Housing crisis culprit staring us in the face

by Jensen Ahokovi, Grassroot Institute, September 8, 2022

The evidence continues to mount that land-use, zoning and other homebuilding-related restrictions are the main force behind Hawaii’s ever-increasing housing prices.

Nevertheless, many people in Hawaii have for years been blaming the state’s housing crisis on “outsiders” — people from elsewhere in the U.S. or from foreign countries.

A recent policy brief for the Grassroot Institute of Hawaii, “The ‘outsider’ theory of Hawaii’s housing crisis,” shows this belief is far from reality, based on an analysis of data from all 50 states, the District of Columbia and more than 2,300 counties.[1]

Using home sales data from the Hawaii Bureau of Conveyances and a novel data set of nationwide tax-assessment records provided by the AEI Housing Center in Washington, D.C., the report found no meaningful pattern between “outside” buyers and median home prices — in Hawaii or anywhere else.

However, the report did find a strong correlation between high home prices and government land-use, zoning and other homebuilding-related regulations.

In the study, there is a scatter plot of all 50 states showing a statistically significant linear and positive correlation between nationwide median home prices and land-use restrictiveness.[2] The graph is based on research provided by the Cato Institute’s land-use freedom index, which in 2021 ranked Hawaii at No. 44, or among the most burdensome.[3]

The Cato index is an extension of the highly respected Wharton Residential Land Use Regulatory Index, or simply the Wharton Index, developed by Joseph Gyourko and other economists at the University of Pennsylvania.[4]

The methodological tool of the Wharton Index is to survey planning officials in counties nationwide about issues such as public participation in the regulatory process, the range of rules used to regulate the housing market, and the outcomes of restrictions  “such as changes in the costs of lot development and the number of re-zoning permits applied for by developers.”[5] In 2018, the survey covered 2,400 counties, but excluded Hawaii.[6]

Earlier this year, researchers with the University of Hawaii Economic Research Organization noted that “home prices in Hawaii are among the highest in the nation”[7] and decided to test the theory that government regulations have something to do with it. So they applied the Wharton Index to Hawaii’s four counties and found that “average regulatory burdens in Hawaii are significantly higher than those found in any other state.”[8]

Other studies that have made similar connections include:

>> In 2021, Jaehee Song of Yale University found that minimum-lot restrictions, which determine the minimum lot size allowed for construction, “play significant roles in increasing housing prices and limiting housing supply.”[9]

>> In 2019, land-use policy expert Randal O’Toole found “a strong negative correlation between growth-management planning and housing affordability.” He noted that in 2018, “18 of the 20 least-affordable urbanized areas out of 437 nationwide, with value-to-income ratios above 5.8, were in California, Hawaii and Oregon. The other two were Boulder, Colorado, and Flagstaff, Arizona. It’s fair to say that virtually all of the 45 urban areas with value-to-in- come ratios above 5.0 practice some form of growth management.”[10]

>> In 2018, economists Edward Glaeser of Harvard University and Gyourko of the University of Pennsylvania wrote, “The general conclusion of existing research is that local land-use regulation reduces the elasticity of housing supply, and that this results in a smaller stock of housing, higher house prices, greater volatility of house prices and less volatility of new construction.”[11]

Glaeser and Gyourko also observed that “empirical investigations of the local costs and benefits of restricting [homebuilding] generally conclude that the negative externalities are not nearly large enough to justify the costs [housing] regulation.”[12]

>> In 2017, Vanessa Brown Calder of the Cato Institute found that “in general, the states that have increased the amount of rules and restrictions on land–use the most have higher housing prices.”[13]

>> Also in 2017, Gyourko and Federal Reserve economist Raven Molloy conducted a review of previous housing research and found “the vast majority” concluded that “locations with more regulation have higher house prices and less construction.”[14]

>> In 2009, four economists wrote in the U.S. Department of Housing and Urban Development’s academic journal Cityscape that from 1988 to 2005, inclusionary zoning policies in California had “measurable effects” on housing in the jurisdictions that adopted them, specifically: “The price of single-family houses increases and the size of single-family houses decreases.”[15]

>> In 2009, a group of researchers found that in six U.S. metropolitan areas, high-density zoning “as practiced by suburban governments … limits the construction of multifamily housing below market-determined levels.”[16]

>> In 2002, Gyourko and Glaeser looked at high-cost areas in the U.S. where the price of homes exceeded the costs of construction and found that, “The bulk of the evidence … suggests that zoning and other land-use controls are more responsible for high prices where we see them, [and] measures of zoning strictness are highly correlated with high prices.”[17]

>> In 1996, University of Wisconsin-Madison economist Stephen Malpezzi looked at 56 metropolitan areas and discovered that housing regulations raised both rent and home values while reducing homeownership.[18]

>> Just two months ago, in July, economists Kevin Corinth and Hugo Dante provided new estimates of housing shortages for each state and found that Hawaii and the District of Columbia had the highest housing shortages in the nation.[19]

Published by the Institute of Labor Economics, this study is especially noteworthy because Corinth and Dante did not use the typical definition of “housing shortage.”

Most people define a housing shortage as the difference between new housing units and the expected number of new units, given historical trends. Corinth and Dante, however, said a housing shortage is determined by taking the difference between the current housing stock and the number of homes that would exist absent housing regulations.

Using this approach, they found a positive correlation between housing shortages and housing regulations.

They concluded that “restrictions on housing supply have a negative impact on the economy and the well-being of American families by driving up the cost of homes in the United States.”

Their findings, they said, “show that the scope of the problem is far larger and more widespread than policymakers currently recognize” and “proposed solutions are likely to fall short of solving the problem.”

They added that, “In order to address these challenges, policymakers require an accurate understanding of the scope of the housing-supply problem.”[20]

As the Grassroot Institute’s outsider report states: “Land-use regulations are not the only driver of home prices across the country, but the data suggests that they are, at least, a substantially better predictor of home prices [than out-of-state buyers].”[21]

If local lawmakers want to make a dent in Hawaii’s housing crisis, they would do well to reform or even repeal state and county restrictions that unreasonably block or hinder new homebuilding.
____________

[1] Jensen Ahokovi, “The ‘outsider’ theory of Hawaii’s housing crisis,” Grassroot Institute of Hawaii, August 2022.

[2] Ibid, p. 16.

[3] William Ruger and Jason Sorens, “Hawaii — #44 Land,” in “Freedom in the 50 States: An Index of Personal and Economic Freedom,” Cato Institute, 2021.

[4] Joseph Gyourko, Albert Saiz and Anita A. Summers, “A New Measure of the Local Regulatory Environment for Housing Markets: The Wharton Residential Land Use Regulatory Index,” The Wharton School, University of Pennsylvania, Oct. 22, 2006.

[5] Rachel Inafuku, Justin Tyndall and Carl Bonham, “Measuring the Burden of Housing Regulation in Hawaii,” University of Hawaii Economic Research Organization, April 14, 2022, p. 3.

[6] Joseph Gyourko, Jonathan Hartley and Jacob Krimmel, “The Local Residential Land Use Regulatory Environment Across U.S. Housing Markets: Evidence from a New Wharton Index,” National Bureau of Economic Research, December 2019.

[7] “Ibid,” p. 1.

[8] “Ibid,” p. 4.

[9] Jaehee Song, “The Effects of Residential Zoning in U.S. Housing Markets,” Job Market Paper, Yale University, Nov. 28, 2021.

[10] Randal O’Toole, “Build or build out? How to make housing more affordable,” Grassroot Institute of Hawaii, February 2019, pp. 14-15.

[11] Edward Glaeser and Joseph Gyourko, “The Economic Implications of Housing Supply,” Journal of Economic Perspectives, Winter 2018, p. 8.

[12] Ibid, p. 27.

[13] Vanessa Brown Calder, “Zoning, Land-Use Planning, and Housing Affordability,” Social Science Research Network, Oct. 18, 2017.

[14] Joseph Gyourko and Raven Molloy, “Regulation and Housing Supply,” National Bureau of Economic Research, October 2014.

[15] Antonio Bento, et al., “Housing Market Effects of Inclusionary Zoning,” Cityscape, U.S. Department of Housing and Urban Development, 2009, p. 7.

[16] Arnab Chakraborty, et al., “The Effects of High-density Zoning on Multifamily Housing Construction in the Suburbs of Six US Metropolitan Areas,” Urban Studies, February 2010, p. 438.

[17] Edward Glaeser and Joseph Gyourko, “The Impact of Zoning on Housing Affordability,” National Bureau of Economic Research, March 2002, p. 21.

[18] Stephen Malpezzi, “Housing Prices, Externalities, and Regulation in U.S. Metropolitan Areas,” Journal of Housing Research, Vol. 7, Iss. 2, 1996, p. 236.

[19] Kevin Corinth and Hugo Dante, “The Understated ‘Housing Shortage’ in the United States,” Institute of Labor Economics, July 2022, p. 10.

[20] Ibid, p. 14.

[21] Ahokovi, “The ‘outsider’ theory of Hawaii’s housing crisis,” p. 16.