Hoisted from comments: An experienced builder objects

In reply to my previous editorial about Regulations and Affordable Housing, I got a comment from an Anonymous Builder. Let's call him "Mr. AB." Here is the comment:

Unknown January 23, 2020 at 9:17 AM

Steel straps is a ridiculous example of the costs of regulation of housing production in California, and illustrate the author's (1) lack of knowledge or (2) bias. Just in the context of earthquake resilience, shear wall assemblies and moment frames are much more costly. High efficiency HVAC systems, automatic garage door openers with battery backups, solar power systems and fire sprinklers are all required and significantly increase construction costs. BTW fire sprinklers are much less effective than smoke detectors in saving lives and reducing property damage.

But the greater costs are in the regulatory hurdles that require years to entitle land for residential development and in the absurd conditions that are imposed by local agencies. After spending 2-20 years and millions of dollars in obtaining development entitlements, builders commonly have to build larger units, add masonry trim, ridiculously steep roof pitches and many other expensive and totally unnecessary architectural details to meet local agency design standards.

The author is correct in noting the market impacts of Prop 13 and related legislation. However, to ascribe 80% of the last decade's home price appreciation to land values is way off-base. Since 2010, construction costs have more than doubled and impact fees have climbed significantly as well.

What is the source for the statement "the consensus among deregulators is that rent control would be a disincentive for affordable housing builders"? As J. W. Mason stated, rent controls encourage conversion of rental units to for-sale units. Basic macroeconomics and common sense assure that in the long run, a cap on rents will limit investment in rental properties and will reduce both quantity and quality of the rental housing stock. However, housing projects take years to entitle, develop and build out, so in the short term it is very difficult to isolate the impacts of newly imposed rent caps.
Clearly there will always be a portion of society that needs assistance in obtaining decent housing. However, as long as local regulation (and NIMBYs) limit the supply of housing, there will be a shortage and those with the least resources will suffer the consequences.

I thought that comment significant enough to answer, and legitimate enought to expose to public view (comments are concealed by default on my blog).

The builder claims "2-20 years" of  experience. I have spent more than a decade and a half in the real estate business, roughly half that time I sat on a Community Planning Advisory Council for the County of Sacramento. ... so neither of us is just a guy with an opinion. I'm not sure 2 - 20 entitles Mr. AB to pull rank just based on experience, but he's not just a guy with a random opinion, either.

I won't profit, except in the most general way, from my opinion, but does Mr. AB's opinion have an agenda? I'd say Mr. AB, and his countless colleagues making such comments, are like a coach who barks at the referees. They are doing it for their own self-interest, not necessarily for objective reality. In a way, it's a reminder of the auto manufacturers' reaction to requirements for seat belts and catalytic converters. Cries of "It's impossible!" and "It'll bankrupt us!" filled the air.

Mr. AB's cost objections involve many tricky appraisal calculations (I have been a professional appraiser, too) so they are particularly difficult to gauge. Are they accurate, or even germane? A garage door opener with a battery backup is one mandated cost he complains about, yet a Google search of such openers says the battery backup only makes an opener cost ~$100 more...an insignificant amount in a purchase of hundreds of thousands of dollars.

For a very specific example, consider this: I purchased a Sacramento County suburban house in 1982 for $60,000. As a passive solar home, it had $13,000 in added-cost features, compared to what current regulations required, including 2 x 6 exterior walls (extra insulation), thermal mass, and a clerestory. The first purchaser would get a tax write-off, but I was buying resale.

If this home increased at the rate of other goods, as reflected in the Consumer Price Index (CPI), it would be worth 273% of its original value in 2020. That's $163,800. But the "Zestimate" (estimate of value on the Zillow real estate site) is $316,000. Even if I added 50% to the house price to account for the items Mr. A complains about, CPI says it would only be worth $246K.

Where did that surplus value--inflation-adjusted as much as a 92% premium!--come from? There were no large additions to the house, in fact it is an older home now, so it should have depreciated. I'd suggest land appreciation was the source of the higher price. Part of the tricky-ness of such an appraisal is the fact that the more outlying land that is developed, the more likely it is to run into natural obstacles (flooding, vernal pools, remote access) and the more likely it is to be more expensive. So is land speculation the source of that enormous inflation-adjusted price appreciation? Or is it that new land has to overcome more obstacles to building? Good question! I'd say corrupt, private-sector-serving-government-encouraged speculation is at least partly responsible. After all, there's 20 years of unbuilt infill in the region.

Here is what scholar and economist Michael Hudson says: "There’s a simple way to keep housing prices down: You prevent land prices from going up by doing what Adam Smith, John Stuart Mill and the whole 19th century of classical economics advocated. Land prices go up not because of enterprise, not because of population growth, but mostly because of bank credit. If you tax the increase in the land value, then the banks will not be able to lend against that. Now Germany has the lowest real estate taxes of almost any country. That’s because it has a tradition of not having a real estate class dominating society, not a Donald-Trump type economy. But if Germany begins to follow the U.S. and English pattern and you let the banks lend more and more to inflate housing prices, then you’re going to continue to shrink. Germany’s economy is beginning to shrink. I’ve seen bank reports that say that if German living standards can be lowered by 20 percent or 30 percent, German technicians and workers will have to emigrate. The German population would fall by 30 percent in 20 years. Your disposable personal incomes would have to fall by 50 percent in order to let the banks make the German real estate market look like the U.S. market."

In addition to the increased price of land, Mr. AB ignores all the government subsidies for real estate, and for the financing that supports the real estate market. Not only do homeowners get favorable tax treatment (mortgage interest is a write-off, capital gains are deferred if you buy a new home, etc.), the financial sector whose crooked loans inflated housing prices got bailed out with literally trillions of dollars (see this video for the absurdity of the financiers' complaints about government, and their criticism of "socialism" for the masses while they receive extravagant bailouts).

So...if Mr. AB wants to complain to the regulators about how silly and misguided they are, I suppose those "referees" will think twice about regulating more...but don't expect my sympathy. Real estate gets plenty more advantage from the tax breaks and (regulated) financial markets than any fee or regulation deemed absurd.

To get specific about the objections listed in Mr. AB's complaint (from Google searches):
- Excess cost of garage door opener with battery backup: ~$100
- Excess cost of all-steel framing vs. wood per 1,000 sq.ft: ~$7,000 (much more than earthquake compliance, partially framing in steel, typically costs)
- Photovoltaic Solar cost: ~$10,000 - $20,000 (doesn't count the tax or utility credit[s], doesn't mention the monthly savings on utility bills, so buyers qualify for bigger loans, either)

- Cost of sprinklers per 1,000 sq.ft.: ~$2,000 (BTW, Google search says: according to the NFPA, working smoke alarms reduce your risk of dying in a fire by 50%! Fire sprinklers, on the other hand, work fast to reduce heat, flames, and smoke from a fire, reducing the risk of dying by as much as 80%...contradicting Mr. AB's statement...but he's working the refs, not trying for accuracy.)
- Efficient HVAC excess cost: None I can detect (saves energy cost, too)

That's a total of ~$25K in current values. Not nothing, but certainly less than 10% of most current new home costs.

The study saying 80% of house price appreciation comes from land came from Rethinking the Economics of Land and Housing (by Ryan-Collins, Lloyd and Macfarlane). Note that neoclassical economics, in contrast to classical economics, omits land as a factor in production. It considers capital and labor factors of production, and land is folded into capital. Land is not the droids you want!

Meanwhile, governments make the housing market possible... Historically, no economic markets of any kind exist without states that sponsor and regulate them. So yes, such regulations are frustrating and often absurd, but they are part of the deal.

No mention in the comment about how affordable housing subsidies have been slashed.

The source for "the consensus among deregulators" is plenty of Bee editorials, and statements from the likes of Sacramento County Supervisor and amateur economist, Sue Frost.

The quoted economist, J.W. Mason, says nothing like "rent controls encourage conversion" to condos. The citation says "there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build." In any case, the specifics of rent control could govern condo conversion too. (For a more detailed responses, see this article)

Mr. AB's last paragraph has a bit more to address. Here is a relevant excerpt:

Basic macroeconomics and common sense assure that in the long run, a cap on rents will limit investment in rental properties and will reduce both quantity and quality of the rental housing stock. ....However, as long as local regulation (and NIMBYs) limit the supply of housing, there will be a shortage and those with the least resources will suffer the consequences.

First of all, no. Macroeconomics does not mean rent caps will limit any housing stock, that's the reason to cite macroeconomist J.W. Mason, who says just the opposite. If the government restored the cited subsidies it has slashed, odds are the supply of housing would increase, even if rents were capped.

I'll agree that the regulations are often stupid and counterproductive (see this, for one example), but better regulations would fix that, while bitter complaints about stupid government do nothing to reform...or govern...and governing is not optional. Meanwhile, Mr. AB and his political peers complain about government programs, slash their funding, then say "See! Government doesn't work!"

So, Mr.AB, I feel your pain, and doubt anything I could say will convince you otherwise. Yet you do not describe obstacles most people would call insurmountable, nor do you mention the abdication of government described in the editorial when it comes to funding affordable housing.

Yet...could such complaints as yours be the only side getting press coverage? I'd say "yes." If the editorial is biased in attempting to correct the record, then so be it. Your point of view is all that's seen in the mainstream press I've read. Now...where's my tiny violin...?