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Limits on homes push up prices

- The Washington Times - Monday, December 12, 2005

Escalating prices that have made houses unaffordable for many people in Washington are mostly the result of homeowners using political and regulatory means to block construction of new housing, economic studies show.

Washington home prices continued to soar last month despite a slowdown in sales, with gains of 21.5 percent and 18 percent over November 2004 in the District and Montgomery County, respectively, the Greater Capital Area Association of Realtors reported this week.

It now costs $618,692 to buy an average-priced home in the District, and $560,327 in Montgomery County. Prices in Northern Virginia also have maintained breathtaking heights, among the highest in the country, despite some slackening of sales.

The remarkable run of record housing sales and prices since 1998 has become a major puzzle and topic among economists. The high prices have put homeownership out of reach for many young people and low-income households hoping to break into the market.

Economists increasingly are concluding that the shortage of affordable housing in Washington and other major U.S. cities on the East and West coasts is a result more of man-made restrictions on development than high construction costs or other market forces.

"It simply takes too long and is too expensive to move through the development process," said Mark Vitner, senior economist at Wachovia Securities, pointing at "smart growth, slow growth and no growth" movements in many of the same areas where the population and demand for housing are growing the fastest.

What many economists have been proclaiming as a "bubble" in Washington and other high-cost areas can be mostly explained by the restrictions on development, combined with a rush to homeownership by renters taking advantage of low interest rates, he said.

The restrictions have mounted as homeowners have grown more powerful and more willing to use their power to stop or greatly restrict development in their neighborhoods through the political and regulatory processes and the courts, according to a study published recently by the National Bureau of Economic Research.

Since 1970, Washington and other coastal cities where housing prices have exploded have seen "a significant increase in the ability of residents to block new projects," transforming vast swaths of the cities into "homeowners' cooperatives" that are no longer open to growth, said Edward L. Glaeser, Harvard economist and one the study's authors.

The study encompassed trends in Washington and 315 other U.S. cities since the 1950s. It found that the explosion in house prices ironically has occurred in areas where the price of housing already was high, making homeownership increasingly unaffordable while the cost of housing remained reasonable and affordable throughout the vast interior of the country.

"Changes in housing-supply regulations may be the most important transformation that has happened in the American housing market since the development of the automobile," Mr. Glaeser said.

Before 1970, home prices in Washington and the rest of the country mostly reflected the cost of acquiring land and building on it. That was also the era when most existing houses were built. Now, construction costs represent half or less of a new or existing home's price in high-cost cities, the study found.

The increasing power of homeowners to block construction, forcing buyers to bid up the prices on the few homes available, is only partly a result of steady growth in the portion of the population that owns homes, which now stands at a record high near 70 percent.

It also is a result of the increasing willingness of homeowners to use that status through political activism and the courts to maintain low density, green spaces and other amenities in their neighborhoods, at the expense of newcomers, the study found.

As the housing boom has rolled along in recent years, nearly every jurisdiction in the Washington area has witnessed movements to further restrict development.

Montgomery County imposed a temporary moratorium on building this year after a controversy over a developer's violation of height restrictions in Clarksburg.

The county already had banned most development in one-third of the jurisdiction set aside as an agricultural reserve. Under pressure from residents' groups, it is considering further restrictions on building in the reserve by churches and nonprofit institutions.

Loudoun County, one of the fastest-growing jurisdictions in the nation, put severe restrictions on the density of housing several years ago, but some of those restrictions were overturned later by a more pro-development Board of Supervisors.

Prices are booming in the District, where federal ownership of large tracts has limited the land available for development and height restrictions imposed by Congress have been in effect for more than a century.

Prince George's County, with much land available for development, only recently lifted a restriction against building in areas where police and fire-safety infrastructure is not able to accommodate new residents.

Even Fairfax County, which gained fame in earlier decades for free-wheeling development policies that led to rapid job growth and construction, is contending with homeowners against plans to increase the density of housing near the Vienna Metro station.

Neighborhood activists often use tactics such as demonstrations, sit-ins and write-in campaigns, while vilifying developers who rely on lobbying and traditional money politics to win approval of their building plans.

The Harvard economists said developers and renters -- the consumer group that stands to gain the most from increased housing construction -- rarely are as effective at organizing as homeowner groups, which often align themselves with and use the tactics of environmental groups.

"Rising education levels and learning from other political battles -- i.e., the civil rights movement -- may have made community members more savvy about using the courts and the press," said Mr. Glaeser, while the high incomes of homeowners make them more demanding of the amenities they seek to protect.

The resulting shortage of housing causes an escalation of prices as new residents and renters seeking to become homeowners bid up prices to purchase the few homes available. That further serves the interests of the homeowners by pushing up the value of their houses.

The result is to turn the housing market on its head, the study found. High home prices should act as an inducement for developers to build more houses, increasing supply and lowering prices. But construction rates in Washington and other high-priced cities are substantially lower than those in the interior, less-pricey areas of the country.