Economic evidence of effects on housing costs of regulatory barriers to affordable housing 

Rigorous recent studies by leading housing economists have measured the extent to which regulatory barriers increase the cost of housing for low- and moderate-income Americans. See Edward L. Glaeser, et al., The Impact of Building Restrictions on Housing Affordability, Economic Policy Review, Federal Reserve Bank of New York, June 2003, at 28, available at Edward L. Glaeser, et al.
Why have housing prices gone up? NBER Working Paper 11129 (© 2005). 
Those studies find a large and growing disconnect between construction costs and housing prices in many major metropolitan markets of the United States. The studies focus on metros where housing prices diverge the most from the basic, underlying costs -- which are construction costs and “hedonic” land prices (the prices people are willing to pay for a larger lot for their house). The authors conclude that regulatory barriers substantially increase housing prices in areas where prices exceed construction costs by at least 40 percent. 

Housing prices have diverged strongly from physical production costs since the 1970’s in the biggest California metros: Los Angeles, San Diego, and San Francisco. During the 1980’s, that phenomenon spread to the Northeast Corridor and West Coast metros generally, as well as interior markets in California. The same phenomenon spread to certain other non-coastal markets in the 1990’s: Ann Arbor, MI, Austin-San Marcos, TX, Denver, CO, Nashville, TN, and Raleigh-Durham-Chapel Hill, NC. 

Based on the authors’ “40 percent” formula, the underlying data in those studies indicate that regulatory barriers substantially increase housing prices in numerous other major metropolitan areas too. By the year 2000, the problem areas included places such as Albuquerque, NM, Atlanta, GA, Charlotte, NC, Cleveland, OH, Fort Lauderdale-Miami, FL, Norfolk, VA, Phoenix, AZ, and Salt Lake City, UT.

Even the nation's recent economic problems have not reduced the difference between housing prices and construction costs that much. Prices have fallen to 1990's levels in some markets. However, the data described above shows that regulatory barriers were having severe, widespread effects during the 1990’s. And the American housing market now is largely stabilizing, with prices in some areas edging up again. It is not too soon to take all feasible measures to control regulatory barriers to affordable housing.