Why is housing so much more expensive in Los Angeles than it is in Dallas? Higher demand? No so much. The reason is that building new housing in Dallas is easy, while building anything at all in California is a nightmare of absurd regulations. Virgina Postrel explores a study that shows the marginal cost, in land prices, of pushing innocent people around by force with land-use restrictions. (HT Dan Melson.)
Some of the higher price of L.A. real estate does reflect the intrinsic pleasure of living there, as I’m reminded every time I walk out my door into the perfect weather. Some of the price reflects the productivity advantages of being near others doing similar work (try selling a screenplay from Arlington, Texas). All of these benefits—and the negatives of traffic and smog—are reflected in the price of land.
But what exactly is that price? Consider two ways of computing the price of a quarter acre of land. You can compare the value of a house on a quarter acre with that of a similar house on a half acre. Or you can take the price of a house on a quarter acre and subtract the cost of the house itself—the price of construction. Either way, you get the value of an empty quarter acre. The two numbers should be roughly the same. But they aren’t. The second one is always bigger, because it includes not just the property but the right to build. Expanding your quarter-acre lot to a half acre doesn’t give you per- mission to add a second house.
In a 2003 article, Glaeser and Gyourko calculated the two different land values for 26 cities (using data from 1999). They found wide disparities. In Los Angeles, an extra quarter acre cost about $28,000—the pure price of land. But the cost of empty land isn’t the whole story, or even most of it. A quarter- acre lot minus the cost of the house came out to about $331,000—nearly 12 times as much as the extra quarter acre. The difference between the first and second prices, around $303,000, was what L.A. home buyers paid for local land-use controls in bureaucratic delays, density restrictions, fees, political contributions. That’s the cost of the right to build.
And that right costs much less in Dallas. There, adding an extra quarter acre ran about $2,300—raw land really is much cheaper—and a quarter acre minus the cost of construction was about $59,000. The right to build was nearly a quarter million dollars less than in L.A. Hence the huge difference in housing prices. Land is indeed more expensive in superstar cities. But getting permission to build is way, way more expensive. These cities, says Gyourko, “just control the heck out of land use.”
The unintended consequence of these land-use policies is that Americans are sorting themselves geographically by income and lifestyle—not across neighborhoods, as they used to, but across regions. People are more likely to live surrounded by others like themselves, creating a more-polarized cultural map. In the superstar cities, where opinion leaders congregate, the perception is growing that the country no longer has a place for middle-class life. Yet the same urban sophisticates who fret that you can’t live decently on less than $100,000 a year often argue vociferously that increasing density will degrade their quality of life. They may be right—but, like any other luxury good, that quality commands a high price.
Today is Blog Action Day, which is half about thumb-twiddling exercises of dubious utility and half about aggrandizing the über-state. The idea is to write about “the environment,” but the environment humanity lives in is one sort of slave-camp or another. We in America are blessed that we are not being slaughtered in the streets, like the Monks of Myanmar, but this does not in any way diminish the lilliputian knots in which we are bound. Our “environment” is government, the most decisively influential element in every human life. If you want to change something that matters, that’s the place to start.
Technorati Tags: blogging, real estate, real estate marketing
Apella says:
I agree.
One of the things that keep the third world the third world is the lack of education, repression and the repression of education (funny how they go hand in hand).
I chose to forego the environment topic today as well and decided to post the announcement of our partnership with a real estate educational provider. You are right about government and I think that the best way to change is with education.
As in this post people have to be educated to the wrongs of government or that which harms the public or an industry. Thank you for not making me alone in the blog world. Great Post!
October 15, 2007 — 7:35 pm
Minimum Wage says:
Up the coast in Portland, the opinion leaders are inflicting density on the rest of us, whether we want it or not. NO PARKING signs are being stolen in crowded suburban subdivisions as a way to “create” more parking spaces. Poverty is becoming highly concentrated on the far east side as the poor are displaced from gentrifying neighborhoods. I can’t imagine where the poor will live 20 years from now.
October 15, 2007 — 10:18 pm
William J Archambault Jr says:
In three words: Location, Location, Location!
For a deeper discussion we’d have to go back to 1973.
Bill
October 16, 2007 — 12:22 am
Houses for Rent in Dallas County says:
What a contrast between Dallas and Los Angeles in terms of land value! Great article – I was under the impression that it did have more to do with the high demand and premium location, but there’s so much more to it.
October 17, 2007 — 10:56 pm