High Rents and Land Use Regulation

photo by cincy Project

The Federal Reserve’s Devin Bunten has posted Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation. It is a technical paper about an important subject. It has implications for those who are concerned about the lack of affordable housing in high-growth areas. The abstract reads,

Highly productive U.S. cities are characterized by high housing prices, low housing stock growth, and restrictive land-use regulations (e.g., San Francisco). While new residents would benefit from housing stock growth in cities with highly productive firms, existing residents justify strict local land-use regulations on the grounds of congestion and other costs of further development. This paper assesses the welfare implications of these local regulations for income, congestion, and urban sprawl within a general-equilibrium model with endogenous regulation. In the model, households choose from locations that vary exogenously by productivity and endogenously according to local externalities of congestion and sharing. Existing residents address these externalities by voting for regulations that limit local housing density. In equilibrium, these regulations bind and house prices compensate for differences across locations. Relative to the planner’s optimum, the decentralized model generates spatial misallocation whereby high-productivity locations are settled at too-low densities. The model admits a straightforward calibration based on observed population density, expenditure shares on consumption and local services, and local incomes. Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation. Abolishing zoning regulations entirely would increase GDP by 6%, but lower welfare by 5.9% because of greater congestion.

The important sentence from the abstract is that “Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner’s allocation.” Those are significant effects when we are talking about  real people and real places. The introduction provides a bit more context for the study:

Neighborhoods in productive, high-rent regions have very strict controls on housing development and very limited new housing construction. Home to Silicon Valley, the San Francisco Bay Area is the most productive and most expensive metropolitan region in the country, and yet new housing construction has been very slow, especially in contrast to less-productive large cities like Houston, Texas. The evidence suggests that this slow-growth environment results from locally determined regulatory constraints. Existing residents justify these constraints by appealing to the costs of new development, including increased vehicle traffic and other types of congestion, and claim that they see few, if any, of the benefits from new development. However, the effects of local regulation extend beyond the local regulating authorities: regions with highly regulated municipalities experience less-elastic housing supply. (2, footnotes omitted)

The bottom line, as far as I am concerned, is that localities that are attempting to deal with their affordable housing problems have to directly address how they go about their zoning. If the zoning does not support housing construction, then no amount of affordable housing incentives will address the demand for housing in high growth places like NYC and San Francisco.

Dipping Into Home Equity

photo by Aitor Méndez

TheStreet.com quoted me in Americans Are Increasingly Dipping Into Home Equity. It opens,

Is there a flipside to rising home values across the nation?

Take California, where stronger home value figures “are giving many homeowners a reason to tap into their equity and spend money,” according to the California Credit Union League.

The CCUL states that approximately 5.2 million homes with mortgages across 11 different metropolitan statistical areas in the Golden State “had at least 20% equity as of June 2016,” citing data from RealtyTrac. Meanwhile, home equity loan originations rise by 15% over the same time period, to $2 billion. “Altogether, HELOCs and home equity loans (second-mortgages) outstanding increased 5% to more than $10 billion (up from a low of $9.2 billion in 2013 but down from $14.2 billion in 2008),” the CCUL reports.

The organization doesn’t see all that home equity lending and spending as a bad thing.

“The local surge in home-equity lending and cash-out refinancings reflects a strong national trend in homeowners increasingly remodeling their homes and enhancing their properties,” said Dwight Johnston, chief economist for the California Credit Union League.

Financial experts generally agree with that assessment, noting that American homeowners went years without making much-needed upgrades on their properties and are using home equity to spruce up their homes.

“Homeowners are cashing in on home equity again because they can,” says Crystal Stranger, founder and tax operations director at 1st Tax, in Wilmington, Del. Stranger says that for many years, home values have decreased or only increased very minor amounts, but now home values have finally increased to a significant enough level where there is equity enough to borrow. “This isn’t necessarily a bad thing though,” she says. “With the stagnant real estate market over the last decade, many homes built during the boom were poorly constructed and have deferred maintenance and upgrades that will need to be made before they could be re-sold. Using the equity in
a home to spruce up to get the maximum sale price is a smart investment.”

U.S. homeowners have apparently learned a harsh lesson from the Great Recession and the slow-growth years that followed, others say.

“Before the financial crisis, many used home equity as a piggy bank for such lifestyle expenditures,” says David Reiss, Professor of Law at Brooklyn Law School, in Brooklyn, N.Y. “Many who did came to regret it after house values plummeted.” Since the financial crisis, homeowners with home equity have been more cautious about spending it, Reiss adds, and lenders have been more conservative about lending on it. “Now, with the financial crisis and the foreclosure crisis receding into the past, both homeowners and lenders are letting up a little,” he says. “Credit is becoming more available and people are taking advantage of it.”

“Nonetheless, good financial advice is timeless, and that hard-earned home equity should be protected from casual expenditures,” Reiss notes. “Your future self will thank you for it, no doubt.”

Other financial industry insiders agree and warn homeowners who take out home equity loans that there is great risk attached to using the money in non-essential ways.