According to an article published today in the Seattle Times, University of Washington professor Theo Eicher found that the median price of Seattle real estate, which rose over $200,000 from 1989 to 2006, was likely a result of regulations imposed by the city.
In Eicher’s analysis of 250 U.S. cities, Seattle is:
• First in terms of the impact of state involvement in land issues.
• In the top 3 percent for approval delays for new construction.
• In the top 10 percent for local political pressure influencing land use.
In addition, a study performed by Wharton showed that cities that have high median incomes, high home prices and a large percentage of college-educated workers—such as Seattle—tend to have the most land-use regulations. Other cities with a high level of regulation and high real estate prices include San Francisco and Boston. In contrast, developers in cities such as Houston and Atlanta,face little regulation and real estate prices are accordingly lower.
The Seattle Times article also quotes Sam Anderson, who is the executive officer of the Master Builders Association of King & Snohomish Counties. According to Anderson, the various fees and requirements imposed by these regulations can exceed 30 percent of the total building project budget in Seattle.
This news probably makes sense to most investors, those who don’t pay attention to city politics should start doing so. If a city starts down the path of increased regulation, investors might want to consider jumping on board. As long as the other fundamentals of the city look good, increased regulation should only lead to higher housing appreciation rates. The harder and more costly it is to build new construction in a city, the more value there will be to the existing housing stock.
In the case of Seattle, these regulations were imposed on all new construction. Developers have had a difficult time not only getting single-family homes up, but also multi-family housing, which has resulted in a sharp increase in rental rates. Since new multi-family housing can’t go up fast enough to meet demand, the supply of rental housing is being squeezed. This is bad news for tenants, but great news for investors.
Since multi-family housing is less desirable to homeowners than more single-family homes, zoning rules usually make it (a lot) harder/expensive to build multi-family projects.
Often, homeowners will come out of the woodwork to lobby against approval of proposed multi-family development. In my experience, the homeowners lobby, the local government rejects the proposal, the developer sues, the lawsuit drags on for years, the parties eventually settle out-of-court, the developer recovers some of his sunk costs, and goes away.
The homeowners are happy and consider their tax dollars an excellent investment in keeping multi-family development at bay.
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