In my recent op-ed about rent control I point out that Houston, TX permitted more home and apartment building than Seattle, WA from 2005 to 2014. The graph below shows the magnitude of this difference. The bars are the number of permits each year (the left axis) and the line is the ratio of Zillow’s home value index (numerator) and the average single family home construction cost for each city (denominator). The right axis reports the ratio. (Seattle’s data are here, Houston’s are here, and permit data are here).
As seen in the graph, the orange bars (Houston) are much taller than the blue bars (Seattle). Also, Houston’s home value to average cost ratio was relatively flat during the period shown despite the fact that Houston grew by 163,000 people during this time period. This is because Houston’s high level of building kept pace with demand. During this 10 year period Houston’s home values were roughly 1.6 times average construction cost.
In Seattle, where less building occurred, home values reached nearly 2.5 times average construction costs in 2007 before falling to approximately 1.8 in 2009 due to the housing bust. Home values decreased even further from there, reaching their low point in 2012. Since 2012, however, they have been increasing while in Houston it appears the ratio has leveled off. The difference between the two ratios is not driven by relative cost changes either. The graph below shows the cost per unit in each city over this time period. They are fairly similar in dollar amounts and the ratio between them was relatively constant during this time period.
Seattle’s building restrictions are contributing to the high price of housing in that city. And because prices in Seattle are primarily driven by demand, home values are much more volatile: When demand increases they rise and when demand falls, like from 2007 – 09, they decline quickly.