Edward L.

Glaeser and Joseph Gyourko

The Impact of Building

Restrictions on Housing
Affordability

1. Introduction examines whether America actually does face an affordable

housing crisis, and why housing is expensive in high-price
areas.

A chorus of voices appears to proclaim unanimously that

America is in the midst of an affordable housing crisis.
Housing and Urban Development Secretary Andrew Cuomo
In general, housing advocates have confused the role of
housing prices with the role of poverty. Both housing costs and
poverty matter for the well-being of American citizens, but
asserted the existence of such a crisis in his introduction to a only one of these factors is a housing issue per se. Certainly, the
March 2000 report that documents a continuing and growing country should pursue sensible antipoverty policies, but if
housing affordability crisis throughout the nation. Indeed, housing is not unusually expensive, these policies should not be
Secretary Cuomo regularly justified aggressive requests for put forward as a response to a housing crisis.1 To us, a housing
funding by pointing to this crisis. Advocacy groups for the poor affordability crisis means that housing is expensive relative to
such as the Housing Assistance Council pepper their its fundamental costs of production—not that people are poor.
documents with assertions that “the federal government Therefore, we will focus entirely on housing prices, not on the
should commit to a comprehensive strategy for combating the distribution of income.
housing affordability crisis in rural America.” Trade A second key concept in thinking about a housing
associations such as the National Association of Home Builders affordability crisis is the relevant benchmark for housing costs.
decree that “America is facing a silent housing affordability Affordability advocates often argue for the ability to pay (for
crisis.” The National Association of Realtors agrees: “there is a example, some percentage of income) as a relevant benchmark,
continuing, growing crisis in housing affordability and but this again confuses poverty with housing prices. We believe
homeownership that is gripping our nation.” that a more sensible benchmark is the physical construction
Does America actually face a housing affordability crisis? costs of housing. If we believe that there is a housing crisis, then
Are home prices high throughout the United States, or are presumably the correct housing response would be to build
there just a few places where housing prices become extreme? more housing. Yet the social cost of that new housing can never
In those places that are expensive, why are home prices so high? be lower than the cost of construction. For there to be a “social”
Is subsidized construction a sensible approach to solving this gain from new construction, housing must be priced
problem—relative to other, deeper reforms? This paper appreciably above the cost of new construction.

Edward L. Glaeser is a professor of economics at Harvard University and The authors are grateful to Albert Saiz; Jesse Shapiro; and their discussant,
a faculty research fellow at the National Bureau of Economic Research; Brendan O’Flaherty, for comments. The views expressed are those of the
Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate and Finance authors and do not necessarily reflect the position of the Federal Reserve Bank
at the University of Pennsylvania’s Wharton School. of New York or the Federal Reserve System.
<[email protected]>
<[email protected]>

FRBNY Economic Policy Review / June 2003 21

 This argument is not meant to deny that the existence of information on housing characteristics. Thus, we can better
poor people who cannot afford housing is a major social compare the self-reported value of a house with the cost of
problem. However, if housing does not cost appreciably more building a home from scratch. When combined with the Means
than new construction, then it is hard to understand why data, the American Housing Survey allows us to examine
policies oriented toward housing supply would be the right housing prices in a wide range of cities as well as the gap
response to this problem. Hence, we focus on the gap between between these prices and new construction costs.
housing costs and construction costs. These data suggest that America can be divided into three
To look at the housing affordability issue, we use the R.S. broad areas. First, there are a number of places where housing
Means Company’s data on construction costs in various U.S. is priced far below the cost of new construction. These areas are
metropolitan areas (hereafter, the Means data). These data give primarily central cities in the Northeast and the Midwest, such
us information (based on the surveying of construction as Detroit and Philadelphia. In these places, which were the
companies) on the costs of building homes with various subject of our previous work (Glaeser and Gyourko 2001),
characteristics. As a basic number, the Means data suggest that there is almost no new growth. In general, these places had
construction costs for the lowest of the four quality types they significant housing price appreciation over the 1990s, but
track (termed an economy home) are about $60 per square foot. values are still below construction costs.
Construction costs for the next highest quality type (termed an In the second category of housing, in large areas of the
average home) are about $75 per square foot. Ultimately, we country, costs are quite close to the cost of new construction.
compare this information with data on housing prices. These places generally have robust growth on the edges of
To get a better sense of the distribution of housing prices cities, where land is quite cheap. These areas represent the bulk
throughout the United States, we turn to the American of American housing, although they seem to be somewhat
Housing Survey (AHS), but for a quick look at the affordability underrepresented in the AHS.
issue, it is useful to examine the 2000 U.S. census. The census Finally, there is a third category of cities and suburbs where
indicates that the self-reported median home value is the price of homes is much higher than the cost of new
$120,000.2 Sixty-three percent of single-family detached homes construction; Manhattan and Palo Alto are two examples.
in America are valued at less than $150,000. Seventy-eight Indeed, many of these places are in California, but the 1990s
percent of these homes are valued at less than $200,000. The saw an increase in such areas in the Northeast and South as
American Housing Survey reports that the median size of a well. Although there are a number of such places with
detached owned home is 1,704 square feet. The construction extremely expensive homes, they do not represent the norm for
costs of an average home imply that this home should cost America. Both poor and nonpoor people suffer from higher
about $127,500 to build, with a lower quality economy home housing costs in such areas.
costing $102,000 to construct.3 In this paper, after first surveying housing costs in the
Together, these numbers provide us with the first important United States, we examine why the expensive places have such
lesson from housing markets. The majority of homes in this high housing costs. High-cost places generally have either very
country are priced—even in the midst of a so-called housing attractive local amenities (great weather or good schools) or
affordability crisis—close to construction costs. The value of strong labor markets. The Rosen (1979) and Roback (1982)
land generally seems modest, probably 20 percent or less of the framework has proved useful in such studies, and one of us
value of the house. To us, this means that America as a whole (Gyourko and Tracy 1991) has written on this topic.
may have a poverty crisis, but its housing prices are basically It is noteworthy that we do not focus here on the housing
being tied down by the cost of new construction. Unless state demand side of the cost equilibrium. Instead, we focus on the
intervention can miraculously produce houses at far less than role of housing supply. What is it that creates places where the
normal construction costs, such programs are unlikely to cost of housing is so much higher than the physical
reduce the distribution of housing costs in America radically. construction costs? We offer two basic views. First, there is the
If housing costs in the United States are so low, why the classic economics approach, which argues that houses are
horror stories? What about the tear-downs going for millions expensive because land is expensive. According to this view,
in Palo Alto? What about the multi-million-dollar apartments there is a great deal of demand for certain areas, and land, by its
in Manhattan? The American Housing Survey allows us to see very nature, is limited in supply. As such, the price of housing
the distribution of house prices across the country. In addition, must rise. Traditional models, such as the classic Alonso-
this source improves on the census by providing much better Muth-Mills framework, take this view.

22 The Impact of Building Restrictions on Housing Affordability

 Our alternative view is that homes are expensive in high- between high prices and density. This again is consistent with a
cost areas primarily because of government regulation, that is, critical role for regulation.
zoning and other restrictions on building. According to this Our third approach is to correlate measures of regulation
view, housing is expensive because of artificial limits on with the value of housing prices. This approach is somewhat
construction created by the regulation of new housing. It problematic because high values of land may themselves create
argues that there is plenty of land in high-cost areas, and in regulation. Nonetheless, we find a robust connection between
principle new construction might be able to push the cost of high prices and regulation. Almost all of the very high-cost
houses down to physical construction costs. This is not to areas are extremely regulated—even though they have fairly
imply that high prices exist in areas with weak demand reasonable density levels. Again, we interpret this as evidence of
fundamentals. A strong demand, because of attractive the importance of regulation.
amenities or a thriving labor market, is essential. However, this As a whole, our paper concludes that America does not
hypothesis implies that land prices are high, not due to some uniformly face a housing affordability crisis. In the majority of
intrinsic scarcity, but because of man-made regulations. places, land costs are low (or at least reasonable) and housing
Hence, the barriers to building create a potentially massive prices are close to (or below) the costs of new construction. In
wedge between prices and building costs. the places where housing is quite expensive, building
We present three pieces of evidence that attempt to restrictions appear to have created these high prices.
differentiate between these two hypotheses. First, we look at One implication of this analysis is that the affordable
two different ways of valuing land. The first, classic way, is to housing debate should be broadened to encompass zoning
use a housing hedonic and compare the price of comparable reform, not just public or subsidized construction programs.
homes situated on lots of different sizes. With these Although poor households almost certainly are not consuming
comparisons, we are, in principle, able to back out the value the typical unit in areas with extremely high prices, we suspect
that consumers place on larger lots. Our second methodology that most filtering models of housing markets would show that
is to subtract the construction costs from the home value and they too would benefit from an increased focus on land-use
divide by the number of acres. This gives us another per-acre constraints by affordability advocates.
value of land that is implied by the home price. The first, or That said, we have done nothing to assess the possible
hedonic, methodology can be thought of as giving the intensive benefits of zoning (well discussed by Fischel [1992], for
value of land—that is, how much land is worth on the margin example). So we cannot suggest that zoning should be
to homeowners. The second methodology gives the extensive eliminated. However, we believe that the evidence suggests that
margin—or how much it is worth to have a plot of land with a zoning is responsible for high housing costs, which means that
house on it. if we are thinking about lowering housing prices, we should
The two hypotheses outlined above offer radically different begin with reforming the barriers to new construction in the
predictions about the relationship of these two values. The private sector.
neoclassical approach suggests that land should be valued the
same using either methodology. After all, if a homeowner does
not value the land on his plot very much, he would subdivide
and sell it to someone else. The regulation approach suggests 2. Housing Prices in the
that the differences can be quite large. Empirically, we find that United States
the hedonic estimates produce land values that often are about
10 percent of the values calculated with the extensive method- We start with an analysis of housing prices across the United
ology. We believe that this is our best evidence for the critical States. This work follows the methodology of Glaeser and
role that building limitations may play in creating high housing Gyourko (2001). In this paper, we use the American Housing
costs. Survey and the U.S. census to gather data on housing
Our second empirical approach is to look at crowding in characteristics and values; we use the R.S. Means data for
high-cost areas. The neoclassical approach tells us that if these construction costs. We then create measures relating home
are areas with a high cost of land, then individuals should be prices to construction costs.
consuming less land. The regulation approach argues that R.S. Means monitors construction costs in numerous
highly regulated areas will have large lots and high prices. Our American and Canadian cities. The Means Company reports
evidence suggests that there is little connection across areas local construction costs per square foot of living area. Its data

FRBNY Economic Policy Review / June 2003 23

on construction costs include material costs, labor costs, and new construction costs. If the appropriate benchmark is an
equipment costs for four different quality types of single-unit economy home, then for these homes land is about 40 percent
residences. No land costs are included.4 or more of the value. If the appropriate benchmark is an
The Means data contain information on four quality types average home, then for these homes land is approximately
of homes—economy, average, custom, and luxury. The data 20 percent of the value of the home. Our view is that homes
are broken down further by the size of living area (ranging from below this cutoff are sitting on relatively cheap land. We also
600 to 3,200 square feet), the number of stories in the unit, and calculate the share of homes with prices that are more than
a few other differentiators. We focus on costs for a one-story, 10 percent below the cost of new construction.
economy house with an unfinished basement, with the mean Table 1 shows the distribution of homes—relative to
cost associated with four possible types of siding and building construction costs—for the nation as a whole and for the four
frame, and with small (less than 1,550 square feet), medium main census regions. These data highlight the point that at least
(1,550 to 1,850 square feet), or large (1,850 to 2,500 square feet) half of the nation’s housing is less than 40 percent more
living areas. Generally, our choices reflect low to modest expensive than economy-quality home construction costs, or
construction costs. This strategy will tend to overestimate the no more than 20 percent more expensive than average-quality
true gap between housing prices and construction costs. If the home construction costs. They also suggest that a large share of
relevant benchmark is an average-quality unit, not an the nation’s housing has its price determined roughly by the
economy-quality unit, construction costs should generally be physical costs of new construction, as most of the housing value
increased by about 20 percent. is within 40 percent of physical construction costs. That said,
The housing price data used in this paper to create the the regional breakdowns reported in Table 1 emphasize that
relationship between home prices and construction costs come much land in Western cities looks to be relatively expensive.
from the American Housing Survey. We focus on observations Charts 1 and 2 give an overall impression of the underlying
of single-unit residences that are owner-occupied and exclude data. In Chart 1, for central cities, we have graphed the share of
condominiums and cooperative units in buildings with homes with prices that are more than 40 percent above
multiple units, even if they are owned. construction costs in the 1999 American Housing Survey on
Excluding apartments simplifies our analysis, but in some the share of comparable homes in the 1989 AHS. The straight
ways the connection between construction costs and home line in the chart is the 45-degree line. In Chart 2, we have
prices is easier with apartments. In general, the marginal repeated this procedure for the suburban parts of the
construction cost of an apartment is the price of building up. metropolitan areas.
For example, other data from R.S. Means show that the price
per square foot of building in a typical high-rise of from eight
to twenty-four stories was nearly $110 per square foot in New
York City in 1999.5 This implies that the purely physical costs Table 1
of construction for a new 1,500-square-foot unit in New York Distribution of Single-Family House Prices Relative
City are about $166,500. Anyone familiar with the New York to Construction Costs
American Housing Survey Data: 1989 and 1999,
housing market knows that a large number of Manhattan
Central-City Observations
apartments trade at many multiples of this amount.
Because house price will be compared with construction 1989 1999
costs, and the latter are reported on a square-foot basis, the
Fraction Fraction Fraction Fraction
house price data must be put in similar form. This is of Units of Units of Units of Units
straightforward for the AHS, which contains the square footage Valued below Valued above Valued below Valued above
of living areas. For every single unit reported in the 1999 or 90 Percent of 140 Percent of 90 Percent of 140 Percent of
Construction Construction Construction Construction
1989 AHS, we can then compute the ratio of house value to
Costs Costs Costs Costs
construction costs (as long as it is in an area tracked in the
Means data).6 From this, we can calculate the distribution of Nation 0.17 0.46 0.17 0.50
Midwest 0.41 0.14 0.30 0.27
homes priced above and below construction costs and can do
Northeast 0.12 0.58 0.37 0.34
so for nearly forty cities in both 1989 and 1999. We look at two South 0.11 0.50 0.13 0.46
measures: the first is the share of housing in the area that costs West 0.05 0.69 0.04 0.77
at least 40 percent more than new construction. These are the
homes in the area where land is actually a significant share of Source: Authors’ calculations.

24 The Impact of Building Restrictions on Housing Affordability

 Chart 1 makes two major points. First, there is a great deal than 1.4 times construction costs. However, in a number of
of permanence in these measures. The correlation coefficient places, almost all of the homes cost less than this benchmark.
between the 1989 and 1999 measures is 82 percent. The average Chart 2 makes similar points. The correlation between the
of this variable across central cities was 47.8 percent in 1989 1989 and 1999 measures is lower, but remains high at 0.70.
and 50.2 percent in 1999, so it does not look like the 1990s were There is also heterogeneity across space in suburban areas,
a watershed in terms of housing price changes. Second, there is a but in general these places are more likely to have land values
great deal of heterogeneity across places. A number of places— that are substantially higher than construction costs. The
primarily in California—have almost no homes that cost less unweighted mean across the thirty-seven suburban areas was

Chart 1
House Prices/Construction Costs over Time
Central Cities

1989
1.0
Anaheim

Los Angeles San

0.9 Francisco
Norfolk San Diego
New York City Raleigh Albuquerque
0.8

0.7
Phoenix

0.6
Greensboro Denver
Dallas Sacramento
Philadelphia Jacksonville
0.5
San Antonio New Orleans Seattle
Austin
Baltimore Tampa Tucson
Fort Worth
0.4
Little Rock
El Paso Tulsa
Oklahoma City
0.3
Las Vegas
Chicago
Minneapolis Wichita
0.2
Columbus
Toledo
Omaha
0.1
Kansas City Milwaukee
Detroit
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
1999

Note: The x-axis (y-axis) denotes the share of homes in central cities with prices that are more than 40 percent above construction costs in the 1999
(1989) American Housing Survey.

FRBNY Economic Policy Review / June 2003 25

61 percent in 1989 and 63 percent in 1999. We suspect that one States, there are many areas with extremely cheap housing.
reason for the higher fractions of expensive housing is that However, in this sample, only Philadelphia and Detroit had
suburban homes are newer and are likely to be of high quality. extremely large values of this measure in 1999.7 We should note
A second reason is that suburban homes have more land and that our previous work using the 1990 census suggests that
suburban land is more expensive. there is a greater amount of cheaper housing than is indicated
The data by local area are shown in Tables 2 and 3. These by the AHS. Our suspicion is that the census is more
tables also report the share of the housing stock that is priced at representative, but we leave further examination of these
least 10 percent below construction costs. Across the United discrepancies to future work.

Chart 2
House Prices/Construction Costs over Time
Suburban Areas

1989 Oxnard
1.0
San Francisco
Newark
San Diego Anaheim
0.9 Boston
Riverside
New York City Los Angeles
Sacramento
0.8
Philadelphia
Fort Lauderdale
Orlando Miami Seattle
0.7
Atlanta Chicago
Baltimore Phoenix
Rochester Albany
0.6
Fort Worth Dallas
Tampa
Birmingham
New Orleans
0.5
Columbus

0.4
Milwaukee
St. Louis

0.3
Minneapolis Cincinnati
Houston Detroit
Kansas City Cleveland Salt Lake City
0.2
Pittsburgh

0.1

0
0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
1999

Note: The x-axis (y-axis) denotes the share of homes in suburban areas with prices that are more than 40 percent above construction costs in the 1999
(1989) American Housing Survey.

26 The Impact of Building Restrictions on Housing Affordability

Table 2 Table 3
Distribution of House Prices/Construction Costs Distribution of House Prices/Construction Costs
City Areas, 1989 and 1999 Suburban Areas, 1989 and 1999

1989 1999 1989 1999

Fraction Fraction Fraction Fraction Fraction Fraction Fraction Fraction

of Units of Units of Units of Units of Units of Units of Units of Units
Valued below Valued above Valued below Valued above Valued below Valued above Valued below Valued above
90 Percent of 140 Percent of 90 Percent of 140 Percent of 90 Percent of 140 Percent of 90 Percent of 140 Percent of
Construction Construction Construction Construction Construction Construction Construction Construction
City Costs Costs Costs Costs City Costs Costs Costs Costs

Albuquerque 0.02 0.82 0.03 0.83 Albany 0.06 0.63 0.00 0.40
Anaheim 0.00 1.00 0.00 0.93 Anaheim 0.02 0.96 0.03 0.96
Austin 0.00 0.46 0.06 0.71 Atlanta 0.03 0.67 0.06 0.58
Baltimore 0.18 0.41 0.30 0.27 Baltimore 0.05 0.66 0.01 0.61
Chicago 0.20 0.28 0.16 0.44 Birmingham 0.10 0.56 0.12 0.53
Columbus 0.33 0.18 0.12 0.29 Boston 0.01 0.87 0.02 0.86
Dallas 0.06 0.56 0.13 0.47 Chicago 0.06 0.67 0.05 0.74
Denver 0.04 0.60 0.08 0.86 Cincinnati 0.10 0.29 0.10 0.47
Detroit 0.85 0.05 0.54 0.20 Cleveland 0.15 0.23 0.05 0.58
El Paso 0.05 0.34 0.02 0.28 Columbus 0.12 0.47 0.03 0.61
Fort Worth 0.12 0.40 0.26 0.29 Dallas 0.03 0.58 0.06 0.52
Greensboro 0.13 0.59 0.00 0.69 Detroit 0.24 0.26 0.08 0.58
Houston 0.25 0.40 0.25 0.27 Fort
Indianapolis 0.25 0.22 0.24 0.22 Lauderdale 0.00 0.76 0.00 0.85
Jacksonville 0.08 0.55 0.11 0.43 Fort Worth 0.09 0.59 0.09 0.49
Kansas City 0.33 0.09 0.40 0.12 Houston 0.23 0.24 0.08 0.31
Las Vegas 0.00 0.29 0.03 0.45 Kansas City 0.15 0.22 0.05 0.33
Little Rock 0.09 0.36 0.08 0.40 Los Angeles 0.04 0.91 0.04 0.89
Los Angeles 0.02 0.93 0.04 0.89 Miami 0.05 0.72 0.00 0.73
Milwaukee 0.32 0.10 0.27 0.22 Milwaukee 0.05 0.39 0.08 0.53
Minneapolis 0.22 0.21 0.20 0.30 Minneapolis 0.08 0.29 0.05 0.43
Nashville- Newark 0.01 0.96 0.01 0.72
Davidson 0.02 0.69 0.05 0.56 New Orleans 0.10 0.53 0.06 0.61
New Orleans 0.02 0.49 0.03 0.57 New York City 0.03 0.85 0.09 0.78
New York City 0.04 0.81 0.11 0.56 Orlando 0.03 0.70 0.04 0.61
Norfolk 0.01 0.87 0.02 0.66 Oxnard 0.00 1.00 0.04 0.93
Oklahoma Philadelphia 0.03 0.78 0.11 0.47
City 0.13 0.30 0.16 0.41 Phoenix 0.02 0.65 0.00 0.76
Omaha 0.21 0.15 0.30 0.21 Pittsburgh 0.23 0.19 0.25 0.21
Philadelphia 0.10 0.52 0.60 0.16 Riverside 0.05 0.87 0.02 0.76
Phoenix 0.02 0.69 0.05 0.65 Rochester 0.01 0.63 0.09 0.28
Raleigh 0.06 0.81 0.02 0.81 Sacramento 0.03 0.83 0.05 0.72
Sacramento 0.00 0.55 0.03 0.72 Salt Lake City 0.10 0.22 0.02 0.86
San Antonio 0.12 0.48 0.30 0.26 San Diego 0.04 0.92 0.05 0.88
San Diego 0.07 0.88 0.03 0.93 San Francisco 0.01 0.98 0.02 0.97
San Francisco 0.00 0.97 0.04 0.96 Seattle 0.02 0.72 0.01 0.90
Seattle 0.06 0.49 0.02 0.86 St. Louis 0.11 0.34 0.21 0.34
Tampa 0.09 0.43 0.13 0.49 Tampa 0.03 0.57 0.05 0.66
Toledo 0.27 0.16 0.40 0.23
Tucson 0.06 0.43 0.04 0.61
Tulsa 0.07 0.36 0.08 0.38
Wichita 0.18 0.21 0.13 0.48

FRBNY Economic Policy Review / June 2003 27

 Our focus here is not on the cheap areas, however, but on much more natural policy response to high housing prices than
the expensive ones. Moreover, we believe that these data is reducing demand.
confirm that there are some areas of the country that do indeed To clarify the issues, let us consider a jurisdiction with a
have a dearth of affordable housing. Still, for much of the supply of land equal to A. Assume that the construction cost for
country, prices are determined by new construction costs. a home is K. Here we are not interested in the margin of
As we discussed, this means that there is not an affordable interior space. The free market price of land equals p. We
housing crisis in such areas. The problem probably lies in the represent zoning and other building restrictions with a tax T on
labor market, not the land market. We now consider why home new construction. In principle, zoning could also work by
prices are high relative to construction costs in the areas that limiting the total number of homes in the area to a fixed
are expensive. number or, equivalently, by constraining lot size to be greater
than a given amount. As we assume homogenous residents, a
minimum lot size and a constraint on the number of residents
will be equivalent. Also, as we are not interested in the
3. Discussion: Demand for Land incidence of the policy, a tax and a quantity limit will yield the
versus Zoning same outcomes.
As such, the supply price of building a house with L units of
Housing prices are determined by both demand and supply
land will be K + T + pL . We will not generally directly observe
concerns. High housing prices must reflect high consumer
either p or T . The sales price of the home will be denoted
demand for a particular area. However, they must also reflect
P ( L ) , where P ( L ) refers to the price of a home with L units
some sort of restriction on supply. Data from sources such as
of land. In equilibrium, P ( L ) must equal K + T + pL so
Means suggest that physical houses can be supplied almost
P′ ( L ) = p .
perfectly elastically. As such, the limits on housing supply must
Our primary interest is in the relevant magnitudes of pL
come from the land component of housing. The usual urban
and T in creating expensive housing. We do not directly
economics view of housing markets suggests that the
observe either p or T , but we do observe P ( L ) and K . As such,
restriction on housing supply is the availability of land. Because
we can compute P ( L ) – K , which gives us an estimate of
land is ultimately inelastically supplied, this naturally creates a
T + pL . Using standard hedonic analysis, we can estimate
limit on the supply of new housing at construction costs. An
P′ ( L ) , which is the amount the housing price increases within
alternative view is that land itself is fairly abundant, but zoning
authorities make new construction extremely costly. These a given neighborhood as the amount of land rises. By
costs can take the form of classic impact fees or Byzantine estimating P′ ( L ) , we are estimating p —the implicit price of
approval processes that slow or put up costly hurdles to land. Even in communities where new houses are not being
construction. Obviously, there could be some truth to both built, the hedonic value of land still gives us an implicit price of
views. In this section, we provide an analytical framework for land. We can then compare p with ( P ( L ) – K ) ⁄ L , which
our attempts to distinguish empirically between the two views equals p + T ⁄ L . The difference between these two values gives
of expensive land: intrinsic scarcity versus zoning. Section 4 us a sense of the relative importance of land prices and building
then examines a variety of data to determine if the weight of the restrictions.
evidence more strongly supports one view over the other. A second test of the model requires us to look across
As noted, we have decided to ignore the housing demand communities with different levels of some local amenity that we
component of the housing prices. Two reasons underpin this denote as B. In this case, we write the home price function as
decision. First, housing demand has been studied much more P ( L, B ) . If we differentiate across communities and T changes
extensively than housing supply. A distinguished literature, dP ( L ,B ) dp dT
across communities but K does not, then --------------------- = ------
- L + ------- .
including Alonso (1964), Muth (1969), Rosen (1979), and dB dB dB
Roback (1982), has considered the determinants of housing The value of T might differ across communities because
demand. Labor market demand and consumption amenities, impact fees differ, but more likely T will differ if zoning takes
such as weather and schools, are both important causes of the form of quantity controls. If zoning takes the form of mini-
particular demand for some areas. We have little to add to these mum lot size or maximum residents, then the implicit tax will
findings. Second, policy responses to housing prices are be higher in high-amenity communities. In a sense, our interest
dp dT
unlikely to change housing demand. Increasing supply is a lies in determining the relative magnitudes of ------ - L and ------- .
dB dB

28 The Impact of Building Restrictions on Housing Affordability

One way to examine this is to look at our implied measures of indicator variable that takes on a value of 1 if the home has a
p and T found using the methodology discussed above. fireplace, an indicator variable that takes on a value of 1 if the
Another way is to look at land densities. We specify utility as home has a garage, an indicator variable that takes on a value of
a function of the location-specific amenity B , consumption of 1 if the home is in a central city, an indicator variable that takes
land, and consumption of a composite commodity, denoted C , on a value of 1 if the home has a basement, an indicator variable
which is equal to income (denoted Y ) minus housing costs. Thus, that takes on a value of 1 if the home has air conditioning, and
total utility equals U ( B, L, Y – P ( L, B ) ) . This implies an optimal the age of the home. We ran each regression separately for
level of land, denoted L∗ , which satisfies U L = P′ ( L∗ )U c 26 metropolitan areas for which there were 100 observations
(where Ux denotes the derivative of U (.,.,.) with respect so that trait prices would reasonably be precisely
to an argument X ). For simplicity, we assume that estimated.8
U ( B, L, Y – P ( L, B ) ) equals W ( B ) + V ( L ) + Y – P ( L, B ) , Column 1 of Table 4 reports the hedonic price of land for
so the first-order condition for land becomes V′ ( L∗ ) = p . different metropolitan areas using this linear specification. The
Differentiating this with respect to B then yields hedonic literature has generally argued that non-normal error
α
dL∗ ⁄ dB = ( dp ⁄ dB ) ⁄ V ′′( L∗ ) . If V ( L ) equals vL , then this terms make a logarithmic specification more sensible. As such,
log ( v α ) 1 we have also estimated logarithmic equations of the following
tells us that log ( L ) = -------------------- – -----------
- log ( p ) . This yields the
1–α 1–α form:
clear implication that if dp ⁄ dB is big, we should expect there
to be lower densities in areas with large amenities and high ( 1′ ) log(home price) = p′∗ log(land area) + other controls.
costs. Conversely, if there is no connection between housing
costs and density, then this is more evidence for the zoning To transform the estimate of p′ , which is an elasticity, into
model rather than the neoclassical housing price model. a value of land, we take this coefficient and multiply it by the
Our third empirical approach relies on the existence of ratio of mean home price to mean land area. After this
zoning. If we have measures of the difficulty of obtaining transformation, our elasticity-based estimates should be
building permits in a particular area, then we should expect comparable to those in column 1, and we report them in
them to drive up housing costs (holding B constant). This is column 2.
just documenting that dP ⁄ dT > 0. Obviously, this approach is The two hedonic estimates are strongly correlated ( ρ = .5),
likely to be compromised if high-amenity areas impose more although the implicit prices arising from the logged
stringent zoning. Nonetheless, a connection between the specification tend to be slightly higher. In any event, functional
strength of zoning rules and housing prices seems like a final form does not lead one to materially different conclusions
test for the zoning view. As an added test, if we have measures regarding the value of a small change in lot size about the
of zoning controls across communities, we would expect the sample mean in these areas. In general, the hedonic estimates
estimated value of T ⁄ L to be higher. suggest that land is relatively cheap on this margin. In some
cities, the estimated price is below $1 per square foot. Although
estimates in those places tend not to be precise, the t-statistics
reported still do not imply really high prices, even at the top
4. Evidence on Zoning: The end of the 95 percent confidence interval. In places where the
Intensive Margin and point estimate is reasonably precise, land prices tend to be
the Extensive Margin between $1 and $2 per square foot. In these areas, this implies
that an average homeowner would be willing to pay between
As our first test, we follow the framework and attempt to $11,000 and $22,000 for an extra quarter-acre of land.9 The
estimate p: the market price of land, and T ⁄ L : the implicit estimates are higher in some cities, primarily in California. For
zoning tax. Using data from the 1999 American Housing example, in San Francisco, it appears that homeowners are
Survey, we begin by estimating p using the standard hedonic willing to pay almost $80,000 for an extra quarter-acre of
methodology in a regression of the following specification: land.10 Although we do not have very good benchmarks against
(1) housing price = p∗ land area + other controls. which to compare these prices, intuitively they seem reasonable
to us as a whole.
The other controls include the number of bedrooms, the To implement our first test, we must compare these prices
number of bathrooms, the number of other rooms, an with the implicit price of land found by computing the

FRBNY Economic Policy Review / June 2003 29

 Table 4
Land Price on the Extensive and Intensive Margins

Hedonic Price of Imputed Land Cost from

Land/Square Foot, Hedonic Price of Land/Square R.S. Means Company Data
City Linear Specification Foot, Log-Log Specification (Intensive Margin) Mean House Price

Anaheim $2.89 $3.55 $38.99 $312,312

(1.54) (1.34)
Atlanta $0.23 -$0.30 $3.20 $150,027
(0.50) (-0.70)
Baltimore $1.15 $5.21 $4.43 $152,813
(2.53) (2.31)
Boston $0.07 $0.55 $13.16 $250,897
(0.10) (0.67)
Chicago $0.79 $0.80 $14.57 $184,249
(2.43) (1.96)
Cincinnati $0.89 $0.50 $2.71 $114,083
(1.92) (1.14)
Cleveland $0.26 $0.24 $4.13 $128,127
(0.95) (0.81)
Dallas -$0.83 $0.21 $5.42 $117,805
(-1.14) (0.27)
Detroit $0.14 $0.45 $5.10 $138,217
(0.92) (2.31)
Houston $1.43 $1.62 $4.37 $108,463
(2.61) (2.66)
Kansas City $2.06 $1.65 $1.92 $112,700
(2.75) (2.11)
Los Angeles $2.19 $2.60 $30.44 $254,221
(4.63) (3.53)
Miami $0.37 $0.18 $10.87 $153,041
(0.45) (0.24)
Milwaukee $1.44 $0.95 $3.04 $130,451
(3.08) (1.90)
Minneapolis $0.29 $0.35 $8.81 $149,267
(0.93) (1.09)
Newark $0.42 $0.10 $17.70 $231,312
(0.62) (0.11)
New York City $0.84 $1.62 $32.33 $252,743
(1.09) (1.60)
Philadelphia $1.07 $0.77 $3.20 $163,615
(6.41) (5.28)
Phoenix $1.89 $1.86 $6.86 $143,296
(3.88) (3.26)
Pittsburgh $2.28 $1.71 $3.08 $106,747
(6.26) (4.55)
Riverside $1.35 $1.60 $7.92 $149,819
(3.55) (2.95)
San Diego $0.58 $1.29 $26.12 $245,764
(0.97) (1.33)
San Francisco $0.97 $7.84 $63.72 $461,209
(0.76) (2.42)
Seattle -$0.68 $0.48 $18.91 $262,676
(-0.69) (0.06)
St. Louis $0.63 $0.07 $1.74 $110,335
(1.91) (1.55)
Tampa $0.19 $0.89 $6.32 $101,593
(0.36) (1.30)

Note: t-statistics are in parentheses.

30 The Impact of Building Restrictions on Housing Affordability

difference between home prices and structure costs. 5. Evidence on Zoning: Density
Subtracting structure costs (provided by the Means data) from and Housing Costs
reported home values and then dividing by the amount of land
generates an estimate of p + T ⁄ L , as described above—the Our second test is to look at the connection between housing
value of land including the implicit tax on new construction. prices and density. As described in the model, the neoclassical
These average values of p + T ⁄ L for each metropolitan area land model strongly suggests that there should be a positive
appear in column 3 of Table 4. connection between density and housing prices. The free land
Comparing columns 1 and 2 with column 3 illustrates the market view suggests that higher amenities will lead to higher
vast differences in our estimates of the intensive and extensive land prices and lower consumption of land. The zoning view
prices of land, or p and p + T ⁄ L . In many cases, our estimate suggests that higher amenities will just lead to a higher implicit
of p + T ⁄ L is about ten times larger than p. For example, in zoning tax. This zoning tax does not impact the marginal cost
Chicago, our imputed price of land per square foot from the of additional land and there should therefore be little
extensive margin methodology is $14.57. This means that a connection between the cost of land and density.
home on a quarter-acre plot (or 10,890 square feet) will cost To test this implication, we correlate land density within a
more than $140,000 above construction costs. In San Diego, this central city with our various measures of housing prices within
quarter-acre plot is implicitly priced at nearly $285,000. The that city. Because the framework suggested the relationship
analogous figure is even higher in New York City, at slightly log ( v α ) 1
log ( L ) = -------------------- – ------------log ( p ), we estimate a logarithmic
more than $350,000. In San Francisco, the plot is apparently 1–α 1–α
worth just under $700,000. equation. We use as our land area measure the logarithm of the
This is our first piece of evidence on the relative importance land area in the city divided by the number of households.13
of classic land prices and zoning. In areas where the ratio is Obviously, density is higher the lower the value of this variable.
10:1, the findings suggest that for an average lot, only 10 per- Table 5 presents the results from a series of regressions
cent of the value of the land comes from an intrinsically high exploring the relationship of our density measure with the
land price as measured by hedonic prices.11 index of expensive homes and land in our sample of cities. In
Although the hedonic land prices from the linear regression 1, we use as the independent variable our measure of
specification (column 1) are not significantly correlated with the share of houses that cost at least 40 percent more than
the mean house prices reported in column 4 of Table 4, both construction does. In this case, the relationship is negative, so a
the hedonic prices from the logged model (column 2) and the higher concentration of expensive homes is associated with
extensive margin prices (column 3) are strongly positively greater density. However, there still is no meaningful statistical
correlated with mean prices. Simple regressions of each of the relationship. Chart 3 plots the relationship with the regression
three land price series on mean house price find that the dollar line included. The chart highlights the extraordinary amount of
impact of house price with respect to land price is far larger for heterogeneity in the relationship between density and the
the series that reflects the implicit development tax. Specifi- distribution of house prices. For example, Detroit, Seattle, and
cally, a one-standard-deviation increase in house price (which Los Angeles have similar land densities per household, but
equals $82,239 in this twenty-six-city sample) above its mean is radically different fractions of units sitting on expensive land.
associated with a $13.82 increase in land price as reflected in Analogously, New York City and San Diego have similarly high
our p + T ⁄ L measure. The analogous standardized effect with fractions of expensive land, but very different residential
respect to our measure of p arising from the logged hedonic densities.
model is $1.10.12 Although these results are based on an In regression 2, we control for median income in the city in
admittedly small sample, we believe that the difference in the 1990 to help account for the possibility that richer people live
scale of the changes provides evidence consistent with the in expensive areas and demand more land. However, there still
hypothesis that high home prices appear to have more to do is no really strong relationship between density and the fraction
with regulation than with the operations of a free market of expensive land and homes. Density is slightly higher in more
for land. expensive areas on average, but the relationship is tenuous even
when controlling for income. In regression 3, median house
price in 1990 is used as the independent variable. There is a
statistically significant negative relationship between density
and price in this case, with the elasticity being -0.56. However,
there is much heterogeneity here too. The statements above

FRBNY Economic Policy Review / June 2003 31

regarding Detroit, Seattle, Los Angeles, New York City, and the distribution of housing prices using average January
San Diego still hold true when median price is on the right- temperature as an instrument. January temperature is meant to
hand side of the regression. represent the exogenous variation in amenities that causes
For regressions 4, 5, and 6, we take the model more seriously prices to rise. Not only is there no statistically meaningful
and use an amenity to look at the impact of housing costs and connection between prices and land consumption, but these
land consumption. We focus on a particularly well-studied instrumental-variables results imply that higher prices are
amenity—average January temperature. In regression 4, we associated with lower, not higher, densities. One possibility is
show that there is a strong positive relationship between the that incomes are higher in these areas and that richer people are
fraction of expensive homes and land and average January demanding more land. Consequently, we redid the analysis
temperature. This relationship is necessary for this variable to adding median family income as a control, but the results were
qualify as an instrument. In regression 5, we regress the largely unchanged. That is, there is no statistically significant
logarithm of land area per household on January temperature. relation between instrumented prices and density, and the
In this case, the relationship is much less strong statistically. point estimate still is slightly positive (albeit small). Although
The t-statistic is 1.6. Taken together, these results show that a we acknowledge that the sample is small and that there could
warmer January temperature may raise housing prices,14 but be other omitted factors, these results suggest to us that higher
there is no strong evidence that it increases densities—at least prices have more to do with zoning than a higher marginal cost
not by very much. Indirectly, this suggests that it is not raising of land.
the marginal cost of land by much. As a final test of this view, we regress our two measures of
In regression 6, we follow the spirit of the framework most land costs from Table 4 with average January temperature. We
closely. We regress the logarithm of land area per household on only have twenty-six observations, but the results are still quite

Table 5
Density and the Distribution of House Prices in Cities, 1990

Dependent Variable
Fraction of Units
Valued at or above
Log Land Area Log Land Area Log Land Area 140 Percent Log Land Area Log Land Area
per Household per Household per Household of Construction Costs per Household per Householda
Fraction of units valued at or above -0.510 -0.576 1.177
140 percent of construction costs (0.451) (0.507) (0.880)

Log median family income, 1989 0.266

(0.895)
Median house price, 1990 -0.565
(0.225)
Mean January temperature 0.013 0.015
(0.003) (0.009)
Intercept -7.050 -9.784 -0.959 -0.021 -7.882 -17.254
(0.245) (9.191) (2.536) (0.113) (0.387) (8.678)
2
R 0.01 -0.02 0.12 0.34 0.04
Number of observations 40 40 40 40 40 40

Notes: Standard errors are in parentheses. Density is defined as the log of the ratio of square miles of land in the city divided by the number of households.
a
Two-stage least squares: Mean January temperature as instrument.

32 The Impact of Building Restrictions on Housing Affordability

 Chart 3
Density and the Distribution of House Prices
Central Cities, 1990

Land area per household, 1990

-5.5

Oklahoma City Jacksonville

-6.0
Nashville-Davidson

Kansas City
-6.5 Fort Worth
El Paso
Little Rock
Indianapolis Austin
Tulsa Greensboro
San Antonio Phoenix Raleigh
-7.0 Tucson
Wichita Tampa New Orleans
Las Vegas
Houston Dallas Albuquerque San Diego
Omaha Columbus Denver
Toledo Sacramento
-7.5
Norfolk Anaheim
Milwaukee
Los Angeles
Detroit Seattle
-8.0
Minneapolis
Baltimore

Chicago
-8.5
Philadelphia

San Francisco

-9.0
New York City

-9.5
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Central cities, 1989

Note: The x-axis denotes the share of homes in central cities with prices that are more than 40 percent above construction costs in the 1989 American
Housing Survey.

illuminating. A standard-deviation increase of 14.7 degrees in 6. Evidence on Zoning: Housing

mean January temperature is associated with a $5.02 higher Costs and Zoning
construction-cost-based price of land. The same increase in
warmth is associated with only a $0.47 higher hedonic-based Our last perspective on the role of zoning comes from an
price of land.15 Once again, amenities seem to have more examination of the correlation between land prices and
of an effect on the implicit zoning tax than on the marginal measures of zoning. Such data are very difficult to obtain. Our
cost of land. measures of zoning come from the Wharton Land Use Control

FRBNY Economic Policy Review / June 2003 33

Survey. This survey, which took place in 1989, covers measure (again using the share of the city’s housing stock
jurisdictions in sixty metropolitan areas. Because of the priced more than 40 percent above the cost of new
limitations of our American Housing Survey data, we are construction) on the first zoning measure—the time required
forced to consider only observations on the central cities of to get a permit issued for a rezoning request. We find a strong
forty-five metropolitan areas. positive relationship, so that when the index increases by one,
The variable we focus on here is a survey measure of the 15 percent more of the housing stock becomes quite expensive.
average length of time between an application for rezoning and This positive relationship also survives controlling for
the issuance of a building permit for a modest size, single- population growth during the 1980s and median income, as
family subdivision of fewer than fifty units. This measure can shown in the second column.17
take on values ranging from 1 to 5: a value of 1 indicates the In the final column of Table 6, we return to our implied
permit issuance lag is less than three months, a value of 2 zoning tax—T/L from above. This value is calculated using the
indicates the time frame is between three and six months, a data in Table 4. Specifically, we subtract the cost of land
value of 3 indicates a seven-to-twelve-month lag, a value of estimated in the nonlinear hedonic equation (that is, p from
4 indicates the lag is between one and two years, and 5 indicates column 2 of Table 4) from the cost of land implied by sub-
a very long lag of more than two years. Before proceeding to a tracting structure cost from total home value (that is, p+T/L
regression, we note that the correlation of the permit length from column 3 of Table 4). We then regress this variable on our
variable with the fraction of housing stock priced more than zoning measure. As the results show, the implied zoning tax is
40 percent above the cost of new construction is fairly high at strongly increasing in the length of time it takes to get a permit
0.43. The mean fraction of high-cost housing among the cities issued for a subdivision. Increasing a single category in terms of
with permit waiting times of at least six months (that is, a value permit issuance lag is associated with a nearly $7 per-square-
of 3 or more for this variable) is 0.75. Difficult zoning seems to foot increase in the implicit zoning tax. If the dependent
be ubiquitous in high-cost areas.16 variable is logged, the results imply that a one-unit increase in
Table 6 reports regression results using the permit length the index is associated with a 0.50-log-point increase in the
variable. In the first column, we regress our housing cost implicit zoning tax.18

Table 6
Zoning Regulations and the Distribution of House Prices

Dependent Variable
Fraction of Units Valued at or above Fraction of Units Valued at or above T/L from Table 4
140 Percent of Construction Costs 140 Percent of Construction Costs (Implied Zoning Tax)
Time to permit issuance for rezoning request 0.150 0.112 6.796
(0.051) (0.044) (3.048)
Log median family income, 1989 0.260
(0.255)
Percentage population growth, 1980-90 1.080
(0.411)
Intercept 0.111 -2.512 -3.527
(0.120) (2.634) (7.732)
2
R 0.16 0.40 0.15
Number of observations 40 40 22

Note: The independent zoning variable is a categorical measure of time lag between the application for rezoning and the issuance of a building permit
for development of a modest size, single-family subdivision.

34 The Impact of Building Restrictions on Housing Affordability

 7. Conclusion construction costs and the price of land implied by the price
differences between homes on 10,000 square feet and homes on
America is not facing a nationwide affordable housing crisis. In 15,000 square feet. Measures of zoning strictness are highly
most of the country, home prices appear to be fairly close to the correlated with high prices. Although all of our evidence is
physical costs of construction. In some of the country, home suggestive, not definitive, it seems to suggest that this form of
prices are even far below the physical costs of construction. government regulation is responsible for high housing costs
Only in particular areas—especially New York City and where they exist.
California—do housing prices diverge substantially from the We have not considered the benefits of zoning, which could
costs of new construction. certainly outweigh these costs. However, if policy advocates are
In the areas where houses are expensive, the classic urban interested in reducing housing costs, they would do well to start
model fares relatively poorly. These areas are not generally with zoning reform. Building small numbers of subsidized
characterized by substantially higher marginal costs of land, as housing units is likely to have a trivial impact on average
estimated by a hedonic model. The hedonic results imply that housing prices (given any reasonable demand elasticity), even
the cost of a house on 10,000 square feet is usually pretty close if well targeted toward deserving poor households. However,
in value to a house on 15,000 square feet. In addition, these reducing the implied zoning tax on new construction could
high prices often are not associated with extremely high well have a massive impact on housing prices.
densities. For example, there is as much land per household in The positive impact of zoning on housing prices may well be
San Diego (a high-price area) as there is in Cleveland (a low- zoning’s strongest appeal. If we move to a regime with weaker
price area). zoning rules, then current homeowners in high-cost areas are
The bulk of the evidence marshaled in this paper suggests likely to lose substantially. To make this politically feasible, it is
that zoning, and other land-use controls, are more responsible crucial that any political reform also try to compensate the
for high prices where we see them. There is a huge gap between losers for this change.
the price of land implied by the gap between home prices and

FRBNY Economic Policy Review / June 2003 35

 Appendix: Creation of the House Value/Construction Cost Ratio

A number of adjustments are made to the underlying house are estimated using the AHS. More specifically, we regress
price data in the comparison of prices and construction costs. house value per square foot (scaled down by the Goodman and
These include imputation of the square footage of living area Ittner [1992] correction) in the relevant year on a series of age
for observations from the Integrated Public Use Microdata controls and metropolitan area dummies. The age data are in
Series for the 1980 and 1990 census years. However, because interval form so that we can tell if a house is zero to five years
the results reported in this paper do not include census data, we old, six to ten years old, eleven to twenty-five years old, twenty-
omit the description of that imputation. See Glaeser and five to thirty-six years old, and more than forty-five years old.
Gyourko (2001) for those details. The coefficients on the age controls are each negative, as
Two adjustments have been made to the American Housing expected, and represent the extent to which houses of different
Survey (AHS) house price data to account for the depreciation ages have depreciated in value on a per-square-foot basis.
that occurs on older homes and to account for the fact that Finally, we note that our procedure effectively assumes that
research shows that owners tend to overestimate the value of units with a basement in the AHS have unfinished basements,
their homes. The remainder of this appendix provides the so that we underestimate construction costs for units with
details. finished basements. Having a basement adds materially to
As noted, one adjustment takes into account the fact that construction costs, according to data from R.S. Means
research shows that owners tend to overestimate the value of Company. Depending on the size of the unit, those with
their homes. Following the survey and recent estimation by unfinished basements have about 10 percent higher
Goodman and Ittner (1992), we presume that owners typically construction costs. Units with finished basements have up to
overvalue their homes by 6 percent.19 30 percent higher construction costs, again depending on the
Empirically, the most important adjustment takes into size of the unit. After these adjustments have been made, house
account the fact that the vast majority of homes are not new value is then compared with construction costs to produce the
and have experienced real depreciation. Depreciation factors distributions reported in our paper.

36 The Impact of Building Restrictions on Housing Affordability

 Endnotes

1. This is not to say that housing vouchers might not be a sensible part quantity of land is correlated with price and (omitted) amenities. It is
of an antipoverty program. However, if housing is not expensive, then easy to construct examples in which the bias goes in opposite
policies should be thought of as a response to poverty and not a directions. For example, land undoubtedly costs different amounts in
response to a housing affordability crisis. different parts of a given metropolitan area. Although our hedonic
model includes a control for whether the observation is located within
2. Goodman and Ittner (1992) document that self-reported values tend the central city of an area, this may only imperfectly capture a
to be about 7 percent higher than true sale prices. location-specific amenity that reflects, say, distance from a key
employment node. Thus, people could be buying bigger lots in those
3. Another relevant issue is change over time. The census reports a parts of the metropolitan area with lower costs, and by not being able
significant (15 percent) increase in the median value of a home over to control for this fully, our hedonic land price estimates will be biased
the 1990s. However, when we look at repeat-sales indices, which downward.
control for housing quality, we see much less of an increase over the That said, it is not at all clear that the net bias will be in that
1990s. direction. We find it at least equally plausible that richer households,
who tend to have larger lots, end up congregating in higher amenity
4. Two publications are particularly relevant for greater detail on the (and higher price) areas. In this case, our estimated hedonic price of
underlying data: R. S. Means Company’s Residential Cost Data, 19th land would be biased upward. Although we cannot be certain what the
ed., and Square Foot Costs, 21st ed. net bias is, we find it highly unlikely that our estimates are so severely
skewed downward that bias could account for the huge differential
5. See R. S. Means Company (2002). reported between land prices on the intensive and extensive margins.
Our estimates would have to be off by an order of magnitude for that
6. The actual computation is more complicated, as adjustments are possibility to be relevant.
made to correct for depreciation, inflation, the fact that owners tend
to overestimate the value of their homes, and regional variation in the 12. The coefficients are precisely estimated in the underlying
presence of basements. See the appendix for details. We also regressions and are available upon request. Because the hedonic land
performed the analysis using the 1991 AHS; the results are virtually price arising from the linear model is virtually uncorrelated with mean
unchanged from 1989’s results. house price, the analogous impact is near zero for that land price
series.
7. The Philadelphia numbers for 1989 are not typos. They reflect a
small sample bias associated with the number of units with basements. 13. Using population per square mile yields similar results.
This is a statistical oddity that does not show up in other samples,
whether in the AHS or decennial censuses. 14. There is a statistically and economically significant positive
relationship between mean January temperature and median house
8. There are only ninety-six observations in the Baltimore price. Those results are not reported here, but are available from the
metropolitan area, which is the smallest number across all cities. authors upon request.
Visual inspection of the findings found sensible results for most
traits when the number of observations was at or above 100. 15. We use the price series from the nonlinear hedonic in the
underlying regression. Only the regression involving the construction-
9. There are 43,560 square feet in an acre of land. based land prices (column 3 of Table 4) yields statistically significant
results at conventional levels.
10. The estimate from the linear specification is much lower, but
logging materially improves the overall hedonic in the case of 16. Other measures in the database include the analogue to this
San Francisco. rezoning question, except that the permit length time applies to a
completely new subdivision that does not require rezoning. We
11. This ratio obviously is sensitive to biases in our hedonic estimates. examined this and other variables and found correlation patterns
We need to be concerned especially about the possibility that the similar to those presented below.

FRBNY Economic Policy Review / June 2003 37

 Endnotes (Continued)

17. Adding region dummies to the specification eliminates any 19. This effect turns out to be relatively minor in terms of its
significant positive correlation between this zoning control and the quantitative impact on the results.
fraction of expensive housing in the area.

18. Finally, similar results are obtained if other approval-time

variables are used (such as those for a new subdivision).

38 The Impact of Building Restrictions on Housing Affordability

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or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or implied, as to the
accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any information contained in
documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.

FRBNY Economic Policy Review / June 2003 39