More on Parking Prices

At Wabi-sabi, Sandy Ikeda (former Market Urbanism writer) has a great analysis of San Francisco’s pricing for parking. He points out that assigning prices to spots is not equivalent to allowing a market to determine a price. For a real price to emerge capital (the parking space) cannot be state-owned.

Sandy points out that the “shortage” of parking arises because no one owns street parking, so the appropriate incentives are not in place for someone to charge an equilibrium price for parking. While the San Francisco programmay be a step in the right direction, he explains that “more intervention usually doesn’t solve the problems that were themselves the result of a prior intervention.” In this case, the city is trying to set a price for something that it could instead auction off to eliminate the original intervention.

On yesterday’s post, two commenters pointed out other parking reforms in Austin and in Long Beach that go a step further than charging higher prices for parking. These cities have allowed businesses to lease parking spots for outdoor restaurant seating or retail. San Francisco has also tried turning parking spots into mini parks. This has several benefits, including allowing for land to be better-utilized by permitting a form of street narrowing. However, as long as curbside parking remains city-owned, prices for either parking or land leases will be determined arbitrarily, preventing the actual highest-value use from being discovered.

Spring Fever Links

1) Nate Berg at The Atlantic Cities covers new research on the world’s earliest cities. The findings would make Jane Jacobs happy as researchers have uncovered evidence that the earliest urbanization was a case of spontaneous order. Their construction wasn’t directed by kings as some historians previously thought, but rather by bottom-up decision-making.

2) Alex Block had two interesting pieces a while back on the politics of increasing urban density. He points out that the vested interests in urban development complicate the policy prescriptions that we often advocate here of loosening regulations.

3) Charlie Gardner at Old Urbanist points out that we shouldn’t get carried away with hopes for housing prices dropping in expensive cities with increased housing supply. While land use restrictions that Matt Yglesias, Ryan Avent, Ed Glaeser and others have written on force urban housing prices higher than they need to be, infill redevelopment is inherently a costly, slow process. It’s much easier for the price of housing in, say, Houston to stay closer to costs of construction because Houston has available land to build on cheaply and easily. Housing in New York is expensive in large part because of market fundamentals, but density restrictions make it more expensive than it has to be.

4) The case of the successful parking pricing in San Francisco that continues to receive opposition reminds me of this passage from Murray Rothbard’s For a New Liberty:

The libertarian who wants to replace government by private enterprises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial. If the government and only the government had had a monopoly of the shoe manufacturing and retailing business, how would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, “How could you? You are opposed to the public, and to poor people, wearing shoes!”

Of course the San Francisco case is not nearly so radical, as street parking spaces are still government-owned, but the implementation of Donald Shoup’s market-based prices for parking serves as a step toward allocating spaces to their highest-valued use. The program’s success so far demonstrates that it is possible to move toward a free market allocation of a good that we are used to receiving free from the government, but it will always be a political struggle. Adam previously wrote at length about Rothbard the Urbanist.

The Tyranny of Zoning: Exhibit A

The Washington Post reports that the redevelopment of the Giant grocery store at Wisconsin Ave and Idaho Ave will finally be getting underway. Through the sick humors of the real estate gods, I live pretty close the this grocery store and can attest that it is an eyesore in bad need of a renovation:

It is one of the most belabored Washington development projects in recent memory, but on April 12 the Giant grocery store at 3336 Wisconsin Ave. NW will finally close, making way for construction of a $125 million housing-and-retail project that will feature a much bigger new store.

Giant began discussing plans to replace the out-of-date, 18,500-square-foot Giant almost a decade ago, but questions about what the company ought to build in its place grew to monstrous proportions in the Cleveland Park neighborhood. Eventually, the debate reached the point that some neighbors on opposing sides of the issue ceased speaking to one another.

Last week I attended one of the Urban Land Institute’s Real Estate 101 courses about this project and learned about this project from the land use attorney’s perspective.  Phil Feola with Goulston & Storrs shared the story of the entitlement process for this project, going back to the first ANC meeting in 2005.

Part of the property that Giant wanted to develop as retail is zoned residential, so rather than attempting to amend the code, they sought approval of a Planned Unit Development. Typically a PUD is easier to achieve than blanket upzoning for a parcel because with a PUD both city planning and the project’s neighbors know what they will be getting with the redevelopment. The neighbors initially requested 32 changes to the PUD, and after making some adjustments, Giant’s proposal received near-unanimous support from both the Zoning Commission and the National Capital Development Commission.

Current Wisconsin Ave Giant

Aerial View of Redevelopment Rendering

 

 

 

 

 

 

 

 

 

 

 

 

When it looked as if Giant would receive permission to redevelop, neighbors who opposed the project sought to get the building landmarked. Mercifully, the Historic Preservation Office denied this request. When this failed, the neighbors returned with a lawsuit saying that the redevelopment would be in violation of what DC’s Comprehensive Plan calls for at this site — low-density housing and commercial uses. As Lydia DePillis reported in December:

Not that there was really any question that those proposing to turn the one-story, mid-century Giant Foods on Wisconsin at Idaho Avenue NW into a mixed-use development called Cathedral Commons were right on the merits, when the Zoning Commission unanimously voted to approve the project back in 2009. The question, rather, was whether Giant would persevere through the delays to actually build the thing—it wouldn’t be the only project to die after prolonged neighborhood intransigence.

This case is far from the typical PUD process and represents the worst-case scenario under zoning. However, I think it’s appalling that it took 10 years and untold legal costs for a property owner to earn permission to better serve its customers, not to mention the opportunity cost of having a terrible little grocery store for 10 years when a refurbished one could have been serving the neighborhood for much of this time. Feola said that he estimates the typical PUD approval process costs property owners around $500,000 and takes 3-4 years.

Imagine that this property wasn’t a grocery store owned by a multinational corporation, but rather an independent retailer or restaurant. A small business could simply never afford the transaction costs of this type of redevelopment. This case illustrates how the entitlement process contributes to the banality of our cities by setting redevelopment costs so high that small businesses often can’t compete. Increasing as-of-right permissions to build and redevelop would make the DC land market more dynamic and better allow entrepreneurs to meet consumers’ demands.

When an audience member asked Feola what he learned from this project, he quipped that he learned not to build on Wisconsin Avenue. While it’s true that the neighborhood is home to some passionate and well-resourced NIMBYs, it’s equally true that the DC entitlement process could be streamlined to shift the balance of power toward property owners, giving NIMBYs a little less control.

Book Review: The Rent Is Too Damn High

Matt Yglesias’ new Kindle single, The Rent Is Too Damn High, is a quick and engaging read on the reasons that much of the conventional wisdom about housing markets is wrong. While Yglesias has many progressive views, with regard to land use he takes a classical liberal stance. He explains that the “rent is too damn high” because land use regulations restrict housing supply, keeping prices above the free market equilibrium.

My favorite part of the book was Yglesias’ discussion of unbundling the supply and demand for land from the supply and demand for buildings. He provides a very clear explanation of the differences between the two, explaining that rising land values benefit land owners, but rising housing prices serve only to decrease everyone’s real income. Under a system where land use is regulated to constrain the supply of buildings, landowners earn long term rents (higher than they would otherwise earn) that cannot be eroded by other landowners building more densely.

In the chapter “The Virtues of Density,” Yglesias offers a powerful counter-argument to “market suburbanists” who argue that land use deregulation amounts to forcing density on people:

People worry that a denser neighborhood will have more traffic and more noise. Generally speaking, they’re correct. But all this means is that allowing higher density will be a self-limiting process. Balancing the different costs and benefits involved in denser building is, after all, precisely the sort of thing that relatively free markets are good at. Different people have different preferences about noise, commuting mode, lawn size, amenities, and employment possibililties. . . . To say that some of America’s neighborhoods — especially in coastal cities with strong economic opportunities and limited space — should be denser is not an argument for infinite density. Nor is it an argument for central planning and coercion. It’s an argument that places ought to grow to the point where the costs of additional density outweigh the benefits and no more people, on net, want to move there. This is precisely the sort of balancing act that markets perform better than planners.

Compared to similar books on this topic, Yglesias more heavily emphasizes that land use regulations move us toward a Ricardian vision of the economy, where non-land owners pay increasing shares of their income to those who own the most desirable land. This problem can also be viewed from a market process perspective; Kirzner explains in Competition and Entrepreneurship that landowners in a regulated world are not earning entrepreneurial profits on their resources, but rather monopolistic rents because they are shielded from competition.

Yglesias provides only one policy recommendation which I found misguided. In the chapter “The Mirage of Gentrification,” he writes:

Particular projects are always controversial, but nobody opposes the idea of better schools, safer streets, and otherwise improved public services. We should, however, worry about whether urban reforms will actually end up benefitting poor people. The only way to ensure that it does is to ensure that if demand for living in a particular neighborhood increases, so does the quantity of available housing units. Requiring that some portion of new housing in a given are meets some standard of affordability can help, but it doesn’t solve the core issue.

I completely agree with him on the importance of allowing urban housing stock to expand, but if we are going to subsidize housing, it makes more sense to do so through vouchers to individuals rather than requiring developers to do so. Vouchers provide affordable housing recipients with the power to determine the best place to live for themselves, rather than having to live where the affordable housing is provided. Also, vouchers can be administered more fairly with a simple income cutoff rather than affordable housing units which are distributed somewhat by chance and are most likely to go to those who are most adept at using government services.

However, even the least-bad voucher system of affordable housing comes with negative consequences. Subsidizing housing for a select group makes housing more expensive for all other residents in a city, including those just above the income cutoff line for whom the policy would be most painful. I find it odd that Yglesias offers any support for affordable housing provisions given his critique of rent control in an earlier chapter, which leads to many of the same unintended effects.

The Rent Is Too Damn High would be enjoyable for anyone who likes reading Ed Glaeser or Ryan Avent, and Yglesias’ armchair economist style allows him to discuss the problems of land use regulation from a common-sense perspective. In the closing chapter, he concludes with an idea I liked a lot:

Typically, the last chapter of a public affairs book — the one where the author presents his proposed solutions to the problem discussed at length — is the most disappointing one. But as building regulation is an inherently local matter, there is no better general solution than to try to persuade people to understand the issue better. Many on the Left — starting with my inspiration, Jimmy McMillan — are confused about the relationship between housing affordability, regulation, gentrification, and quality of life over the long term. On the Right, the problem is one of myopia and indentity-driven resentment.

[. . . .]

Beyond ideology, the basic terms in which we discuss housing policy and home prices in this country are badly confused. The simple step of getting political figures and the media to better distinguish between the price of land (a speculative investment commodity, like stocks or bonds) and the price of houses (a consumption good, like a car or a refrigerator) could work wonders.

Maryland realtors fight to protect their subsidy

This post originally appeared at Neighborhood Effects, a Mercatus Center blog where we write about the economics of state and local policy.

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the CityEd Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.