41regulatorycosts.pdf

Michael

Luger

isa professorat the

Department

_ofCity

and

RegionalPlanning

and

chairman ofthe CurriculuminPublic Policy Analysisatthe

UniversityofNorth CarolinaatChapel

Hill

Kenneth

M. Temkin

is currentlya research associateat the

Urban

Institutein

Washington,

D.C He

receivedhisPh.D. in

City

and

Regional Planning

from

the

UniversityofNorth CarolinaatChapel Hillin 1997.

Editors'Note: This

paper

was

originally preparedfor

presentationatthe

American

RealEstate

and Urban Economics

Association

Conferencein

May

1998.

Who

Pays

in

the

End?

Residential

Developers'

'Rule

of

Thumb'

and

the

Incidence

of

Regulatory

Costs

Michael

I,

Luger

and

Kenneth

M. Temkin

Sincethe turn

of

the century,

governments

have

placedrestrictions

on

the location

and

characteristics

of

new

buildings,the

primary

reason beingthe

rec-ognition that

new

construction created negative side-effects for surrounding

residents.'

Consequently,

itisdifficultfor

most

housing

analysts to

advocate

eliminatingall

government

regulationsrelating to

housing

production.

How-ever, there is

disagreement

among

housing

policyobserversabout

what

level

of

regulationsis socially desirable.

The

key

task

of

researchers isto establish the costs

of

regulationsothatthe benefits

of

these regulations,

which

accrue

both

tothe

home

buyer

and

residents

of

the larger

neighborhood, can

be

com-pared

tothe costs incurred

by

housing consumers.

Therefore,proper

measure-ment

of

regulationcostsis

an

essential

element

of any

policy debate surround-ing regulatory

reform

of

the

housing development

process.

Many

studies

have

attemptedtoquantifythe effect

of

government

regula-tions

on

home

prices.

A

large

number

of

these studies identifieda positive

and

significantrelationship

between

home

pricesinagivengeographicarea

and

the

presence

of

regulations,

such

aslarge-lotzoning requirements,

growth

controls

and

subdivision standards(foranexcellent

review of

thislarge

body

of

litera-ture see Fischel 1990).

Moreover,

some

housing

market

analysts argue that

home

ownership

has

moved

beyond

thereach

of

many

Amencan

families be-cause

of

the costs associatedwith

complying with uimecessary

government

regulations.^

While

providing

some

evidence

of

the effect

of government

regu-lations,therehas

been

littleresearchaboutthedecision

process used

by

devel-opers

when

faced

with

government

regulations. Therefore, previous studies

have concluded

that regulatory costs

have one of

two

effects.

Some

studies

show

costs arepassed

forward

on

adollar-for-dollarbasis to

consumers

inthe

form

of

higherprices.Alternatively,

some

studies

show

government

regulations are

passed

back

to

landowners

in the

form of lower

values for developable

land.'

Inthis article,

we

arguethattheratio

of

the effectsof regulations

on

home

pricestothe costs

borne

by

developers isgreaterthan one.

Many

developers

work

under

a"rule-of-thumb"that

home

prices should

be

between

two

tofour times the price paid for land. Consequentiy,

government

regulations that

MICHAEL LUGER

and

KENNETH

TEMKIN

resultin relativelysmall increases inlandcosts can resultin large increases in the asking price for

new

home. For

example, a regulation that results in

an

additional

$10,000

in costs to the developer

would

acmally

be

passed

on

to the

buyer

as a

$20,000

to

$40,000

increase in final costs. Obviously, market

conditions

wiU

affectthe ultimate pricepaid

by

con-sumers; however,toacertainextent,

new home

prices will reflect

some

multipleofregulatory costs associ-ated withthe

development

process. Ifso, regulators

must

be

awarethatregulationswithseemingly

modest

effects

on

land prices

may

result in relatively high

increases to

newly

constructed

home

prices.

The

remainderofthisarticleisorganizedintofour

sections.

The

nextsectionpresentsaschematic

model

ofadevelopea-'sdecision calculusalong witha discus-sionof

how

government

regulations affectthe

devel-opment

process. In the third section,

we

develop a

model

toexplain

why

government

regulations

would

have

a multiphedeffect

on

prices. In the fourth

sec-tion,

"Methods

andAnalysis,"

we

presentourresearch

methodology and

results.

The

finalsectionprovidesa

discussionofthepolicyimpHcations of ourfindings.

A

Conceptual

Framework

Figiire 1 illustratesadeveloper's decision

calcu-lus.

The

model

ispredicated

on

the

assumption

thata

developerhas

some

predetermined notion of

both

the typesofregulationstheywillface

and

thetimeneeded to complete the project. Therefore, a developer's decisions

wiU

reflecttheanswerstoseveral questions.

Did

they

know

beforehand

what

therestrictionswere,

and

thenfactor

them

intoprojectplanning?

How

did

he

or sherespond to therestrictions:

By

seeking to

change them?

By

offeringless forthelandthan

he

or

she otherwise

would?

By

changingprojectdesign?

By

changingthe pricingofunits?

Or

did

he

orshe miscal-culatethe costs or delays sothatthe

bottom

line

was

reduced?

The

development

environmentthat exists

when

a

developer contemplates a project includes several

components.

There

is the aspect of

market

demand

(thetypesofunitsthe

buying

pubhc

wants bmlt), an elementaffected

by

macxoeconomic

conditions,

demo-graphics,

and

tastes.

The

financialresources available to thedeveloperis afactor affected

by

macroeconomic

conditions

and

the developer's past success.

The

development

environmentalso incorporatesthe

regu-latory miheu,

which

includes

apphcable

ordinances

and

statutes, precedent,

and

practice in particular

places.

Once

a developer decidesto

embark

on

aproject (taking intoaccountthe three factors just discussed),

he

orshe attemptstofindlandthatis "pricedright." That

may mean

landthat is partof a

bankruptcy

or

under RealEstateInvestment Trust

(REIT)

control

~

resultingitsbeingpriced

under

market

value.

On

the otherhand,the parcel

may

be

solargethatitis afford-ableforonlywell-capitalizedbuyers.

The

developer's searchfortherightprice

may

also

mean

aseller will accede to terms the developer considers favorable, includingadiscoimtedsaleprice,or asaleconditional

on

obtainingnecessaryapprovals.

The

priceof land shouldreflectwhetherithas ap-provals inplace. Ifitdoes,buildingcan beginprior to

final approvals for foundations,

hookups,

or other

such items.

There

may

be

delays,but theynormally will

be

shorterthanin theabsence ofpriorapprovals.

When

landis

bought

withoutapprovals, thedeveloper

must

seek them.

Whether

or not a developer paid a

"properprice" forlandwill

depend

on

how

long

and

costly theapproval process

was

relativeto

what

he

or

sheexpected.

A

developerobviouslywants to getto

the sellout stage as quickly as possible. Ifthere are

unexpecteddelays alongthe

way,

market

demand

may

have

changed,

making

theproducthardto sell atthe desiredprice.Iflandis

bought

outright,thereare also carrying costsassociatedwithdelays.

Both

thetimingofthe

development

process

and

theaccuracyofallactors' expectationsdeterminethe incidence of the regulatory burden. In a

world

of

perfect information

—

no

stirprises

—

and

complete

mobihty

ofcapital, stricterrequirements for develop-ers and longer delays

would

not negatively affect developers in the long run. Ifthey acted rationally, they

would

not stay inthe

development

business if they could not earn a risk-adjusted, economy-viide, averagerateofreturn.Rather thantietheirresources

up

in building,

and

earning, say, a 6 percent rateof return,they

would

seek higherreturns by, say, invest-ing in equities ormanufacturing widgets.

That would

reducethesupplyof

housing

being

buUt and

raise the pricebecause of excess

demand. That

should induce

more

buildersintothe regulated market.Consequently,

thelikelylong-run incidenceiseither

on homebuyers,

who

pay

higherprices,or

on

landowners,

who

receive

Figure

1:

Model

of a

developer's

decision-making process

Market

demand

Regulations

and

regulatory climate

Financial resources

with

approvals

Availabilityofland at

given price without

approvals

The building stage,

and

related

reviews/approovals

MICHAEL LUGER

and

KENNETH

TEMKIN

However,

the incidenceofregulation costsis also affected

by

thefactthatthereisalimit

on what

home-buyers can

spend

annxiaUy for a house,normally about

30

percentofgrossincome.

As

the costofregulation drives

up

housingprices,

demand

falls

and

the

bottom

end

ofthehousing market drops out, leaving mostly high-end housesinthebuildingpipeline. Thus,lower

and middle-income

households bear the burden, not simply through higher

home

ownership costs, but throughtheunavaUabUityof

homes

in theirprice range.

Presumably,rentsrise as well,in

which

casethereisa loss of

consumer

surplus.

Or

therecould

be

a welfare

loss

due

to doubling up,

Uving

with parents, Uving

farther

away

from

work

where

housingis less expen-sive,

and

soon.

The

outcomes

oftheregulatoryprocesses

we

de-scribe

may

deviate

from what

legislators

and

regulators

intended

when

draftingstatutes,ordinances,

and

rules.

For

example, staff shortages tendto create delays in

appUcationreviews. In addition, miiltiplereviews at differentlevels of

government

extendthe permitting

timeline

and

may

lead to inconsistent discretionary requirements. Also, regulators

who

have

some

flexibil-ity (to

accommodate

a

wide

range of

sound

proposals)

sometimes

useitto

deny

ordelayprojectsthat

may

be

in technicalcoropliancebut faUto

meet

thespiritofthe

rules. Similarly,

pubhc

hearings

and

court appeals,

intendedinpart to ensure that

government

officials

foUow

therules,are alsopowerfultoolsforopponents

of developments. Foes canusehearingstopoUticize

an

appro\'alprocess

and

convinceelectedofficialsnot to

foUow

therules,ortodelay and/orkillprojects.

A

Model

of theEffects

of

Regulation

on

Home

Prices

Our

working

hypothesis is that

some

costs of regvilationresulting

from

factorsdiscussed

above

will result inprice increasesthatare greaterthanthe actual costs

borne

by

the developer.This hypothesisis

based

on

thesimphfied housing production

model

inEquation 1:

H

=

_AS"L^

(1)

H

istheoutput of housing,

measured

as a

bundle

that includes land and biuldings; S

and

L

represent structures

and

land, respectively;

and

A

,

a

,

and

/3

areparametersthatrepresent neutral technicalprogress

and

the shares of structures

and

land in production.

respectively.

Assuming

constant orshghtlyincreasing

economies

ofscale, CC and _fi willeach

be

lessthan1. Differentiating (1)withrespect toland(9

H/ 3

L),

and

settingthatequaltothe real "rental rate"

on

land (r), as

would

be

appropriateinlong-run equihbrium,

yieldstheexpression

shown

in

Equation

2:

PH

=

-P

(2)

Here,

pH

isthecostof

housing

and rL

is the cost

ofthelandrequired foritsproduction.

A

doUar change

inthenumerator

on

theright

hand

side,due,for

exam-ple, toregulation,changes theleft

hand

side

by more

thanadollar,aslongas /3 islessthanone.For

exam-ple, foraparameter value of0.5, adollarincrease in the costof land(rL)

woidd

have

to

be

accompanied

by

atwo-dollar increase in the costof housing(pH)forthe

equahty

tohold.

The

smaller )S is(lessthanone),the larger

ApH

for

any doUar

change

in rL. Since /3 is directiy pro-portional totheelasticityof

demand

forhousing with

respect to the price

of

land,

we

can seethat less elastic

demand

allowsregulatory costs to

be

passed forward

more

readily.

Because

landis

unmobUe,

thereshould

be

a

lower

ovm-price elasticityof

demand

foritthanfor

structures(this

was

theorized

by

Sommervfllein1996).

This hypothesis

was

testedusing datacollected

from

builder/developers in

New

Jersey.

A

discussionofthe

data

and

the results

foUow

inthenextsection.

Methods

and

Analysis

The

results presented in this

paper

are derived

from

alargerstudyofdevelopers

and

regulatorsin

New

Jersey

and

North

Carolina.'*

As

part ofthe study

we

conducted

two

typesofprimary datacollectionefforts.

The

firsttypeof datacollected

was from

questionnaires

mailedtoastratified

sample of

850

builders/developers in

New

Jersey.

(The sample was

stratifiedin order to

ensuregeographiccoverageoftheentirestate.)

Two

hundred

biulders/developersthroughoutthestate

were

randomly

selected toreceive a "short" questionnaire;

longerquestionnaires

were

sent totheremaining

650

buUder/developers in each of four regions: the

New

York

commuting

shed; the

Route

1corridor;the

Phila-delphia

commuting

shed;

and

elsewherein thestate .

(Luger, et al., 1998, presents details of the survey

methodology, sampling

strategy,

and

validity issues.)

(approxi-REGULATORY

COSTS:

WHO

PAYS

IN

THE END?

the short

form

by

300;

we

also sent several

hundred

replacementquestionnairestotheoriginalsample.

The

second

typeofdata collected

came

from

tele-phone

interviews with

66

builder/developers

drawn

from

the

same

sample

asour mailsurvey.

We

divided

the interviewedpartiesintofour panels.

The

firstpanel of respondents

was

askedthefollowingquestions:

Assuming

thatthere isa

demand

in

your

market for

completed

homes

sellingfor

$500,000 on

half-acre lots:

In

a

typical case,

what

isthe

most you

would

put

into the

hard

coststobuildthe

house

and

appur-tenances (brick,

lumber

and

directlabor?)

In

a

typicalsituation

what

isthe

most

you

would

pay

for

that

improved

lot, with allapprovals in place (construction, subdivision,

and

environ-mental)?(Disregardthe possibilityof additional

costs

for impact

fees, dedications, etc.)

Again

in

a

typical case,

what

is the

most

you

would

have

paid

forthat

same

lotin

a

subdivi-sion if

approvals

were

inplace, butwithout

any

improvements?

What

is the

most you

would

have

paid

for that

same

lot in

a

subdivision, but withouteither ap-provals

or

improvements?

We

alsoaskedthesequestionstothe

same

panelof

biiilder/developers fora

$500,000

home

on

atwo-acre lot. Panel

Two

was

askedthe

same

questions for

half-and two-acre lots,but for a

$250,000

selling price. Panel

Three

was

askedthe questions for a

$125,000

home

on

ahalf-acrelot,and Panel

Four

fora

$750,000

home

on

two

acres.

The

"willingnessto

pay"

questionsareconsistent

withthecontingent valuationapproach

commonly

used inenvironmental research. In this case, our

purpose

was

to ascertain

how

builders value approvals

and

improvements.

We

used

differentlyvalued propertiesto account for possible non-linearities in the

demand

curve.

Table

1reports the

mean

values.

Note

that the pricepaid forimproved,

approved

land plus the cost of non-land

improvements

do

not

sum

totheselling price. Inpart, thisis a

consequence

ofthedatadistribution

(summing

mean

values);

how-ever thereis also aprofit

margin

to consider.

The

table indicates the followingratesofreturn to builder/developers

For

a

$750,000

home

on 2

acres: 23.7percent

For

a

$500,000

home

on

V2 acre:22.6percent

Fora

$500,000

home

on

2acres: 25.3percent

For

a

$250,000

home

on

V2 acre: 13.4percent

For

a

$250,000

home

on

2

acres: 8.9percent

For

a

$125,000

home

on

V2 acre: 13.0percent

Those

estimates are consistent with

what

devel-oper/builders claimin

foUow-up

interviews

among

a subs

ample

of questionnaire respondents: that higher rates ofreturnaccrue tohigher-valued property,

per-haps

becausethepriceelasticityof

demand

forhousing isrelativelysmall forthehighest

income

households, allowing

more

regulatory costs to

be

passedforward.

(Notethatthe figures are

rough

proxiesofactualrates ofreturn,

because

they

do

not includefinancingcosts,

and

are not annuahzed.)

The

longer a

development

project takes,thelowertheannualizedrateofreturn,

which

is the relevant indicator of financial viabihty.

The

datainTable1roughly agree withour mail survey responses

from

New

Jerseybuilder/ developers.

The

median

priceof

new

homes

buUt

by

our respondents

was

$236,000, and

the

median

sizeofadevelopedlot

was

0.8 acres.

The raw

land

component

ofthatparcel

was

$24,000,

and

the

median

perparcel cost for

im-provements

was

$27,900.

The

responses in

Table

1 can

be

translatedintothe costs for approved,

unimproved and

improved,

ap-proved

lots,as

shown

in

Table

2.

The

offering prices in the table are hypothetical.

For

example, a developer

would

be

willing to

pay

$27

,187

more

for

unimproved

landwithapprovalsthan

for

unimproved

land without approvals for aplanned

$500,000

home

on

half

an

acre.

As

expected, the

more

expensivea

home,

the largerthis difference. (Notethat

the relatively small differences

between

the

mean

values for one-half acre

and

two-acre lots

were

not

significant as

measured

by

a t-test.)

The

first

row

in

each panel ofthe table alsoprovides a basis for

esti-mating

improvement

costs,

which

range

from

10.7

percent to 15.1 percent ofthesales price. Itis worth-whileto note that the written developer surveys re-vealed that hypothetical cost of

improvements,

if weighted

by

the

mix

ofdifferent-valued

homes

in

New

Jersey,

would

be

in the

$22,000

range.

The

survey responses indicated that per-lot

improvements were

11.8percentofthe salesprice.

MICHAEL LUGER

and

KENNETH

TEMKIN

Table

1:

Summary

of

developer surveyresults

Panel

One:

$500,000

house

1/2

acrelot 2acre lot

Mean

value

No.

responses

Mean

value

No.

responses

Non-land

costs

$273,077

13

1258,750

12

Improved

lot 134,615 13 140,357

14

Raw

approved

land 84,545 11

78,654

13

Raw

unapproved

land 51,696 14 56,125

14

Panel

Two:

$250,000

house

1/2

acrelot

2

acre lot

Mean

value

No.

responses

Mean

value

No.

responses

Non-land

costs

$135,845

25

$139,026

19

Improved

lot 84,700

25

91,024

21

Raw

approved

land 46,888

20

55,515 17

Raw

unapproved

land 30,475

20

31,053 19

I

Panel

Three:

$125,000

house

1/2

acrelot

Mean

value

No

responses

Non-land

costs

$76,024

21

Improved

lot 34,643

21

Raw

approved

land 21,235 17

Raw

unapproved

land 17,343 19

Panel

Four: $750,000

house

2

acrelot

Mean

value

No.

responses

Non-land

costs

$404,417

Improved

lot

201,758

Raw

approved

land 94,583

Table2:Costs

of approvals

and

improvements

Panel

One:

$500,000

house

Mean

value

1/2acre lot

Improvements

(forapprovedland) 155,000 Approvals (for

unimproved

land) 27,187

Improvements and

approvals 80,480

2 acrelot

160,193

25,903

84,233

Panel

Two:

$250,000

house

Mean

value

1/2acrelot 2acrelot

Improvements

(forapprovedland) |42,511

Approvals(for

unimproved

land) 16,381

Improvements and

approvals 53,833

$44,630

18,035

60,068

Panel

Three: $125,000

house

Mean

value

1/2acrelot 2acre lot

Improvements

(forapprovedland) |21,559 Approvals (for

unimproved

land) 1,983

Improvements

andapprovals 22,014

n/a

n/a

n/a

Panel

Four: $750,000

house

Mean

value

1/2acre lot 2 acrelot

Improvements

(forapprovedland)

n/a

Approvals(for

unimproved

land)

n/a-Improvements

andapprovals

n/a

3128,610

39,167

175,610

Table 2isbased

on

theassumptionthatdevelopers

have

a targetmarket in

mind when

undertaking

proj-ects,

and

changes inthe cost of approvals affect the pricingofland.

However,

thisis an

extreme

assump-tion. Consider, forexample, a

$125,000 house on

a

half-acrelot.

A

landowner

may

agree to sellthat lot withoutapprovals or

improvements,

not for$17,434, but for $20,000.

A

developer

would

then assess

whetherthe extra

$2,600

could

be

passedonto a buyer,

or if

he

or she could

Mve

witha

lower

rate ofreturn.

MICHAEL LUGER

and

KENNETH

TEMKIN

The

answer depends

on market

conditions in a

particu-larplaceata particular

moment

intime(asreflected in the priceelasticityof

demand).

The

issue of the incidence of cost changes for

structures

and

land

was

addressed empirically

by

SomerviUe

(1996).

He

demonstratedthatunexpected changesinthe costofland,suchasthose

due

to unan-ticipatedregulatory delays, are

borne

in theshortrun

by

builders ordevelopers inlowerprofits,but

unex-pected increasesinthe costof astructure

can

be

passed

on

to

consumers

in higher fmal prices. Therefore,

"bunder behavior

would

be

expectedto

be

much

more

sensitive tolandcosts

because

theydirectly affectthe builder's

bottom

line^".

Over

time,diminished supply

would

affectpricesthrough

normal

supply

and

demand

adjustments.

In addition tobeing supported

by

thecontingent

valuation data, the rule-of-thumb multipher is also evident in our analysis of mail surveys

from

New

Jersey builder/developers. Eightrespondentsestimated the

median

increase in the price of a

house due

to

zoningrestrictions(whichrequired

them

to

change

the

design and/orlayoutoftheirprojects) to

be

$50,000.

Using

the multiplierof 4.0for theratio

between

sales

pricechanges

and

raw

landprice value, thatestimate shouldtranslate

backward

intoa

raw

landprice differ-ence of $12,500. Indeed,therespondents

who

provided an estimate ofthe

change

in

raw

land value

due

to zoning restrictions

gave

a

median

figure of approxi-mately $7,000.

The

higher

impUed

multiplier (closeto

7.0)is

most

likelyanartifactofthesmall unrepresen-tative

sample

ofbuilder/developersrespondingto that

question,butitisofthe rightorderof magnitude.

These

findings indicate thatthereis

more

than a

housing prices, the extent of

which

wUl

vary

from

projecttoprojectdepending

on

localconditions,

house

size, land-to-structures ratio,

and

other factors. This

translation occurs

whether

the cost of regulation is accounted for in the non-land (structures) or land

component

ofthe

housing

biondle, since

both

share parameters, j3

and

a,,areless than 1.

However,

itis

greaterforthoseelements

of

landcostssince /3

<a

.

Thatrelationshiphelpsustinderstandthe

relation-ship

between

home

prices

and

regulation costs in

some

ofthesurveyresponses. Builder/developersindicated, forexample,that

open

spaceset-asidescaused

them

to raise the price ofa

median

finished unit

by

$3,500.

Using

a multiplierof4.0, that

means

that the actual

Similarly,delay coststendtotranslate intohighersales

prices with this multipher effect.

For

example,

we

notedearher that each

12-month

delayadds

approxi-mately

$1,500

per unit in additional carrying costs,

which

would

translate into at

most

$6,000

more

for a buyer.

These

price translations reflect long-run re-sponsestoregulatorycosts;inthe short-term, builders react ina varietyof

ways

to regulatorycosts.

While

ourfindings are

based

on

arelativelysmall sample,the consistencyoftheresultsderived

from

both

the contingent valuation

and

surveydata suggestthata

rule-of-thumbis

used

in practice

by

developers

when

determiningtheoptimalcapital/landratioofproduction

costs. Increases in the costof

raw

land or the costof

improved

land are passed along to

consumers

in

amotmts

greater than the costs paid

by

developers.

Lx)calcircimistances dictate the ultimate incidenceof

government

regulations,but buUder/developers attempt tomaintaina fixed capital/land costratio

when

devel-oping

an

initialaskingprice.

The

pohcy

inqjhcationsof thisresultarediscussedin theconcludingsection.

Conclusions

and

PolicyImplications

The

factthattheelasticityof

demand

forhousing with respect to price is less than zero has another important consequence: a dollar

added

tothe priceof land

due

tothe capitalizationofthe required regulatory

approval adds

more

than a dollar to the final selling price.

That

multipher ranges

from

two

tosix,

depend-ing

on

thevalueoftheproperty beingsoldaswellas

on

the

way

land-priceis

measured

(with or without

im-provements

in place). In general,a multipher offouris not unreasonable; this

means

that

when

a developer expectsregulation to cost a

doUar

(substantively or in

proceduraldelay),

on

average

he

orshewillattenptto

increase

by $4

thepriceofthehouses beingbuilt.

The

phrase

"on

average" is important, because surveydata

showed

a

wide

range ofactualexperiences

among

builder/developers.

Of

57

respondents to a

question about the incidence of subdivision

require-ments,forexample, 19indicatedtheychangedtheoffer

price for land,

and

19 saidthey

changed

the pricingof units. Similarly,

of

64

respondents,

22

said stringent zoningaffects their offer-pricesforland,while10said it affectedtheir selling prices. In addition,

74

of

230

respondents indicated lower land-price offers in re-sponsetoenvironmentalregulations,while

39

saidthey

charged

more

for a house.

Moreover,

the

median

regulations reduced a developer's

bottom

line

by

1 percentagepoint.

To

conclude, our article suggests thatregulatory costs to consumers, in certain circumstances,

may

exceedcosts

borne

by

builder/developers.

Many

devel-opersdescribearule-of-thumb

where

landcosts

make-up

a fixedpercentage (usuallyaround

25

percent)of

theaskingprice for

new

homes.

As

aresult,relatively

modest

additional costs forlandresulting

from

gov-ernment

regulation

may

translate into sizeable price increases faced

by

consvimersof

new

housing. Iftrue,

regulators

must

be

keenly aware ofthefullcostimpacts ofadditional regulationsinordertogeneratean accu-ratecost-benefit assessment ofregtiia|^nsinitiatedto fostersociallydesirableobjectives.

Endnotes

'Lubove, 1981.

Advisory

Commission

onRegulatoryBarriersto Afford-ableHoTisiag, 1991,

Lowry

andFerguson, 1992, Na-tionalAssociation of Homebuilders, 1995.

^_Dealdn

1989,

Knapp

and Nelson1988,Wachterand

Cho

1991.

"Lugeretal, 1988.

Lugeretal., 1998, presents detailsofthesurvey method-ology, sanqilingstrategy,andvalidity issues.

The

contingentvaluationapproachisa techniqueusedto

valuebenefitsor resourcesthroughtheconstructionof ahypotheticalsituation. Individuals aresurveyedand askedtovaluethe

good

inquestionbasedon

informa-tionpresentedin thebackgroundscenario. For

more

information, refertoPaterson,Lugerand Lindsay 1995.

SomerviUe,p.410.

This translatesinto 2.54 percent ofthe medianhousing priceperyear, or 0.2percent per

month

This isless

than the 1.2 percent per

month

estimated by Seidel

(1978),which presumablyreflects changesin interest ratesand housingvaluessincethat time.

References

Advisory

Commission

onRegulatoryBarriersto

Afford-ableHousing (Kean Commission).1991.

NIMBY:

Regulatory BarrierstoAffordableHousing.U.S.

DepartmentofHousing and

Urban

Development, Washington,

DC.

Deakin,E. 1989.

Growth

controlsand growth

manage-ment

A

summary

andreview of empirical research D. Brower, D. Godschalk

andD.

Porter, eds.

Under-standing

Growth

Management

Wasinng^on,D.C.:

The Urban Land

Institute.

Fischel.

W.

1990.

Do

Growth

ControlsMatter?

A

Review of Empirical Evidence on the Effectiveness

and

Effi-ciencyof Local

Government

Land

UseRegulation.

Washington,D.C.LincolnInstituteof

Land

PoUcy.

Knapp,G.and A.Nelson. 1988.

The

effectsofregional

landusecontrolinOregon:

A

theoreticaland enq)iri-calreviewThe Review of RegionalStudies 18:37-46.

Lowry,I.andB.Ferguson. 1992.Development

Regula-tion

and

HousingAffordability.

Urban Land

Institute, Washington,

DC.

Lubove,R. 1981.

The

rootsofurbanplanning.R.

Lubove

ed. The

Urban

Community:

Housing

and

Planning in theProgressive

Era

Westport, Conn.:

Greenwood

Press.

Luger, Michael. 1998,

Ken

Temkin, Spencer

Cowan

and

Art Wells.TheEffectsof

Government

Regulationson HousingPricesin

New

Jersey

and

North Carolina.

Report Prepared for

Housing

New

Jersey

and

the Stateof

New

JerseyDepartment of

Community

Af-fairs.Report

NationalAssociationofHomebuilders. 1995.TheTruth

About

Regulations

and

theCost ofHousing.National Association of Homebuilders.

Paterson,Robert,MichaelLugerandGregLindsay. 1994.

The

use of contingentvaluationinplanning.Journal

of Planning Education

and

Research.

Seidel,S. 1978.Housing Costs

and Government

Regula-tions: ConfrontingtheRegulatoryMaze.

The

Center

for

Urban Pohcy

Research,

New

Brunswick, NJ.

SommerviUe,C. 1996.

The

contributionof landand structuretobuilderprofitsandhoxise prices.Journal of Housing Research7:127-141.

Wachter,S.

andM.

Cho. 1991.Interjurisdictionalprice effectsof land usecontrols. Washington University Journal of

Urban

and

Contemporary Law. 40:

49-63.