A Theoretical and Empirical Investigation of the Effects of Impact Fees on the Affordability of Starter Homes

Author: Gregory S. Burge

Dissertation School: Florida State University

Pages: 158

Publication Date: September 2005

Availability:
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Access Number: 10813

Abstract:

How do impact fees affect the price of starter homes in comparison to larger homes? What effect, if any, do impact fees have on the supply of new homes of different sizes that get built within urban housing markets? Do impact fees disproportionately burden lower income households and lead to increased racial segregation? These questions are of critical importance as impact fee use across the United States has increased rapidly over the past three decades. However, even though roughly one quarter of all local governments presently use impact fees (Lawhon, 2003), there is widespread disagreement among policymakers and scholars concerning even their most basic effects. Opponents of impact fees claim they lead to higher prices, lower construction levels, and that impact fees disproportionately burden lower income groups. Advocates of impact fees believe just the opposite. Several scholars (Gyuorko, 1991; Altshuler and Gomez-Ibañez, 1993; Ladd, 1998) have suggested that impact fees may temper exclusionary zoning and other types of exclusionary regulations, allowing more low-income housing to be built within suburban areas. This dissertation provides clear evidence that development impact fees help create more housing opportunities for lower income households within suburban areas by reducing the fiscal incentive behind the adoption of exclusionary land use regulations.

Using a unique panel data set of historical county level impact fees in Florida spanning the years 1993 to 2003, this dissertation addresses the above questions through a theoretical and empirical investigation of the effects of impact fees on the availability and affordability of starters homes. The widespread use of impact fees as well as the presence of considerable within-county variation in impact fees over this time period makes Florida an ideal test case for a study of this nature. Building upon the insight of previous investigation of impact fees (Yinger, 1998; Brueckner, 1997), I first develop a theoretical model of segmented housing markets and impact fees. The hypotheses generated from this model serve to guide later empirical portions of this dissertation, as I investigate the specific effects that different types of impact fees have upon constant quality housing prices and new home construction rates.

The panel nature of the data allows for a variety of different estimation techniques (including fixed effects, random trend, stock-adjustment, and lagged dependent variable models) that control for unobservable factors and possible endogeneities that otherwise may have biased the results. The results of several reduced form price equations show that while impact fees do raise the constant quality price of starter homes, the price increase does not represent a disproportionate burden. One dollar of non-water/sewer impact fees was found to raise the price of small, medium, and large homes by $0.39, $0.82, and $1.28, respectively. These effects are found to be consistent with the idea that impact fees raise housing prices primarily through an increase in demand rather than through a restriction in supply.

Concerning the construction effects of impact fees, the results of the present investigation show that non-water/sewer impact fees increase the construction of small homes within inner suburban areas and of medium and large homes within all suburban areas. Non-water/sewer impact fees are also found to expand the stock of multifamily housing construction within inner suburban areas. Collectively, these finding lead to an important policy implication: by decreasing the fiscal deficit imposed on existing residents by new affordable developments (namely, starter homes and rental housing), impact fees may lead to a significant increase in the number of affordable residential opportunities available within inner suburban areas (where a majority of Florida's metropolitan population lives). These results strongly contradict conventional wisdom regarding the effects of impact fees on housing construction and suggest that impact fees may be a socially desirable alterative to other types of exclusionary regulations that local governments are likely to implement (and more stringently enforce) in the absence of development impact fees.

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