Winners, Losers and Government

June 2, 2011 • Commentary
This article appeared on The New York Times (Online) on June 2, 2011.

The stability of D.C. prices can be found in one word: government — although in more ways than you think. Prices are ultimately driven by supply and demand, and government has had a major impact on both.

The most important driver of housing demand is income, which is driven by jobs. While the rest of the country suffers from an unemployment rate of around 9 percent, the Washington area has a rate of 5.4 percent. Wages are also about 9 percent higher in D.C. relative to the nation. Central to these numbers is the increase of government workers. Whereas the civilian U.S. labor force has been shrinking since 2008, government employment in D.C. has been growing. When government constitutes a fourth of your labor force, as it does in greater Washington, its actions become a driver of housing demand.

It is the interaction of demand and supply that determines prices. If D.C. were Houston, with little zoning, then despite the increase in government jobs, prices would likely be falling. Quite simply, with the exception of outer Virginia counties, it is quite difficult to bring new supply onto market in the D.C. area. Both Houston and D.C. have about 5 million residents, yet in 2010 over 27,000 housing permits were issued in Houston, compared with around 13,000 in the D.C. metro area. This is a trend that held even more so during the boom: in 2006, Houston issued three times the building permits as D.C.

While supply constraints can put a floor under prices, they come with a very real cost in affordability. The most recent median existing sales price for D.C. metro is close to $300,000, but only about $150,000 in Houston. This difference is not simply driven by income, as the D.C. metro median household income of $56,000 is only slightly above Houston’s $54,000. Wharton’s Residential Land Use Regulation Index shows Maryland, whose Prince George’s and Montgomery Countries constitute a large segment of the D.C. metro area, being one of the most highly regulated states in terms of land use. Virginia falls in the middle of the pack.

So while government has been both a stabilizer for D.C. in terms of housing demand and supply, its impact has come at considerable cost, much of which has been borne by those on the lower half of the income distribution.

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