Page Two articles are from our reader community.

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 The paper is from two decades ago, so the numbers are wildly outdated.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. 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.

11 Replies to “Construction and zoning vs supply and demand”

  1. Thanks for the article Bernie. You touch upon some of the errors housing advocates make.

    The first you address is new construction is always the least affordable.

    Second builders and developers are doing it for the money. That means buy low and sell high if they are the property owner and are doing it on spec. So new construction is not only the least affordable, it replaces older more affordable housing with new least affordable housing.

    Third is the price of the land is the key factor in the cost of housing because it dictates the cost per square foot for construction. Few houses on Mercer Island will be less than $500/sf. Builders prefer these houses because their profit is in things like flooring, fixtures, lighting, kitchen cabinets and countertops, and so on rather than sheetrock. Manufactured homes might cost less per sf than onsite construction, but don’t provide the profit from high end onsite construction for the builder if the neighborhood supports it. Whether a mobile home is disallowed on MI or not no builder will put one on a lot because they don’t profit from it.

    Fourth building a DADU is like a building a small house, and even if you can get a contractor the price per sf is very expensive because of the scale.

    Fifth private property owners are going to rent out a room or ADU/DADU for the highest price the market will bear, and want a return on their investment. An 800 sf DADU in Seattle if new can cost $600,000.

    Sixth if you allow the property owner to not live onsite when renting out more than one dwelling on the property (main house/DADU) you change the character of a SFH zone into an absentee landlord rental zone with less lot upkeep and a more transient crowd and more cars on the street, which families see as a safety risk for them and their children.

    Seventh builders are only interested in smaller minimum lot sizes if the GFAR (gross floor area to lot area ratio) is higher so they can build a bigger house on a smaller lot. Otherwise often the larger lot and larger house is more profitable (sales price less total construction costs) than two smaller houses.

    Eighth if you upzone a SFH zone but keep in place the same regulatory limits (height, yard setbacks, impervious surface limits, GFAR) you may increase the number of legal dwelling units, but not the total housing compared to SFH with four bedrooms, and each new dwelling unit must have its own kitchen, bathroom, living room and entrance.

    Ninth if you change the regulatory limits for a SFH zone you destroy the character of the zone, which is about vegetation, non-shared walls, yards for kids and dogs, and owner occupied houses where you know your neighbors.

    Tenth, progressives tend to live alone, and so see housing as small units for one. They have a hard time understanding the needs for kids, or that different ethnicities live in extended families, in part because it is cheaper.

    Eleventh, if you upzone you gentrify. That is the whole point. Unless there is new construction the new zoning is meaningless. That means poor, and usually minorities, are driven from their neighborhoods and replaced with wealthier white residents.

    Twelfth if the builders and developers don’t buy into the new zoning nothing changes, and the new zone is inchoate. But builders and developers are doing it for the opposite reason: they want the least affordable housing as possible because they want to sell or rent high.

    Thirteenth people are not going to get rid of their cars, at least in this large and undense region with crummy weather, just because they can’t park them onsite. They will park them on the street.

    Fourteenth threaten the SFH zones with upzoning at least at the local level and they will always vote for the more conservative candidate, which will trickle down into other issues like transit.

    Fifteenth money can always move. For decades the wealthy — and now businesses — have been leaving Seattle for the eastside, and eventually that cut into a city’s tax revenue.

    Sixteenth private property owners are very, very careful about whom they rent to if they live on the property, which nearly every city except Seattle requires. Forget about showing up with a voucher looking like your last home was a tent. They want the schoolteacher, librarian, professional couple living right next to them within their yard.

    Seventeenth, upzoning everywhere dilutes any kind of walkable urbanism, and Seattle IMO is a terrible urban city, with a hollowed out downtown core and UGA’s that are to spread out so there is very little retail density, and the retail tends to be not high end.

    Eighteenth, government built and managed housing will always be 1/3 to 1/2 more expensive than the same housing if privately built and managed.

    Nineteenth, the folks who own don’t mind skyrocketing housing prices, including investors.

    Twentieth, there is a lot of risk building multi-family housing today, and over seven stories you are into steel and concrete framed buildings which many builders can’t do. There is about zero risk building a SFH, or remodeling one.

    Add it all up along with a county AMI of almost $100k and a city AMI (Seattle) around $106k and “affordable” housing that is not subsidized doesn’t exist, and can’t be created with new zoning which requires new construction. They have been saying the same thing about San Francisco for decades, and the housing prices prove that, which is why SF has rent control.

    Throw in a pandemic that has deurbanized larger cities and increased the desire for a SFH among Millennials who have the money (especially if couples) to buy a SFH and upzoning the SFH zones becomes pointless, while prices on the eastside for a SFH are up 39% in 2021.

    Upzoning the SFH zones makes little sense if the goal is affordable housing, unless you just don’t like SFH’s or resent those who can afford one, or who bought a long time ago and have realized a windfall because they didn’t sell during the downturn from 2009 to 2016, although those folks will still make a windfall when they sell if their property is upzoned, probably as a SFH.

    And expect a big political fight over upzoning the SFH zones, despite the fact it won’t create any affordable housing, or really any additional housing GFA over the SFH it replaces.

  2. The problem is scarce land, not expensive buildings. Existing houses, condos, and apartments are rising rapidly in price even though their construction costs are already paid off or were fixed when the building was finished. so they aren’t a part of any construction cost increases. Second, 70% of the residential land is single-family only (with a small concession for ADUs), and all those houses are already built. So you have a rapid population increase but no single-family lot increase, so most addtional housing has to be squeezed into the 30% of the land that allows multifamily. There are only a few such lots, so developers and homebuyers and renters bid the price up, making them inaccessible to those who could previously afford them. That’s the problem. Allowing denser housing in single-family areas would relieve the competition for each unit that’s driving the prices up.

    ADUs are a welcome addition, but as you said they don’t scale. Even if every house added an ADU, that’s only twice the number of houses at most. And only a small fraction of homeowners will realistically build ADUs. And ADUs are still larger, more detached, and have more yard than an apartment, so they may be more expensive to rent.

    The goal is to ensure everyone has an opportunity for a housing unit at a third of their income, and can live in any of the large cities they choose to. (That means everybody who wants to live in Seattle should be able to, but not that everybody who wants to live in Medina or Beaux Arts should be able to.) There are different price points across the entire income scale. We don’t just need to house the zero-income and low-income, but also the working-class and middle-class workforce, and everybody up to $70K income where they can afford market-rate. And we need to keep building housing so that prices don’t rise further relative to income. Otherwise we’ll be in an even worse disaster than we are now; viz. the Bay Area.

  3. Third is the price of the land is the key factor in the cost of housing because it dictates the cost per square foot for construction.

    No the article I examine claims that land is at most 1/4 of the cost of housing. There is a better article (more recent and speaks specifically to rentals in Seattle and Portland) that Martin Duke pointed me to. Why’s the Rent So High for New Apartments in Seattle? “ If you can take emotion out of the equation it’s clear that the number one driver of cost (which determines rent) is construction. Nothing else is even close.

    It’s true that, especially with single family the lot price will factor into the minimum value that a bank is willing to finance. The cost of a lot has more to do with location than size. Relatively small lots in Seattle are more expensive than much larger lots in Snohomish County. When buying in a neighborhood people tend to pay a little more for a larger lot but it’s not even close to a one to ratio. Conversely, when a lot is subdivided the cost of each lot is nowhere near half of the original.

    DT’s point “new construction is always the least affordable” is generally true. And that was one of the reasons Harrell was against blanket abolition of SF zoning. What’s driving up the cost is competition but it’s competition of dollars. Every tear down that’s replaced with two SF homes just brings one more wealthy techie into the City. The point of both of these articles is you can’t bring down the cost of housing without significantly lowering the cost of construction.

    1. Economy-minded people don’t look at new apartments for the same reason they don’t look at new cars: newness intrinsically has a price premium. But apartments more than five years old are going up just like new apartments are. That can’t be construction because there is no construction: it’s the value of land.

      “Every tear down that’s replaced with two SF homes just brings one more wealthy techie into the City.”

      The fallacy is that even teardown houses have become expensive; they’re going for over $400K and sometimes $600K. The only people who can afford that are wealthy techies. So if you do nothing, the floor will just go higher and you haven’t solved anything. There are some people with modest means who bought their house years ago when it was affordable to ordinary people, but they’re increasingly unusual exceptions. And there’s nothing wrong with two wealthy techies instead of one. We shouldn’t block the rich from living in Seattle, but neither should we give them more than less-affluent apartment renters.

      1. apartments more than five years old [that’s not old] are going up just like new apartments are. That can’t be construction because there is no construction: it’s the value of land.
        1st off, what it cost to build “old” structures “back in the day” is irrelevant (and we won’t even get into the inflation adjusted cost). What matters is what they are worth today because if they are financed or not the cost of ownership is the opportunity cost of the investment. The marginal cost of adding more supply determines the value and that value is driven primarily by construction costs.

        if you do nothing, the floor will just go higher
        The “floor” as you call it will go up as the ability to bid up the price goes up. You’re poor, Amazon techie is rich; you lose. No investor is going to build so many houses that the sale price is less than the production cost. And the land value is a small portion of that cost as referenced in both pieces. Get over your emotional investment and understand the driving economic facts. Only then can you advocate for a realistic improvement.

        You need to wrap your head around the fact that nobody will build more houses to increase supply when the sale price is less than the production cost. Did you take the full ECON 101-102 course when you were at UW?

      2. What prices? Which 10 years? Where? And why does it matter? Both articles I reference, produced two decades apart, show that construction was and still is the predominant driver of new housing projects. It just is and the price of peanuts in Shanghai is irrelevant.

      3. King County, 2011-2021.

        Another thing I realized, if this paper is based on national trends, it won’t reflect the outlying price increases in Seattle and other major west coast cities. Even if it’s true that land only accounts for 25% of the cost of a house/multifamily building as a nationwide average and doesn’t change much, that doesn’t account for the much larger price increases here, where more of it is due to more valuable land. Consider that construction costs are the same in Seattle, Tukwila, and Lakewood, yet prices are different, and rise at different rates, sometimes one faster, sometimes another.

      4. Mike,
        The article I wrote about talks about areas where there are high land prices. Construction still is the largest cost. Existing stock is priced at or below the cost of new construction. The Sightline article which uses the latest available data for Seattle and Portlandia shows that on multifamily (the least expensive form of housing) the land amounts to only 10% of the cost of development.

        Consider that construction costs are the same in Seattle, Tukwila, and Lakewood

        No, costs in Seattle are much higher. Finding land to stage material, labor, parking for said labor, permit fees and lengthy permit and inspection times all contribute.

        Look at it this way, the construction costs (doesn’t matter why) are the major limit the supply side. On the demand side you have two things pushing up prices. #1 average income in Seattle is increasing faster than inflation. #2 the demographic moving into Seattle is more and more single resident households. #3 insanely low interest rates mean that with the same income you can afford to bid up the price and still qualify for a loan.

        Bottom line, zoning changes are important but only make a difference in supply if it’s a limiting factor on development. It’s not as proven by all the new projects that are being built or in the pipeline. Finding qualified people is a limiting factor. Electricians are making over $100/hr. Supply chain issues are becoming huge. Priced plywood lately? “Completed units are sitting vacant because it’s taking months to get appliances (nine months for us to get a new gas cooktop). The fact is the only thing that can significantly reduce the price of housing is lower construction costs. Unfortunately it’s going in the wrong direction.

      5. “average income in Seattle is increasing faster than inflation”

        You can’t look at the city of Seattle in a vacuum. The average income is rising because lower-income people are being displaced to South King County, Snohomish County, Pierce County, and tent clusters. That would be fine (except the tent part) but most of the suburbs are an unwalkable, transit-challenged hellhole — especially the parts where lower-income people move to. Saying “Oh well, Seattle is getting richer, nothing to see here”, is like white flight in the 1960s were families moved beyond the school-district boundary where school desgregation couldn’t reach them, or like Detroit’s suburbs that have all the resources and ignore their responsibility to help the central city — because it’s a single metropolitan area.

        You’re not making the connection between construction costs and $700K houses and $2000 apartments. Construction costs may be high but are they really that high? Did they double in ten years? In 2003 prices were much lower yet companies were still making a profit.

        “the demographic moving into Seattle is more and more single resident households.”

        Then we need housing options for the changing demographic. One-person households suggests single-family houses are becoming less relevant, so we should be willing to upzone at least some of the 70% of land devoted tot them,

        But there’s a larger issue: we should have a full government mobilization to build enough subsidized and market-rate units so that everyone can have stable housing at 30% of their income. We did it for WWII and vaccines. The city and state have limited resources so they can’t do it perfectly, but they could at least try. Using construction costs as a scapegoat is just sidestepping the issue.

        “insanely low interest rates”

        That’s one factor, but I don’t think it’s the primary one. The primary factor is that the population is increasing faster than housing units are.

        “Completed units are sitting vacant because it’s taking months to get appliances”

        Oh, well, they’ll come on the market eventually and that will relieve the supply crunch a little then.

        “nine months for us to get a new gas cooktop ”

        Sorry about that. I know another family in the same situation. They’re renovating their kitchen/dining room, and their appliances have been delayed for months.

        A side question for you: I saw a gas stove at Costco that has six burners and two ovens but only six knobs. All the knobs are for the burners, so how do you control the ovens? Has this become common? I looked to see if any are push-for-oven but they don’t seem to be.

  4. Mortgage rates just hit their highest level since 2020 and are sure to go higher (2.65% one year ago to 3.22% today, still historical lows). With the Fed set to end quantitative easing and sure to raise rates next year you will see even higher mortgage rates, plus existing adjustable-rate mortgages will begin to rise, as will interest rates on credit card balances. If housing prices decline look for defaults to rise as new purchasers walk away from the loan.

    Construction may be the primary cost of new housing as Bernie suggests, but it is the long-term cost of the loan to purchase the property that is in the end the biggest cost. This long-term cost only makes sense if property prices or rents go up, or at least don’t decline.

    The stock market is repricing based on these expectations, and for many stock gains serve as the down payment for a house. Biden is now suggesting the country learn to live long term with Covid, which could mean the number of houses for sale will begin to increase, and he has basically shifted his entire agenda to economic and job issues, like the supply chain and cost of energy before the 2022 midterms. This month’s jobs report suggests what many are expecting next year: a mild recession, with continuing high rates of inflation, especially in anything energy dependent (like food). Plus you will have the end of eviction moratoria across the board.

    You don’t have to be a genius to see there is a housing bubble, especially in SFH. As the Wall St. Journal noted, this is from investors taking advantage of very low mortgage rates and rising housing prices along with rising rental rates, Millennial couples having saved up for a SFH deciding to purchase during the pandemic, lots and lots of federal cash pumped into the system without many services to spend it on, Covid and a deurbanization, a belief housing prices and rents for a SFH won’t decline (which hits investors particularly hard), and fewer houses for sale as folks are worried about moving or about finding affordable new housing. Meanwhile housing construction — at least SFH’s — is at very high levels, but that is fueled by very low interest and mortgate rates.

    Will this create affordable housing in expensive cities like Seattle? No. Housing prices will decline which will probably lead investors to bail, but still at a profit. The rate of increase will decline. New construction will decline, especially on spec. As Bernie notes, when you factor in the basically fixed cost of new construction, and high costs of land — and rising interest rates — new construction in this region will never be “affordable”.

    The real question is whether the economic factors I list above will dampen the new construction of multi-family rental housing, which requires the investor to hold the loan unlike the sale of condos. I think it will, along with rising fixed income investment returns which are based on interest rates which compete with REIT’s, the unknow permanent change in housing due to Covid, and whether urban centers will ever return to pre-pandemic levels if as Biden suggests we are going to have to learn to live with Covid for a very long time, which basically means WFH. How can a major employer reopen offices knowing the next variant is around the corner.

    There is something worse than high housing costs, and many forget 2009: declining housing costs because of a steep economic downturn. Inflation in core sectors like energy and food that are not part of the phony CPI, rising interest rates which directly impact variable rate mortgages and credit card balances, a declining stock market, elimination of $120 billion/month in Fed stimulus, the end of trillions in federal stimulus, a resignation Covid will be here in one variant or another for years which could fundamentally change urban cores and who wants to live there (multi-family), and we could see some reductions in housing prices, especially high end multi-family in urban areas.

    Unfortunately, all these changes mean cities, counties and states will have less tax revenue to subsidize truly affordable housing while there are rising rates of evicted tenants and those needing housing without first/last/damage deposit, and urban cities who inherit these folks with less tax revenue to subsidize housing. You can upzone every parcel to 50 stories, but if developers and builders don’t see the profit over 30 years when they have to hold the loan for rental multi-family housing, or see too much risk and unknown, the new zoning remains inchoate, like it never existed.

    Increasing housing prices usually mean economic stability, low interest rates, and good economic times, which are not all bad.

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