C. Tsuriel Somerville

Land use regulation and new construction

Abstract This paper describes the relationship between land use regulation and residential construction. We characterize regulations as either adding explicit costs, uncertainty, or delays to the development process. The theoretical framework suggests that the effects on new construction vary by the type of regulation. Using quarterly data from a panel of 44 U.S. metropolitan areas between 1985 and 1996, we find that land use regulation lowers the level of the steady-state of new construction. Our estimates suggest that metropolitan areas with more extensive regulation can have up to 45 percent fewer starts and price elasticities that are more than 20 percent lower than those in less-regulated markets. One implication of regulations that lengthen the development process is that the short- and long-run effects of demand shocks will vary relative to conditions in markets without such delays. We find support for this observation in the data. As well, we find other differences by type of regulation: development or impact fees have relatively little impact on new construction, but regulations that lengthen the development process or otherwise constrain new development have larger and more significant effects.

Irreversible investment, real options, and competition: Evidence from real estate development

We examine the extent to which uncertainty delays investment, and the effect of competition on this relationship, using a sample of 1214 condominium developments in Vancouver, Canada built from 1979-1998. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the probability of investment by 13 percent, equivalent to a 9 percent decline in real prices. Increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development. These results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion.

The Industrial Organization of Housing Supply: Market Activity, Land Supply and the Size of Homebuilder Firms

Existing studies of housing markets assume that homebuilding is a homogeneous, perfectly competitive industry. This paper uses MSA-level data on the average size of homebuilder establishments and homebuilder market concentration to test the appropriateness of this paradigm. The data reveal a wide and systematic variation across metropolitan-area housing markets in both the average size of builders and the market share for the largest builders in an MSA. These results are more consistent with treating homebuilders as monopolistically competitive suppliers of a differentiated product than with treating them as perfectly competitive homogeneous firms. Builders are larger in more active housing markets and where there is a greater supply of readily developed land suitable for large developments. Builder size and concentration are sensitive to the type of regulating jurisdiction imposing land-use regulation. Both are lower when land-use regulations are imposed by smaller jurisdictions, and this is particularly true when the smaller jurisdictions impose more intense regulation. Copyright American Real Estate and Urban Economics Association.

Permits, Starts, and Completions: Structural Relationships Versus Real Options

Real estate development from raw land to completed structures is a multistage process. Given the current view of development as the exercise of a real option, the question arises whether development should be modeled as a compound option. This paper tests the validity of the compound option characterization by determining whether builders start units for which they have permits and then complete units started consistent with the predictions of the real options model. To do so, I first identify a reduced form relationship between permits and starts and then between starts and completions. The parameters of this relationship indicate how well permits proxy for starts and starts for completions. Then, I determine whether controlling for this structural relationship, new information, and uncertainty in returns affect permit exercise and completion rates, as in the exercise of real options. I find that current and previous quarter permits forecast current single-family starts, while multifamily starts require more quarterly lags of permits. More than one and two years worth of lagged starts numbers are needed to estimate current quarter completions for single- and multifamilys buildings, respectively. The principal result is that once building permits have been obtained, the development process proceeds to completion. While there is no evidence that completion is the exercise of an option embedded in a start, some aspects of permits are consistent with builders treating them as an option for starts. However, even if they do, given permits obtained, it takes large changes in market conditions to affect small changes in starts. Copyright Blackwell Publishers Ltd 2001.

Government regulation and changes in the affordable housing stock

1. INTRODUCTION In terms of housing issues, the primary public policy focus of economists has been the affordability of homes, mortgage availability, land-use regulation, and rent control. Studies of land-use regulation focus on the effects of regulation on the price of owner-occupied housing. Work on low-income housing has concerned itself more with issues of measurement and the debate over supply-side versus demand-side subsidies. In this paper, we look at the relationship between these two issues to examine how government regulation affects the dynamics of the low-income housing stock. We find that, consistent with theoretical models of housing, restrictions on the supply of new units lower the supply of affordable units. This occurs because increases in the demand for higher quality units raise the returns to maintenance, repairs, and renovations of lower quality units, as landlords have a stronger incentive to upgrade them to a higher quality, higher return housing submarket. This result is disturbing because it highlights how policies targeted toward new, higher income owner-occupied suburban housing can have unintended negative consequences for lower income renters. Our research differs from most studies of affordable housing in that we are not concerned with identifying the size of the affordable stock or matching it to the number of low-income households. The gap between the housing needs of low-income households and the stock of units deemed affordable has been demonstrated in a considerable amount of other research. (1) Here, we build on the Somerville and Holmes (2001) study of the effects of the unit, neighborhood, and market characteristics on the probability that a unit will stay in the stock of rental units affordable to low-income households; we do so by looking at how government regulations affect this probability. Our approach is to look at individual units in successive waves of the American Housing Survey (AHS) metropolitan area sample. In doing so, we follow Nelson and Vandenbroucke (1996) and Somerville and Holmes (2001), who use the panel nature of the AHS metropolitan area survey data to chart the movements of individual units in and out of the low-income housing stock. The remainder of the paper is structured as follows. First, we lay out the theoretical framework for our analysis. We follow with a discussion of our data. Finally, we present our empirical results, both for measures of constraints on the supply of new residential units and for the pervasiveness of rent control in an area. 2. THEORETICAL FRAMEWORK We model movements of units in and out of the stock of affordable housing as the filtering down of units through successive housing submarkets. The filtering model describes the housing market as a series of submarkets differentiated by unit quality. Rents fall as quality declines, so units that are lower on the quality ladder have lower rents than units of the same size in the same location at the top. Without expenditures on maintenance, renovation, and repairs, units decline in quality as they depreciate physically and technologically. As this occurs, the units move down the quality ladder. The cost to maintain a given level of quality is assumed to increase with unit age. Extra expenditures on maintenance and renovation can move units back up the ladder. Relative rents in the different submarkets vary with the distribution of income across households (demand) and the supply of units in that submarket. When quality is least expensive to provide at the time units are built, new units will be of high quality. The supply of the most affordable, lowest quality units will be those units built in earlier periods that have been allowed to depreciate and more down--to filter down--the quality ladder. Landlords will choose a level of maintenance to maximize profits, and that choice determines into which housing submarket their unit will fall. …

Economic and Social Status in Household Decision Making: Evidence from Extended Family Mobility

Models of the allocation of household resources use as a decision rule either the maximization of a household utility function (Becker, 1984) or the solution to a Nash-bargaining game (McElroy and Horney, 1981). To date the mobility literature has exclusively utilized the former approach to analyze the households decision to change location. This is despite the strong empirical evidence that allocations in other areas are more consistent with the bargaining model. In this paper we use micro-data from Taipei, Taiwan to determine which approach is most appropriate for studying housing mobility decisions. We compare the mobility decisions of nuclear and different types of extended family households to test whether the social and economic roles of different generations affect the household decision process, as is consistent with the bargaining approach. In doing so, we analyze household mobility with a richer description of household structure than is found in the current literature, which implicitly treats households as either a nuclear family or some smaller unit. Our results support the bargaining model of household decision making. Conditional probabilities differ between nuclear and extended families, when a member of the eldest generation in an extended household is the household head, and when a member of the eldest generation contributes to household earnings.