OUP - Abstract

Housing Affordability, the Holdout Problem, and Land Use Regulations

Dissertation School: New York University

Abstract:

Despite the recent downturn in housing markets nationwide, housing costs remain high in many urban areas, such as New York City, Boston, San Francisco, and Washington. One key reason why affordability problems are so severe is the high cost of developing new housing in dense, built-out areas, where vacant land is relatively scarce and the cost of acquiring land right for residential development can be considerable.

Why is land so expensive? The theoretical literature offers two main explanations. First, new construction often relies on the assembly of multiple parcels of land, and developers may experience a “holdout problem” in land assembly that drives up the cost of acquiring land (Strange 1995). A second explanation is that local land use regulations may drive up housing prices, either by directly increasing the costs of construction or, more generally, by constraining the supply of new housing (Glaeser and Gyourko 2003).

While the regulatory hypothesis has enjoyed considerable attention in the empirical literature, we have much less hard evidence how holdouts affect housing costs. If the costs from holdout are high, then previous estimates of the magnitude of the “regulatory tax” may be overstated. As Brooks and Lutz (2011) emphasize, there is a need to better understand the extent to which high housing costs are the result of private market constraints (holdouts) versus constraints imposed by the government (local land use regulations).

To address this gap in the literature, the proposed dissertation aims to deepen our understanding of the factors that contribute to high housing costs, with the analysis centering on New York City, an exceptionally high cost city. I will assess impacts of the two institutional constraints identified above that are thought to contribute to high housing costs: the holdout problem and local land use regulations. To be specific, I consider the effects of two New York City regulations that are hypothesized to drive up the cost of housing: the maximum floor area ratio (FAR) permitted by zoning, and rules requiring developers to create a minimum number of off-street parking spaces for each housing unit constructed.

This study overcomes many of the data limitations of previous studies, relying on an innovative data set that tracks all properties in New York City. An essential and unique feature of this database is that it contains measures of: land assembly activity; reliable estimates the value of vacant land; the structural characteristics of newly constructed buildings; and the strength of various land use restrictions. All of these measures will be provided at the parcel level.

The analysis will proceed in two stages. First, I will use regression techniques to estimate the magnitude of the “holdout premium” in New York, and also to explore property and neighborhood factors that affect its magnitude. The second phase of analysis investigates the effect of two land use restrictions (maximum FAR and minimum parking requirements) on housing costs. Are these restrictions binding? How do minimum parking requirements affect development decisions, in terms of the number of units constructed? To address this last question, I will exploit a 1982 change in parking requirement rules as a natural experiment. I will use a difference-in-difference model to identify the causal impact of minimum parking requirements on building activity.

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