Zoning and other local land use regulations have increased over the last three decades, particularly in high–growth cities and metropolitan areas. In our most recent Insight, we examine the relationship between government regulations, geography, housing supply, house prices and rents.
A 2016 study by Paul Emrath of the National Association of Home Builders found that government regulations account for 24.3% of the final price of a new single-family home built for sale. These regulations limit increases in the supply of housing and thus boost house prices and rents. Economists use the concept of supply elasticity to characterize these situations.
When builders can easily add housing units in response to growth in demand, housing supply is elastic–it can stretch like an elastic band to meet the demand. When builders can't provide many new units despite the lure of higher prices, housing supply is inelastic.
What difference does supply elasticity make?
Which matters more, regulation or geography?
The bottom line: Both the impact and the likelihood of lasting regulatory reform appear to be limited by geographic constraints in cities with inelastic housing supply. Simply put, where you live makes a difference. For San Francisco, New York and similar cities, geography may be destiny. However, even with some of the challenges homebuyers face in today's housing market, current low mortgage rates offer monthly mortgage payments that are more affordable than at almost any time in history.
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