildings where it makes economic sense. Homeowners could cash out on their newly-valuable land and renters would have more options. Much of Ward 3, a paragon of exclusionary zoning, would be opened to development under this change.

2. Allow unlimited density, mixed-use development, and no parking minimums within a quarter mile of any Metro station entrance

Areas surrounding Metro stations are prime locations for building transit-oriented development with the least impact on parking availability and traffic. Too many Metro stations are surrounded by sleepy neighborhoods despite the multi-billion dollar public infrastructure located just steps away. Let’s make full use of the transit investments we have by allowing dense development nearby Metro stations. The federally-imposed Height Act will cap what can be built, so there isn’t much need to control development near the stations.

3. Automatic price-based upzoning

High per-unit prices well above construction cost can be an indicator that zoning is too strict, but it can take the zoning code decades to catch up to reality. One way to get around this is by allowing automatic upzoning when per-unit sale prices hit a certain price–say, $400 per square foot–in a neighborhood.

 

4. Cap the number of buildings protected under historical preservation laws

There are literally thousands of buildings in DC that can’t be torn down or greatly altered. Some are architectural or historical gems that will be cherished for generations. Others are run-of-the-mill rowhouses that really don’t merit permanent protection from development pressures. As more and more structures and neighborhoods are nominated for historic status, we should look back at what’s currently protected and consider what is really important.

DC laws give NIMBYs a lot of power to say no to any new development. We give District residents a way to say yes.