Jan 7, 2019,
By: Adam Millsap
It’s no secret that high housing prices keep many people out of America’s most desirable locations. As one of the country’s most attractive states, Florida is home to many of the most in-demand communities and this has put upward pressure on housing prices throughout the state. But strong demand is not a problem as long as supply keeps pace. Unfortunately, that’s not what’s happening in Florida.
In a new report published by the James Madison Institute, my co-authors—Samuel Staley and Vittorio Nastasi—and I explain how land-use regulations, complicated impact fees, and permitting delays contribute to the high cost of housing in historically affordable Florida.
The rise in U.S. housing prices was especially large from the late 1990s to the mid-2000s, as shown in the figure below. From 1983 to 1999, housing prices only increased about 3% per year in Florida’s large metro areas. But from 2000 to 2006 they increased by an amazing 11% to 16% each year, depending on the metro area (see full study for data).
Housing prices fell as part of the Great Recession, but since 2012 they have been back on the rise. In several Florida metro areas, including Orlando and Fort Lauderdale, the price increases since 2012 have been nearly as large as those during the years just prior to the recession.
Sometimes rising construction costs drive housing costs, but that doesn’t seem to be the case right now. Economists Joseph Gyourko and Raven Molloy show that inflation-adjusted house prices have increased much faster than construction costs since the mid-1980s.
Another reason housing prices go up is when demand outpaces supply, which is happening in Florida. As shown in the figure below, from 2010 to 2016 Florida added 114,744 new households per year but only 57,952 housing units. It’s not hard to see how this drives up housing prices as families try to outbid one another for housing.
Florida’s population is increasing rapidly, but the housing supply is not keeping up . As a result, the median sales price of homes in many parts of Florida is five times greater than median household income, well-above the housing finance industry recommendation of three to four times income.
Two big reasons supply is falling short of demand—and causing high prices—are land-use regulations and permitting delays. Regulations such as minimum lot sizes, building height limits, and building permit limits reduce the amount of housing that can be built in a given area. In attractive areas, such as southwest Florida, this also means more people vying for less housing.
Permitting delays also increase the cost of housing. There are certain costs developers must pay, such as loan payments on land and materials, even if no construction is occurring. Longer delays mean higher costs for developers and thus higher prices for consumers.
Using research from economist Keith Ihlandfeldt and others, we calculate that an additional land-use regulation and permitting delays add $20,000 to $27,000 to the cost of a house in select Florida communities, as shown in the next figure. As a percent of the total house price, the cost increase is largest for smaller houses in Florida. So, if lower-income people tend to buy smaller houses on average, land-use regulations and permitting delays are regressive, meaning they hit lower-income people the hardest.
Another way local governments impact housing development is via impact fees. Impact fees are levied on new development and used to pay for government goods and services the new development needs, such as roads and schools. In Florida, impact fees need to pass what’s called the “dual rational nexus test.” This means that local governments not only need to use the fees on expanding or maintaining public infrastructure or services, but that the spending must specifically benefit the new development. Impact fees cannot be used as general taxes or to fund infrastructure or public services in parts of town not impacted by the new development.
Impact fees have been linked to higher housing prices, but unlike with land-use regulations, consumers are ostensibly getting something for their money in the form of roads, water and sewage pipes, schools, parks, etc. In fact, there is some evidence that impact fees can act as a barrier to more restrictive land-use regulations since they put the cost of new infrastructure and public services on the people benefiting from it rather than the entire community in the form of a general tax increase.
But even though impact fees may not be so bad in theory, they can be bad in practice. Appropriate impact fees should be relatively stable, easy to understand, accurately reflect the cost of expanded public services, and be linked to the size of the unit being built. This latter condition mitigates the regressive effects of impact fees, since one-size-fits-all fees place a relatively larger burden on smaller, lower-priced houses.
And to the extent that impact fees are borne by the builder, linking them to size will also stimulate the development of smaller, more affordable houses.
Unfortunately, in southwest Florida similar communities have different impact fee formulas and many of them are confusing and not linked to a unit’s size. It’s also not clear that the fees accurately reflect the additional cost of new development. Thus, there is room to improve the way impact fees are levied in Florida.
Florida is currently the third-largest state in the country and is growing rapidly, which is a testament to its attractiveness as a place to live and work. However, housing prices are also rising fast, in part due to local government policies, and this threatens to price out some current or would-be Floridians. If Florida is going to continue to grow and be a place where people at all income levels can live, local governments must reform their land-use regulations, permitting processes, and impact fee schedules.
I am the Assistant Director of the L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity at Florida State University and a Senior Affiliated Scholar at the Mercatus Center at George Mason University. I conduct research on urban developm…
Adam A. Millsap is the Assistant Director of the L. Charles Hilton Jr. Center at Florida State University and an Affiliated Scholar at the Mercatus Center at George Mason University.