An interesting debate has arisen over the Watkins bill to cap proffers and impact fees: To what extent do proffers and fees contribute to higher housing prices? Sandhya Someshekhar and Anita Kumar in the Washington Post report that Home Builders Association of Virginia officials said the bill “would stabilize the market and slow the double-digit percentage increases in housing values. Opponents argue that rising housing values have little or nothing to do with proffers.”
The article does not specify which individuals are making these claims, but it strikes me that both sides are blowing smoke. You can make theoretical arguments for both positions, but no one is presenting any data. Everyone, it appears, is making unsubstantiated claims.
I don’t have any hard facts that would shed any light, but perhaps I can provide some conceptual clarity. Let us start with a point so obvious that it requires no supporting data. If a developer negotiates a $30,000-per-dwelling proffer with Prince William County, to pick an example, he will incorporate that expense into the selling price of the house. Only an utter fool would commence building a house knowing that he will sell it for less than what it cost to build and pay off a $30,000 proffer. No, not even a fool could get away with such a thing — his banker would stop him.
Admittedly, it’s possible that the builder will miscalculate. The supply and demand equation can shift, as has happened in the aftermath of the sub-prime mortgage debacle, and the builder can wind up selling speculatively built houses at a loss under distress conditions. But no builder will start construction of a new house knowing up front that he will lose money! Thus, insofar as cost establishes a base price at which houses will sell under normal conditions, proffers and impact fees undeniably contribute to higher selling prices. For foes of the legislation to assert that “rising housing prices have little or nothing to do with proffers” is simply ludicrous.
But that doesn’t make the home builders entirely right: The price of housing is set by the interplay of supply and demand. In Northern Virginia, where debate is the most intense, the problem over the past decade has been twofold: (1) insufficient supply of new housing in locations where the demand is greatest, and (2) speculation and easy credit driven by the mortgage bubble. Local government policies continue to restrict the development of housing supply in locations where demand is the strongest (closer to the urban core), but a decisive change has occurred in real estate markets in the past year: The mortgage bubble has popped, speculation has subsided and real estate prices are falling.
Thus, the home builder argument that the legislation would stabilize the market and “slow the double-digit increases in housing prices” is specious. Housing prices have already backed off from double-digit increases! Proffer/impact fees are only one factor among several that influence prices. I don’t know of a single economist who believes that housing prices will resume their double-digit climb. Many believe that housing prices, after settling into a new equilbrium, will track the slow but steady growth in consumer buying power.
The real issue, in my appraisal, is the mismatch in supply and demand in regional sub-markets. Demand for housing is greatest in or near the urban core, but it is exceedingly difficult to increase the supply there. Too many people raise too many objections, and the cost of getting land rezoned for redevelopment can be prohibitively expensive. It is simply easier for developers to move to the metropolitan periphery and build on open fields — where expensive infrastructure must be built from scratch. Now, even counties on the metropolitan fringe are erecting barriers to growth. Long term, the restriction of housing supply in growing metro areas will exert a upward effect on housing costs. Trouble is, nobody is talking about that problem.
Breaking the logjam requires two things: (1) Finding a formula for requiring new development to “pay its own way,” and (2) Relaxing local government policies that inhibit new development in more balanced, more cost-efficient human settlement patterns. Otherwise, we’ll be arguing until the cows come home…. And, given the rapid disappearance of farmland in Northern Virginia, the cows may never come home.
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