Study: Austin home size limits hurt economy

From todays Austin Business Journal email newsletter is the article below citing a study that says the Austin “McMansion Ordinace” is hurting the Austin Economy.

I haven’t read the study, but the Homebuilders Association of Greater Austin paid for the study. The Home Builder’s Association is against the ordinance and is lobbying the Texas Legislature to pass laws that will effectively void it. So I’m not sure if the study results should be trusted.

The only questions I have would be:
1) Have home and/or lot values in the areas covered by the ordinance declined in value?
2) If homes in these areas have not declined in value, have values appreciated in equal proportion to the rest of Austin and/or similar areas not affected by the ordinance? (has the ordinance stunted the potential appreciation of homes in the areas affected)

In other words, is that puny little teardown in Tarrytown, on a 50ft by 125ft lot, now worth less than it would be if a bigger home could be built than what the ordinance now allows? It wouldn’t surprise me if the ordinance has had at least some impact, but MLS Sales data doesn’t bear that out as the central areas saw some of the strongest real estate appreciation numbers in Austin from 2005 to 2006. See my 2006 Austin Sales Market Summary for detailed area by area stats.

See the article below. The math seems confusing to be. I’d rather see a study that simply answers the above questions.

Austin Business Journal – 2:41 PM CDT Tuesday, March 13, 2007
A new study suggests that a city of Austin ordinance restricting home sizes is having negative effects on homeowners and causing a reduction in economic activity within the city.

The study conducted by Austin-based economic research and analysis firm Impact DataSource concludes that the city’s “McMansion” ordinance has forced increases in the cost of new homes and remodel projects in the areas it covers, making it difficult to finance improvements while limiting the ability of homeowners to sell their property. The Homebuilders Association of Greater Austin paid for the study.

The ordinance that went into effect in September 2006 limits development plans for owners of lots in the zone between Northwest Hills and Montopolis in the north and south sectors, and between Barton Hills and University Hills in the west and east sectors. A bill recently filed in the Legislature by Rep. Edmund Kuempel, R-Seguin, would force Texas cities to regulate home sizes based on one set of criteria and not multiple criteria like the Austin ordinance does. The city is fighting that bill, saying it would effectively “gut the ordinance.”

The study evaluated four properties, demonstrating an average loss of $229,888 of real property improvements, along with a $5,806 annual loss to local taxing districts per property and reduction in possible construction to an average of $451,375 per property. In total, of a possible 110 similar infill redevelopment properties listed for sale on October 31, 2006, improvements not added to tax rolls could total $25.2 million. Homeowners would lose $12.8 million in their share of actual and projected market value resulting in a further loss of $638,614 in annual tax revenues from these properties.

“The new residential standards make urban projects more complicated and more expensive,” says Jerry Walker, principal of Impact DataSource. “Regulations could add as much as $75,500 to the cost of remodeling and constructing a new residence in the affected area, further pushing middle-income residents to areas outside Austin and contradicting the city’s stated urban density goals. Young homeowners trying to upgrade or move to larger houses to accommodate their growing families are getting squeezed the worst.”

Posted by Steve
9 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Mare - 9 years ago

Interesting. Do you think that maybe it’s a little too early to determine if there has been stunted appreciation in the affected central neighborhoods? I say let’s wait another year and see.
I agree – the math is weird. I’d like to see exactly what the variables were, given that they only studied 4 properties.

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AustinContrarian - 9 years ago

The right comparison is between large lots and small lots in a given neighborhood, not beween lots in one neighborhood and lots in another neighborhood. That small-lot Tarrytown tear-down may have appreciated a bunch over the last 1/2 year but not as much as the large Tarrytown lots. If small lot tear-downs have gone up by 5% but large homes have gone up by 10%, that might be some evidence of McMansion’s effect. (I don’t know one way or the other what the data show.)

Comparing home appreciation between different neighborhoods seems to me to be mostly irrelevant, except possibly as a control.

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Steve - 9 years ago

I just took a quick look at the 78703 zipcode for lot sales the past 3 years.

Zipcode 78703
2004 = 8 lots sold, Avg $375K, High $435K, low $250K
2005 = 14 lots sold, Avg $280K, High $600K, low $120K
2006 = 14 lots sold, Avg $584K, High $1M, low $265K

Not a big enough sample size to be conclusive, but I honestly don’t see lots, big or small, getting any cheaper in close-in areas of Austin. AC, I know you follow this tsuff closely. if you give me some parameters, I’ll run the numbers for you. Unfortunately, I can’t search on lot size because too many are listed at 0 in the lot size field.

I remember back in the early 1990’s when people said the SOS ordinance would kill land values west of Austin. Guess where the most expensive land is today? West of Austin. Markets adjust. Location and scarcity trump everything. I’m really not for or against the McMansion ordinance, other than the fact I lean toward less government in most cases. It’s just hard to find data, in the way I know how to look at it, that suggests what the Builder’s Association is saying.
Steve

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David Smith - 9 years ago

The study is available on the Homebuilder’s Association website, under the “Press Room” link. Under the four case studies presented, three included people who wanted to tear down an existing home and build duplexes, but now are not going to, or are not sure.

The other case study can be described as double or nothing: the homeowner wanted to double her 1710 square foot house, but couldn’t, and so decided that she wasn’t going to do anything. That one made the least amount of sense, since the owner “lost” $94K of potential value to her home that was estimated to cost $350K in construction.

The economic model is based upon the premise that one-third of the properties on the market could have been razed and rebuilt into duplexes.

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AustinContrarian - 9 years ago

Here’s the analysis I’d really like to see: How have “large”-homes appreciated in comparison to “small”-homes? (Given the lack of good lot-size info, using house size as a proxy for lot size is probably the best we can do.) I’d count the top 25% in square footage as the “large” homes and the bottom 25% as the “small” homes. (I don’t even know if searches like that can be conveniently run on the MLS data.)

You’d have to exclude recent construction, which (as you’ve pointed out elsewhere) can skew everything. What’s “recent” is probably a judgment call.

I’d run the search for both 2005 and 2006 (if enough sales, I’d break it out by 1st half and 2nd half of 2006), just to see if there was a change in the relative rates of appreciation for the two groups.

Here’s what I expect the numbers would show: In 2005, small homes appreciated in value more rapidly than large homes. The reason is that most of the increase in value, for either large homes or small homes, is in the land, and the value of the land is a larger percentage of the total value of a small home.

I suspect that in (the second half?) of 2006, small homes lost some or all of their advantage over large homes, or even began to appreciate less rapidly than large homes.

I may be wrong; “small” and “large” homes may have appreciated at the same relative rates in 2005 and 2006. Or any change in the relative rates of appreciation may have been overwhelmed by the wild demand for single-family housing of any type in central Austin. At best, this analysis would be only suggestive, unless we can identify and control for confounding factors. Still, it probably would be more informative than picking out four specific properties to study.

Steve, this sounds like a fair amount of work, particularly for someone who doesn’t have a dog in the fight. I understand if it’s not something you want to take on.

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M1EK - 9 years ago

Steve,

SOS raised the value of the lots that were still developeable; just like McMansion will disproportionately appreciate the large lots in Tarrytown. Neither one says how it affects the lots that are most hurt – in SOS’s case, lots too small to develop at the impervious cover allowed; in McMansion’s, lots with low FAR-based allowance like mine (also in the middle of two-family residential use).

IE, it’s hard to believe somebody’s going to pay as much of a premium for my now-no-longer-expandable small house as they do for one that can be expanded.

I supported (and still do support) SOS, by the way. There’s an obvious externality, and it was passed with wide support in a real referendum, and had to stand up to many many many legislative and judicial challenges. Not the same thing as McMansion in any way, shape, or form.

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M1EK - 9 years ago

David,

The economic model is not based on that premise – it’s just that the duplexes present the first obvious case study.

Consider how difficult it would be to come up with exact figures for me and my neighbor. Our block is 6000 square foot lots; and all lots except mine have at least two residential uses (most have garage apartments).

My next-door neighbor currently has a 1050 square foot house and a 6-800 square foot garage apartment (depending on how it ends up counted). He has a family of 5 and obviously needs more space. Should he demolish the garage apartment in which the kids’ aunt lives? Should he forego anything bigger than 1600 square feet? Should he bite the bullet and build expensive and less comfortable basement or finished attic space?

I have a 1250 square foot house. My long-term goal was a 500ish square foot garage apartment + a standard second floor. Now I have to choose one or the other (or the uncomfortable and more expensive solutions mentioned above, except that I’m a marginal cost case anyways – any additional expense prices me out). How do we measure economic loss here?

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Steve - 9 years ago

M1EK,

It sounds like there are two ways to measure economic loss in a case like yours.

One would be the loss of the opportunity/option to make home improvements which would add more value than the cost of the improvements. In other words, for example, if homes are selling for $200 per square foot in a neighborhood, and you want to add 1000 sqft at a cost of $100 per square foot, you can spend $100K and realize an increase in value of $200K in the resale value of your home. It’s not that cut and dried, but for example sake, I think it shows the basic point.

The other measurement of economic loss would be actual value appreciation loss, which is what AC is wondering about, but which I’ve seen no evidence of. I’ll run the numbers though and see what comes up.

I guess there is even a third type of economic loss. That would be the marginal substitution cost of purchasing a larger home in the instance that your present home is too small and you are forbidden from expanding due to the ordinance. That leaves you with the option of buying something bigger, and if the cost of doing so, in a comparable area, exceeds what you would have spent to expand the current home, I think that could be seen as another way to look at potential harm caused by the ordinance.

I’m not sure where the variance process fits into all of this, but I imagine at least some potential scenarios were anticipated and expected, but I’ve not looked into the process and and how difficult and time consuming it might be. Knowing the reputation of the City of Austin, I assume the process is arduous and frustrating, and some value has to be accounted for for that too, even if a variance can be obtained.
Steve

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Steve - 9 years ago

AC,

Here are some numbers for you. I looked at sales of smaller homes (1500 sqft or less) in MLS Areas 4, 1b, 6, 7, the core Central Austin neighborhoods for 2005, 2006, and 2007 YTD.

2005
591 Sold, Avg Price $234,933, Avg sqft=1108, avg price psf=$212

2006
545 Sold, Avg Price $257,608, Avg sqft=1107, avg price psf=$233
Average appreciation for the small homes in 2006 was 9.65%.

2007 (through March 14)
80 Sold, Avg Price $273,013, Avg sqft=1129, avg price psf=$242
Appreciation in 2007 is 6% YTD. Not bad given we haven’t finished the first quarter.

Smaller homes don’t appear to be suffering in value. Though we don’t know if smaller homes on large lots are now selling for more (and vice versa) because of the better potential for expansion/upgrade on larger lots, which would offest the averages.

Larger Homes
2005
649 Sold, Avg Price $484,115, Avg sqft=2354, avg price psf=$206

2006
716 Sold, Avg Price $554,977, Avg sqft=2415, avg price psf=$230
Average appreciation for the large homes in 2006 was 14.63%. Quite a bit more than the smaller ones. Hmmm. This is an interesting figure compared to the smaller homes.

2007 (through March 14)
97 Sold, Avg Price $564,499, Avg sqft=2362, avg price psf=$239
Doesn’t seem to be a steep climb yet for 2007 prices. Only 1.7% compared to 6% for the smaller homes.

Just some food for thought. The data seems contridictory in a way. 2007 is trending the opposite of 2006 thus far, with regard to smaller vs. larger homes and whether there is a difference in appreciation and demand.

I’m not sure what conclusions can be made.

Steve

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edward - 9 years ago

Excellent dialog guys.

Thanks for rolling up your sleeves and mining the data Steve.

edward tasch

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josh - 9 years ago

My guess is that what you’ll see is dictated by simple supply and demand. There’s now an artificial scarcity on “McMansions” (if you will) in close-in areas. The houses that have already been greatly expanded in these areas will sell at even greater premiums. Meanwhile, general appreciation in the market will raise the prices of smaller, unexpanded homes – but not at as great a rate as they would if the owners or potential owners had the option to expand them.

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Steve - 9 years ago

I just read the actual report (not the news article). It outlined 4 ways that the ordinance can add costs to remodle or new construction:

—Quoted from the study report:
One, today’s home buyers want higher ceilings and large open areas. Limits imposed by the regulations, however, hurt the marketability and desirability of homes without these features.

A second area that is affected is the mechanical area. With the limited attic space and the extra beams to create the open floor plans, the mechanical units and duct work will need to be installed in the conditioned space of the home. This can take as much as 10 to 20 square feet out of the available living space and require more expensive mechanicals units which must be used in conditioned spaces. Ten to twenty square feet of mechanical space can cost from $1,000 to $3,000. The more expensive mechanical units can cost from $1,500 to $7,500.

A third area that is affected by these limits is the size of garages and storage space. These limits encourage single car garages and car ports which are less desirable for today’s buyers. This forces people to either store items in back yard storage buildings or off site storage centers.

A fourth area is that is affected is when homes are designed for limited ability clients. This limits designs for larger hall ways, ramps, larger door ways, elevators, accessible bath rooms and accessible kitchens.

The additional costs discussed above could add as much as $75,550 to a new or remodeled residence in the area governed by the regulations, as shown below.
—- end quoted text

These seem like valid things to consider. I’m skeptical of some of the numbers. If you read the full report, they’re saying a custom set floorplan blueprints could cost “up to” $50K. So the entire “up to $75,500” number seems flimsy to me, as it assumes the $50K number.

Then, all of the other “economic” statements are extrapolated from the $75,500 number.

Nevertheless, there clearly are issues that previously were not factors. In reading the report though, it’s clearly a biased, doom and gloom peice of work that takes worst case scenarios and presents them as foregone conclusions.

The study also assumes, with no data or evidence, that real estate market forces will not absorb the additional costs of building or remodeling in these areas. I simply don’t believe that’s going to be the case.

Steve

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AustinContrarian - 9 years ago

Thanks a bunch for running the numbers, Steve.

The 2005-2006 numbers are at least _consistent_ with the claim that the McM ordinance hurt small home appreciation, even if they’re not conclusive proof.

I’m not sure how to explain the 2006-2007 numbers. Maybe we’ve got too small a sample at this point. Maybe the McMansion ordinance just had a one-time effect on home prices. Maybe there was never any effect at all, and we’re just seeing random variation.

Thanks again for working on this.

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M1EK - 9 years ago

I don’t know how the data can show us anything – there’s too many “large houses on small lots” and “small houses on large lots” to confound the overall assumption that you can see the effect by looking at small houses vs. large houses. Combine with the fact that unlike newer inventory, it isn’t very easy to compare individual properties and I think this is a hard one to ‘prove’ even though you can certainly subjectively believe it happens (as I do).

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Steve - 9 years ago

M1EK,

I think your right. There are so many variables it would be hard for anyone to present any sort of sales data that can be conclusive, or that caan’t easily be called into question.

A funny thing happened to me today though. I called friend to see if he wants to grab lunch, and he was sitting at the City of Austin waiting to talk to someone about renewing his pre-McMansion building permits. He has a lot in Hyde Park and one in East Austin with building plans in place that he wants to preserve. He absolutely does not want to let his permits lapse he told me, as it will “screw everything up”. We’re meeting for lunch tomorrow and I’ll get his first hand point of view relating to the two lots he’s planning to develop, and find out exactly what he means by McMansion screwing up his plans.

Steve

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edward tasch - 9 years ago

Excellent observation Mike.

Another aspect that makes the economic impact difficult to assess (i.e. isolate) is the general “softening” of real estate.

Although the Austin housing market (particularly central Austin) is proving much much more resilient than other parts of the country.

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AustinContrarian - 9 years ago

“I don’t know how the data can show us anything – there’s too many “large houses on small lots” and “small houses on large lots” to confound the overall assumption that you can see the effect by looking at small houses vs. large houses.”

I would prefer using lot-size data. But there’s a pretty strong correlation between lot size and house size in these central neighborhoods, particularly if you stick to pre-2003 construction. Over 90% of pre-2003 Hyde Park homes have a FAR of under .4. Ditto with Tarrytown. This means there shouldn’t be many large houses on small lots, and they shouldn’t be skewing the numbers much.

I imagine there are more small houses on large lots. If true, then using house size as a proxy will understate the effect of the McMansion ordinance, at least if you believe that small houses on large lots would have appreciated in value like large homes.

I think the fact that it is hard to compare individual properties is why you look at aggregate data in the first place. It’s hard to look at an individual piece of property and say, “It’s market value would have been $X without the McMansion ordinance.” Widespread swings in value ought to show up in the aggregate data, though. If McMansion has hurt small lot owners (and, M1ek, we both believe it has), the sales figures ought to reflect it.

Steve, you’ve already done so much I hate to ask for more, but would it be possible for you to run exactly the same analysis on 2004 data? I’m just wondering how small homes and large homes appreciated between 2004 and 2005, before the McMansion ordinance.

Finally, I’ve read the homebuilders’ report, too, and was disappointed — it’s just advocacy economics. Basically, they came up with an “average” loss in value that doesn’t represent an average of anything, and multiplied it by an arbitrary percentage of an arbitrary number of homes for sale at an arbitrary point in time. When I saw that they were doing a study, I hoped it was something along the lines of what Steve’s done.

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M1EK - 9 years ago

Edward,

Thanks. Please don’t assume though that my feelings on this thing have changed in the slightest – it hurts me and my neighbors next door – that family of 5 I kept bringing up – just as much whether or not we can see the macro-impact on Austin as a whole. (They nearly moved out a month ago but their new deal fell through – they have already indicated that when they finally do go, they’ll be renting to students – I can only assume this is partly because the “best use” of the property has shifted farther from owner-occupant use due to McMansion in their case since their house is effectively not expandable except with the ‘tricks’ like habitable attic space or basement).

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