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Comparing Housing in California and Indiana

Summary:
Summarizing recent research, Bryan Caplan estimates, “It is very plausible that U.S. housing would be 50% cheaper under laissez-faire.” Why do we not live in that less expensive, freer world? “Because regulation is strangling housing supply, especially in desirable locations.” “Yes!” I hear myself saying, no doubt in unison with more than a few readers. Over the past year, mostly as a matter of curiosity and interest, I have kept tabs on a few housing markets across the country, including my local market. I am 23 and interested in buying a house in the next few years, so I want to have a sense of what is on offer in various areas, including but also beyond my own. If nothing else, it’s good to keep an accurate accounting of opportunity costs and available

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Comparing Housing in California and Indiana

Summarizing recent research, Bryan Caplan estimates, “It is very plausible that U.S. housing would be 50% cheaper under laissez-faire.”

Why do we not live in that less expensive, freer world?

“Because regulation is strangling housing supply, especially in desirable locations.”

“Yes!” I hear myself saying, no doubt in unison with more than a few readers.

Over the past year, mostly as a matter of curiosity and interest, I have kept tabs on a few housing markets across the country, including my local market. I am 23 and interested in buying a house in the next few years, so I want to have a sense of what is on offer in various areas, including but also beyond my own. If nothing else, it’s good to keep an accurate accounting of opportunity costs and available alternatives. Moreover, since housing is a major public policy issue, it’s good to be aware of what’s going on in markets outside our own immediate area.

In central Indiana, there are houses to be had, for sure. We’re still building new homes, and have been for years, mostly in suburban subdivisions. And people come. Good schools and jobs in the area fuel demand. It is true that for some the dominant style of these suburban developments is an issue. Even the custom homes in these parts tend to look like simply larger riffs on the familiar planned neighborhood “McMansion”—a design hodgepodge of different architectural styles and elements. But obviously, for many people, the aesthetic tradeoff (if in their mind there is one at all) is more than worth it, as evidenced by people continuing to flock to suburbs like Fishers, Westfield, Zionsville, and Carmel. Exterior style aside, a new or recently built house around here tends to be a very nice and comfortable house on the inside. High ceilings, lots of high-efficiency windows and insulation, bedrooms for each of the kids, granite countertops and spacious modern kitchens, ample grassy backyards, finished basements, two-to-four car garages. These features are all quite common in this market.

For even less money, one can find older ranch style homes that often have been updated with the latest appliances, durable floors, and sleek kitchens and bathrooms. Sometimes these have the added benefit of being situated on larger lots, in older and more-established neighborhoods closer to legacy businesses, restaurants, and entertainment. They tend not to have the square footage or open layout of newer homes, but for the childless family or budget-conscious buyer these refurbished single-story homes can be attractive.

I say all of this just to paint a picture of some of the main options available to someone looking to buy a home on the north side of Indianapolis for less than half a million dollars. A quick visit to a site like Zillow would help the interested reader understand the situation even better.

Of course, many people have no interest in residing in central Indiana and would prefer to live in a place like coastal California instead. This being another market I have followed out of curiosity with some regularity, I will paint another picture, and one that gets more to the core of the issues Caplan is talking about.

In coastal California, between Los Angeles and San Francisco, there are fewer houses to be had, and they are rather significantly more expensive and typically quite a bit older than the houses in central Indiana. Dollar for dollar, they also tend to be smaller, with older fixtures, floors, and appliances. Usually they do not have basements, and large garages are less common. However, these California homes have one thing that the nice new dwellings of central Indiana do not have, and that is a location near the ocean, in a mild climate, and near coastal towns and cities.

So far, so good. If this were the situation and California was simply out of feasible places to build new houses within, say, an hour of the coast, that would be the end of that—a basic supply and demand story. The market price of a widely demanded fixed-supply good would go up. And it can appear that this is what’s happening.

But as Caplan is passionate to show—and as I find worth echoing—this is not a basic, “natural” market outcome. That imagined band of coastal California I speak of is not some kind of island or isthmus that has become full and reached developmental capacity (there is always the possibility of re-development anyway). Rather, it is a space in which governmental forces and personal prejudices—as well as self-interests—have aligned to make it incredibly difficult to build new homes.

Here are a few of the main issues as I understand them. (Commenters, please do let me know if I have missed anything important.)

Zoning restrictions severely limit the available uses of private property in non-urban coastal California. I am familiar with one area where the minimum lot size to build a residence is 40 acres—and I am quite confident that this is an area that more people would want to live in, if they could. Imagine the benefits of reducing the minimum lot size to one acre, or half an acre, in a place like this.

Environmental regulation compliance costs and building fees and permits alone, even for a small single-family home, can approach $75,000 in a non-coastal designated area within an hour of the ocean. (My understanding is that a coastal designated area can be difficult to build in at all.) This atop the price of land and construction itself—and combined with the time-consuming nature of working with regulators and planners on a building project—all but prohibits middle-income people from settling new areas of the coastal land band.

Then there are the attitudes and outlooks that sustain the current regulatory and zoning status quo. Some current California property owners do not want new homes built for reasons of pure self-interest. Nice new homes close to the ocean (and coastal towns and cities) will make the older homes in those areas less valuable (and probably also depress rents). Though again, opportunities to spruce up and profit from older homes do exist. Wanting to live in a place that has “character” (or some other characteristic less common in new houses) is a rational preference that some people might pay a premium for, especially in a world with a lot of new development. But at present, voting property owners seem to fear new development more than they anticipate it creating niche market opportunities.

There is also a relatively common sentiment among coastal Californians—perhaps a product of coastal history and culture—that the areas in which they live have become “too crowded” and that there are “too many people and cars.” Some might add an environmentalist twist to this argument, but from the “build, baby, build” perspective, the basic problem remains. Lots of people have convinced themselves that more housing and more development will be bad for their regions and towns, no matter how it’s done. Current policy reflects their preferences. The dynamism a place like coastal central California could enjoy—that new construction and development have brought to central Indiana—keeps getting deferred.

These are broad-brush pictures, I grant. But looking at the two side by side, a couple things become clear. We can build nice, comfortable homes in America—just look at a place like suburban Indiana, or Cleveland, or Austin. But there are completely unnecessary restrictions on building in places where more people want to live, like coastal California, that actively get in the way of people being able to live the lives they want to lead there. And that is one silly—but also seriously frustrating—situation. Fixing it will require both opening and changing quite a few minds.

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