Frequent commenter RossB recently posted a link to the paper, The Impact of Zoning on Housing Affordability. The title is somewhat of a misdirect because in the opening paragraph it says:
This paper argues that in much of America the price of housing is quite close to the marginal, physical costs of new construction.
The Introduction goes on at some length to emphasis that it is about the cost of housing and not meant to address the issue of poverty. This is key to recognize because it separates the homeless issue from the affordability of housing. As it states on page 4, “To us, a housing affordability crisis means that housing is expensive relative to its fundamental costs of production, not that people are poor.” This is a key concept when related to supply and demand. People who aren’t in the market for a home by definition are not part of demand as it relates to economics. They may want a house, they may need a place to live, but they are not influencing the market price of homes. Or, as they say in the paper, “Hence, we focus on the gap between housing costs and construction costs.”
The paper continues on for several more pages to explain that it will use the R.S. Means Company’s data on construction costs in various U.S. metropolitan areas. The paper is from two decades ago, so the numbers are wildly outdated. I will attempt to provide some current perspective, but I hope more accurate data can be provided as comments. The paper references the American Housing Survey (AHS). The 2019 version is available on the HUD website but finding the median home value escapes me. In the 2000 Census it was reported to be $120,000 (pg 5). One reference I found suggests this doubled from 1999 to 2019. When you dig into State data, Washington ranks fourth or fifth at $393,800. Obviously it’s going to be higher in Western Washington and highest in King County. Real Estate sites give Median sales prices but that’s different than median value. Data USA claims a 2019 Median Property Value of $643,000 for King County. Also on that site, the 1-year growth in median property is 1.23% vs a 1-year growth of 7.98% in household income. It should be no surprise that sale prices are going through the roof with increased affluence and negative real mortgage rates. Also noted is a 1-year growth in population of 0.88%.
In the paper the year 2000 construction cost for an average home was listed as $75/sqft. Using data claiming to reference the National Association of Home Builders that average cost is now $173/sqft and the average home size has gone from 1,700 sqft to 2,800 sqft. Another site put the national average at $155/sqft in the most expensive “region” which was the Northeast. Covid was a game changer that has in many cases doubled the cost of material and pushed costs into the $350/sqft territory. I’d note in this last reference the Sales Tax on construction is 10.25% in Seattle. That dollar amount also doubled with Covid induced shortages of both material and labor.
The paper states, based on 2000 data, “America as a whole may have a poverty crisis, but its housing prices are basically being tied down by the cost of new construction.” In part this is based on an assumption that land values are ~20% of the value. I have always heard the figure quoted as 1/3 land to value when banks are evaluating mortgages. But with current material and labor costs 20% may be an accurate number. Median sale price for King County is easy to find on real estate websites. Redfin reports $750,000. Bobvilla.com reports an average house size of 1,900 sqft for Washington State. If we assume for King County the 2,800 sqft from above that puts sales price per square foot at $270 which is somewhere between the estimate pre/post Covid numbers for new construction. Following the methodology in the paper we cannot build our way to lower housing costs with new construction.
What can be done? Labor costs are significantly lower on manufactured homes than site built homes. Historically this has been associated with mobile homes which are banned by zoning in many locations. Lumped in with “trailers” are some manufactured or “kit” homes that are high quality and indistinguishable from tract site built homes. In fact tighter manufacturing processes often lead to higher quality and flexible manufacturing has created greater ability to customize than site built homes. New building technology such as Cross Laminated Timber are a reality.
And what about zoning, the hook in the paper’s title? Although land cost doesn’t appear to be a significant portion of new construction the expansion of ADU and DADUs is often brought up. An ADU is a remodel which has higher construction cost than new construction. DADU’s are essentially new construction with a free lot. Both can play niche roles but neither scales and have minimal impact on supply. Certainly zoning is important in allowing for new construction in built up areas and to constrain growth (i.e. sprawl). Carving up single family zoned areas into smaller and smaller lots has little value. Subdividing generally benefits the existing land owner where you create two building lots from one and both are worth nearly as much as the original parcel. Again, it doesn’t scale because these existing neighborhoods are limited in the population the infrastructure can support and ultimately only create a very tiny increase in housing units. The end result may be a decrease in density because it creates two homes where 2-4 people live where once was a three or four bedroom that housed 3-5 people. Diverse options are a good thing, and there is a place for this type of rezone, but it has little effect on supply
What has to happen to increase supply is zoning new areas for residential. This was supposed to happen in South Lake Union but zoning strongly favored office space at the expense of residential. Totem Lake in Kirkland and the Spring District in Bellevue have a lot of new housing but it is still outpaced by the number of new office jobs created. It’s easy to understand why. When you add a cubicle, even when you consider common space and parking you are at perhaps 500 sqft. In this same area apartments or condos are going to command at least twice that much floor area plus parking. Shared parking between office and residential is one model that can help. Zoning to include retail, especially essentials such as groceries can play a role in decreasing the paved space and traffic congestion. This is urban planning. Elimination of single family zoning is a lack of planning.