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Growth often is not the sole culprit when affordable housing disappears

By Eric Peters
web posted September 9, 2002

Quantity and quality determine the cost (and ultimately, therefore, the availability) of everything from candy bars to computers. So why is it surprising that the same factors affect the price - and therefore availability - of housing? And, just as wage and price controls never made consumer goods either more affordable or more abundant, why would the imposition of marketplace-distorting controls - such as the "smart growth" polices touted in some quarters - make for better or more affordable housing?

Such policies don't work - and arguably have the opposite effect of that intended. 1 While real estate and housing prices naturally tend to move upward in high-growth areas that are perceived as desirable places to live, it is also true that legislating scarcity via "slow growth/smart growth" policies that forbid new development - or which restrict new housing to larger single-family-type homes - make matters much worse than they would otherwise have been.

This has been the result of "slow growth/smart growth" policies in fast-developing areas such as Northern Virginia's Fairfax and Loudoun counties. In Loudoun County, the problem has been more extreme due to the unprecedented growth of the past decade; its population has roughly doubled since 1990, and the average family income is now almost in the six-figure range. 2 "Slow growth/smart growth" policies hurriedly passed by local politicians to deal with perceived "sprawl" and burgeoning traffic have merely driven up the cost of existing housing - modestly priced older homes that four or five years ago were worth $150,000 now routinely sell for twice that 3 - and put a premium on the land remaining. New construction tends to favor $300,000 and up "McMansions" - with even townhouses now slipping beyond the $200,000 range. 4

According to government statistics, the average new single-family home in Fairfax County had a median market value (as of 2000) of $285,577. 5 Given annual appreciation in the 10 to 30 percent range, the median value circa 2002 is now well over $300,000. 6

Pre-existing homes in Fairfax and Loudoun often cost significantly more - because they were typically built on larger one-half acre or bigger lots, at a time when the county was still fairly rural and land much cheaper. Today, unimproved land zoned for residential development in Fairfax and Loudoun counties can sell for between $75,000 to $120,000 or more, depending upon the location. 7 It has become nearly impossible to find a serviceable single family home in Fairfax or Loudoun county for much less than $220,000. 8

In both counties, rentals are often just as expensive, or nearly so - if the measure is the monthly payment. According to county data, the average rental unit in Fairfax carries a monthly tab of $1,129; 9 Loudoun mirrors this - with $900 and up rents becoming the norm. 10

High average incomes - $95,000 in Fairfax, with 24.3 to 28 percent earning between $100,00 and $149,000 11 - make it possible for most residents to afford the ever-increasing cost of housing. Modesty is out; nine-foot ceilings and two-story foyers are in. As Gopal Ahuwalia, research director of the National Association of Homebuilders puts it: "People want more and more of everything" - and builders must satisfy that demand. It's not realistic to expect any developer to under-price new dwellings, or skimp on materials and features.

However, the downside is that some people - most notably recent arrivals from foreign countries doing service-industry work - often have a tough time finding a place to live. To manage, multiple families, or several individuals, are sharing homes designed for single families. They're also, in the worst cases, looking toward the government to provide relief.

The new homes being built in America's suburban areas are typically larger than pre-existing older homes and have more features. In the 1950s, a 1,500 square foot home - without central air conditioning or other conveniences that modern Americans take for granted - was considered quite adequate; today, a 1,500 square-foot home is looked upon as "small." The presence of such new development does tend to drive up the cost of surrounding real estate - often to the point of making it uneconomic for developers to build new housing in the immediate area that isn't at least comparable in type, quality and square footage.

However, absent restrictions on the use of land beyond the immediate perimeter of the more expensive new homes, it is usually still economically viable to build smaller, more affordable homes - such as townhouse developments or condominiums.

But when zoning and restrictive land-use laws effectively forbid anything but large homes with three car garages on sizeable lots, it's easy to see why there is an increasing dearth of more modestly priced housing in the same geographic area. 12

Builders and developers face the same pressures as other businessmen: They must provide what the market wants - and at market prices. Erecting 1,500 square foot, $75,000 homes in an area that increasingly demands 3,000 square foot, $350,000 homes will quickly lead to bankruptcy court. No builder in his right mind is going to erect "affordable" $120,000 townhouses on one-quarter acre plots that are worth almost as much by themselves.

The tag-team of forces - ever-rising expectations about the type and quality of new housing and ill-conceived, restrictive land use policies - ultimately determine the cost of both real estate and rental property. One is natural and self-correcting; the other a pernicious, artificial distortion of the housing marketplace that leads to less affordable housing - not more.

Is there a solution? On the one hand, pricing housing below market values via subsidies or assistance programs will never be anything more than a stop-gap that will almost of necessity lead to neglect and perhaps even "suburban slums," as landlords and tenants lose their property stake, and thus their motivation, to maintain and improve these under-valued properties. Neither is it reasonable to imagine that more affordable housing will be created by injecting artificial scarcity into the real estate market via restrictive land-use policies that effectively preclude all but the most expensive "McMansions" from being built.

More government intervention, in a nutshell, is not the solution. If past experience is any guide, the value of housing cannot outstrip the capacity of most potential owners to pay for it. That means, left alone to correct itself naturally, the housing market in fast-growing areas will in time return to a more natural equilibrium between cost and ability to pay as things settle out.

The government safety net can be configured to help those who slip through the cracks - but forcible interference with natural market mechanisms via "smart growth/slow growth" policies won't help the majority of those who would be able to make it, given time, without government interference.

Footnotes:

1 Peter Whoriskey, "Prosperity Feeds Housing Crunch," Washington Post, March 17, 2002.

2 "1999 Survey of Loudon Residents: Executive Summary," available at http://www.co.loudoun.va.us/pio/docs/survey_/1999surveyoflou/office2k/office 2k.htm on August 26, 2002.

3 "1999 Survey of Loudon Residents: Executive Summary" and "2001 Rental Housing Complex Census Analysis," available at http://www.co.fairfax.va.us/comm/demogrph/rentalhs.htm on August 26, 2002.

4 "International Real Estate Digest," available at http://www.ired.com/usa/va/; "Summary Facts: Loudon County, Virginia," available at http://www.co.loudoun.va.us/business/PDF%20files%20-%20miscellaneous/summary factsApril2002.pdf; "Greater Washington DC Web Directory: Home Price Reports," available at http://www.onegenesis.com/Real_Estate/Home_Price_Reports/ and "Growth Trends to 2025: Cooperative Forecasting in the Washington Region," Washington Metropolitan Council of Governments, Washington, DC, available at http://www.mwcog.org/hspps/growth2025.html (all available on August 26, 2002).

5 "2001 Rental Housing Complex Census Analysis."

6 "1999 Survey of Loudon Residents: Executive Summary" and "2001 Rental Housing Complex Census Analysis."

7 "2001 Rental Housing Complex Census Analysis."

8 "International Real Estate Digest," "Summary Facts: Loudon County, Virginia," "Greater Washington DC Web Directory: Home Price Reports." and "Growth Trends to 2025: Cooperative Forecasting in the Washington Region."

9 "2001 Rental Housing Complex Census Analysis."

10 "1999 Survey of Loudon Residents: Executive Summary."

11 Ibid.

12 Whoriskey.

Eric Peters is a Senior Fellow with The National Center for Public Policy Research and an editorial writer with The Washington Times. Published with the kind permission of The National Center for Public Policy Research.

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