Galveston Economic Report
David Stanowski Publisher
by David Stanowski
14 January 2011
Why have the cities in the Sun Belt experienced such high relative population growth?
The Conventional Wisdom says it's due to nicer weather, lower business taxes, fewer regulations on business, and right-to-work laws. But a new study concludes that the secret is low relative housing prices!
Lower housing prices in the Sun Belt are the product of fewer restrictions on home building than in the Northeast and on the West Coast, where high housing prices are stifling growth, and even driving some people out of these areas.
Another study explored the typical causes of high housing prices, and three different formulas were used to quantify housing affordability.
One of these methods was then used in this article to calculate the current housing affordability in Galveston, and possible barriers to increased affordability were identified.
Without affordable housing, it will be nearly impossible for Galveston to increase its population.
Readers who do not wish to review the findings of these two national studies may wish to click on the following link, and skip to the last section of this article where the analysis was applied to the City of Galveston.
Housing Affordability in Galveston
The Secret to Growth:
What is the explanation for the high growth of the Sun Belt states relative to the Northeast and West Coast?
In a recent article by Professor Edward Glaeser, he rejects the Conventional Wisdom of nicer weather, lower business taxes, fewer regulations on business, and right-to-work laws, and argues that the secret is low relative housing prices; a metric known as housing affordability.
Glaeser noted that many high-growth states like Arizona, Georgia, and Texas have lower family incomes than low-growth states, like Connecticut, Massachusetts, and New York which confirmed the fact that people were NOT migrating to the high-growth states based on a quest for higher income. The attraction was how much house they could buy with what they were able to earn.
Housing Regulations, which are very strict in the Northeast and on the West Coast, but looser in the Sun Belt, explain the relatively abundant housing supply in the Sun Belt. "The future shape of America is being driven not by quality of life or economic success but by the obscure rules regulating local land use."
What can Galveston learn from this study to grow its population?
"The Planning Penalty":
This March 2006 study by Randal O'Toole estimates the costs of some "planning" processes, and how they create unaffordable housing.
Houston is often used as the benchmark against which all other major cities are measured due to its lack of zoning and growth-management policies. As a result, it has very affordable housing, and is one of the fastest growing cities in the country.
Coldwell Banker defines a “middle-manager’s” home as a very nice house with about 2,200 square feet, 4 bedrooms, 2 1/2 baths, and a 2-car garage. In 2005, this home could be purchased in cities with no growth-management planning for $150,000 to $200,000. In cities that have had growth-management planning for 10-15 years, that same home costs $300,000 to $400,000, and in cities that have had it for 25 years or more, the same house costs $500,000 to as much as $1.5 million!
O'Toole calculates the "planning penalty" as the approximate amount that growth-management planning has added to the cost of a median-cost home.
Another measure of affordability is the ratio of family income to the median price of a home which may be the most accurate way to measure affordability, because it takes local income levels into account. The higher the ratio, the more affordable the city.
This data clearly shows that Houston is the benchmark that should be used to measure affordability, and the template for other cities on how to achieve it!
The same home built in Houston and San Francisco costs 8.6 times more in San Francisco! Planning and control extremists in that city have added $849,783 to the cost of a median priced house! Income differences between the cities do not account for most of this difference, because the income/home price ratio is almost 6 times higher in Houston, indicating that it is almost 6 times more affordable than San Francisco, after accounting for the differences in local income levels!
"More than 30 percent of the total value of homes in this country is attributable to prices inflated by planning-induced
housing shortages. In 2005, home buyers
nationwide paid an estimated $275 billion more for homes because of restrictive regulation, though it is likely to be as much as $340 billion. This does not count the added costs to renters or purchasers of commercial, industrial, or retail land."
This report conservatively estimates that growth-management planning has added a total of $5.5 trillion to the cost of owner-occupied homes, since its inception!
Growth-management planning, also known as smart-growth planning, was first introduced in this country around 1970, when Boulder, Colorado and suburbs of New York City and San Francisco began experimenting with limits on building permits and urban-growth boundaries.
Most people want to buy and live in single-family homes with a yard. These planning processes are designed to use government restrictions to force more and more families to live in high-density condo, townhouse, patio home, or apartment developments by artificially driving up the prices of the type of home that they really want.
What are the restrictive land-use policies that can produce planning penalties as high as $849,783 per house?
"Advocates claim that such planning improves urban livability, but such claims are questionable." For example, high housing prices in core cities often force many people to live in distant lower-priced suburbs which cause lengthy commutes; exactly what growth-management planning is trying to prevent!
In general, regions with growth-management planning have seen housing price increases of 4 to 14 percent per year. Regions without such planning have seen price increases of only 1 to 3 percent per year.
Galveston Housing Affordability:
Data on the typical "middle manager's" home is not available for this study, so it will concentrate on the ratio of median household income to median home prices.
Although the data in this table makes it very clear that the State of Texas, Galveston County, and each city in Galveston County have much more affordable housing than a sample of three growth-management cities shown at the top; the City of Galveston has the dubious distinction of having the least affordable housing in the County! In fact, League City is 60% more affordable than Galveston!
Furthermore, using the latest median sales price, from November 2010, for the City of Galveston ($165,000), and assuming the local median household income remains $36,896; the latest income/price ratio would drop 20% to 0.24!
If the conclusions of the two studies cited above are accurate, then the City of Galveston must find a way to increase its affordability ratio. This can be done by increasing the City's median household income, and/or decreasing the median sales price of homes. This article will focus on possible ways to reduce home prices.
The City of Galveston finds itself in the worst of all worlds. It is the only city in the County choosing to host public housing, it has one of the lowest-rated school systems in the County, and it makes a mockery of code enforcement as it allows buildings to fall apart; the prime reasons why many people choose not to live here! Until these problems are addressed, the local real estate market must offer housing that is even more affordable than nearby cities to have any hope of renewing population growth; however, unfortunately, at the present time, affordability in this city is the lowest in the County!
Based on the factors identified by O'Toole, and listed above, the most likely contributions to the Galveston planning penalty are:
As with the case of downtown commercial buildings, a strategy must also be found to lower the cost of historic homes, or more and more will become empty and unused, and will eventually deteriorate, and face demolition.
Some will resist the changes necessary to make the local real estate market more affordable, believing that the status quo is necessary to maintain the City's "quality of life". Changes to historic rehabilitation rules could certainly effect the authenticity of some buildings, for example, but allowing the use of Vinyl or aluminum windows may be better than the total loss of a house!
It is time to have a discussion on this issue, because there are few absolute answers in life; there are often only trade offs. The City needs to explore the pros and cons of continuing to regulate the local real estate market in the current manner.
Current property owners may object to any policies that would have the aim of lowering property values, but what good are high prices for most owners? They elevate property taxes, and insurance costs every year, and are only a benefit to those who sell and move to a city with higher affordability than Galveston. Otherwise, an owner is simply selling one property at an artificially high price in order to buy another at an artificially high price.
If new residents cannot be recruited, due to the continuation of current policies, and the resulting low affordability, and current residents continue to leave; the burden of paying for ever-more-expensive City services will fall more and more heavily on the remaining property owners.
If the people of this city are interested in reversing 50 years of population decline and actually trying to increase the population, again; it's time to identify and quantify the City's planning penalty, and begin a discussion about how to reduce it.
Methods must be found to make local housing more affordable! Without a growing population, the City will continue its long and painful decline.
A city with a declining population is a dying city! It's time to give it CPR!
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