Why is Your House So Expensive? You’ll Be Surprised

Even though in many areas the cost of a house has plummeted over the last 12 months or so, it is still a huge stretch to afford a decent house, especially for first time homebuyers in many major metro areas. Why are houses so very expensive? Are the developers overcharging? Are the homebuilders all sending their children to Harvard and driving Porsches? Are homes now, filled with expensive standard features that used to be options a decade ago? Perhaps, but in some areas that’s not the largest reason for the increase. What is the single largest reason that a house costs so much in these locations?

In these areas, the single largest component in the increased cost of housing is the cost of government regulation. You read that right. The more “progressive” an area, such as Seattle, or San Francisco, the more expensive these government regulations seem to be for the average citizen looking for a home. Does your friendly state and local government respond to their constituency’s concern by reducing the level of government regulation, restriction and red tape?
Hardly, they’d get little credit for that. They wouldn’t want to reduce the cost of regulation and compliance for the guy just trying to get the house built. There would be nothing concrete local pols could point their finger at and say “See how I reduced the cost of housing for the little guy/gal”. Obviously most politicians are concerned with things they can point to during their next campaign. Now, if they can come up with some money to help Joe/sephine homebuyer in their quest for affordable housing, that’s something that can help them get elected next time around.

Are you having trouble believing me about all this? Well, I can understand that. After all houses are so very expensive, it’s hard to imagine that the cost of government is higher than the cost of wood, labor, or windows. Well, sad to say, it is. It’s not only me saying this either, although decades of involvement in the building industry has provided me with ample anecdotal evidence that it’s true. No, greater minds than mine have actually done real research on the problem of expensive housing, and gotten concrete data to back these theories up.

Government regulations, from land use regulations and environmental laws, to extremely complex and expensive building permit processes have piled on a huge amount of additional costs. They reduce the supply of buildable land, and economic law dictates that when you reduce the supply of something that is demanded, its price will increase. They have also increased the cost of compliance through such regulations as restricting the times of the year when work can be done on building projects. In addition some areas are notorious for the cost of building permits and the lengthy and complicated process one must go through to obtain them and keep them open.

I said that greater minds than mine have concluded that all this is true, and one such mind is University of Washington professor Theo Eicher, founding director of the University’s Economic Policy Research Center. He has released the results of a study, itself derived in part from the Wharton Residential Land Use Index, a detailed analysis of the cost of regulation and its contribution to the cost of housing in MSIs (Mean Statistical Areas) throughout the country. Professor Eicher’s study has concluded that in Seattle, fully $200,000 is of the average home price is attributable directly to the effects of government regulation. When you stop and consider that the average home price in Seattle is $447,800, and that $200,000 of that is due to government regulation, it’s amazing that the citizens of Seattle and King County (Seattle’s county) haven’t risen in revolt. The ironic thing is that it is these very same citizens lamenting the increased housing costs that voted in the politicians that enacted the laws, and in a few notable cases, the laws themselves.