Eisenberg: Regulation and its Unintended Consequences

Guest Post by Eliot Eisenberg, Ph.D 

Looking around the United States there are cities like Boston, Los Angeles and Washington, DC that have very high house prices.  Yet there are equally successful cities like Austin, Dallas, Louisville and Oklahoma City that have much more affordable home prices.  Why the difference?  Of course the surf is better in L.A. than in Dallas, but it has always been better, and 40 years ago L.A. was not an expensive city. The reason for this disparity is regulation.

Simply put, each piece of legislation that becomes law, and each regulation promulgated by the bureaucracy, regardless of how well-meaning, increases home prices.  Sure, having a 30-foot setback looks nicer than a 20-foot setback, but it makes lots more expensive.  And while requiring a brick façade may add gravitas to a house, it too raises its price, and the list goes on. Worse, as housing prices are artificially pushed up, distortions are introduced that have negative unintended economic consequences.   

Imagine yourself new to town and looking to buy a house.  Happily, you quickly find your dream house, but it costs $205,000 and all you can afford is $200,000.  Turns out the house you love was built in 2009, the first year houses were required to have cement driveways and picket fences, which raised the price of those houses and all subsequent ones by, you guessed it, $5,000.  The solution, look for a house built before 2009.  But just like you, everyone else in your situation is doing the same thing.  As that happens, the price of homes built prior to 2009 rises.  After all, demand for them is suddenly up, way up.  And presto, the house that used to sell for $200,000 now costs $203,000.                  

An alternative is to look for a house in a neighboring town where asphalt is still allowed and picket fences are optional.  And as luck would have it, you find a beautiful $200,000 house and move in. The only problem; your commute to work is now twice as long as it would have been if you had been able to buy that original house.  And that increases CO2 emissions, causes needless wear and tear to roads and infrastructure, requires you to buy a new car more often, and hire a sitter for your kids, as you are all too often caught in traffic driving home.     

But wait, it gets worse; suppose your uncle owns a huge parcel of land and planned to build entry-level houses on it for $200,000. He can’t now because of the cement driveway and picket fence rules which force the price up to $205,000.  The problem is folks like you can’t afford those houses, so he goes upscale and builds $225,000 houses, and in that way does well, but contributes to the affordability problem.

To review, forcing anyone to do something they otherwise would not have done makes whatever it is more expensive.  In this case, it raises the price of new entry-level houses.  In addition, it raises the price of houses built prior to the law, which in turn pushes home construction into neighboring areas which adds to sprawl and boosts CO2 emissions.  

The moral of this sad tale, think twice before reflexively solving problems through regulation and legislation.  The consequences can be quite far-reaching and unintended.          

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net.  His daily 70 word economics and policy blog can be seen at www.econ70.com.

Comments

[Gibs]

Very nice and interesting blog, thanks for this post..it's been great reading this.

Caverta