'Luxury' Amenities Aren't Why Housing Is So Expensive In The D.C. Area "Luxury" apartments are everywhere in the D.C. area these days. But fancy appliances aren't the reason new housing is so expensive.
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'Luxury' Amenities Aren't Why Housing Is So Expensive In The D.C. Area

Well-appointed kitchens in new "luxury" apartments aren't driving the Washington region's housing costs. Here's what is. John Hickey-Fry/Flickr hide caption

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John Hickey-Fry/Flickr

There sure are a lot of "luxury" homes in the Washington area these days.

"Premium" amenities. "Elegant" finishes. Marble and stainless steel everything. They're among the many high-end features found in newly constructed apartments in hot neighborhoods like The Wharf and Navy Yard. And it's easy to think these fancy extras are the reason rents have gotten so high.

But that's not exactly right. High housing costs have surprisingly little to do with marble countertops and things that go inside buildings. They have much more to do with what's outside the building: land.

Here's why.

Land Is Crazy Expensive Here

High land values are at the root of staggering home prices in the D.C. area. Land in the Washington region ranks among the most valuable in the country, worth an average $1.2 million per acre. That's twice that of Boston and almost eight times that of Pittsburgh.

"Land is expensive where people want to live," says Jenny Schuetz with the Brookings Institution. "Whatever makes a place desirable to people who want to live there, it's going to drive up the price of land."

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In Washington, jobs and economic development have lured new residents into the city after decades of population loss, pushing up land values. The cost of new and existing homes has risen as a result.

The "luxury" features that go into a new building — fancy appliances, wood flooring — make up a small part of developers' costs in new construction.

"The margin on 100 refrigerators — white versus stainless — is so small [for a developer] compared to everything else," says Ramon Jacobson, executive director of nonprofit housing lender LISC DC. Land and development costs are far more important.

But land becomes even more valuable when the demand for new housing isn't being met. Washington is in the midst of a housing shortage that began with the financial crisis and has deepened as new housing construction has failed to meet demand. Much of that failure can be traced to zoning rules.

Zoning — which determines where new housing can go and how dense it can be — can curb jurisdictions' ability to quickly and adequately meet the demand for new homes. Extensive research has shown that when land regulations suppress supply, they directly influence prices. Housing in the highly regulated northeast, for example, tends to cost more than housing in less-regulated southern cities.

In the D.C. region, vast swaths of residential areas are zoned exclusively for single-family homes, the most space-intensive and costly form of housing. For example, almost 90% of residential land in Arlington County is reserved for detached single-family homes. In D.C., it's 36%. (The percentage is much higher if you include D.C.'s many rowhouse neighborhoods.)

Building single-family homes made sense when land was cheap in the D.C. area. Today, not so much. Plenty of houses now sit on land worth many times its initial value. But when those homes are torn down, zoning rules usually restrict them from being replaced by anything other than another single-family home. (That explains the proliferation of multimillion dollar teardowns in wealthy areas like Bethesda and Vienna.)

Home costs could be lowered if denser housing was built on the region's most expensive land. But zoning rules interfere with that. Expensive D.C. neighborhoods with more restrictive zoning have simply not added new homes, says Jenny Schuetz.

"If you were to relax [zoning] and allow more homes to be built, the land would still be valuable, but you could split the value of the land across more homes," the economist says. "The value of the land under the house may stay the same. But instead of that being borne by one person who owns the whole piece of land, it gets split between three or four people who share it."

Housing economists generally agree that allowing more density would decrease housing prices over the long term. But change wouldn't come right away, and so-called "upzoning" is not the only solution to high costs.

It's Pricier To Build Housing Now

Sure, land is expensive, says Aakash Thakkar with development company EYA. But housing construction has gotten pricier, too.

"Costs are probably 20 to 30% higher than they were 10 years ago," Thakkar says.

Material costs have gone up. Labor is in short supply. Governments have layered on laudable but expensive regulations, like green building standards. Localities charge high fees on new construction, as much as $50,000 per unit in Montgomery County. Homeowners and activists routinely block new development in court. The entitlement process — by which developers acquire land and the rights to build on it — can be slow and costly, especially in D.C.

"The mayor's office wants to encourage higher density, but the Department of Consumer and Regulatory Affairs is notorious for being slow in issuing permits and doing inspections," says Ken Simonson, chief economist with the Associated General Contractors of America.

All of these factors push up the cost of development. "The cost to build a smaller new townhouse, for example, can be $500,000 to $600,000, not including the land or any profit," Thakkar says. Those costs are then passed onto renters and homebuyers.

No wonder it's so hard to build affordable housing in the D.C. region.

But even overhauling regulations wouldn't take a huge bite out of housing prices, as long as people are willing to pay top dollar to live in Washington.

Affluent People Want To Live Here

Housing is only worth what people will pay for it.

Affluent singles and couples drive a lot of housing demand in the region, especially in D.C., and they compete for homes that could otherwise go to lower-income families.

"Because we have this demographic trend with the knowledge-based economy and a lot of people [are earning] north of $150,000, there's just a lot of demand for housing in that range," says Ramon Jacobson.

After years of booming luxury construction, however, the high-end market has started to cool down. Developers are building less of it now that supply has largely met demand and rents have flattened. But challenges to building lower-cost housing remain, even as demand for it has soared. (See WAMU's 2018 story "Why There Isn't More Affordable Housing In The D.C. Area.")

That's why local governments need to invest more in dedicated affordable housing, Jacobson says. D.C. is leading the charge by allocating more funds to housing than any other local jurisdiction. Others are slowly catching up. Leaders increasingly understand that high home costs encourage sprawl, displace the workforce, reduce consumer spending and promote racial and economic segregation.

But adding any new housing will be tough in the years ahead, Jacobson says — and not only for economic reasons.

Today, more Americans are choosing to live in cities. Pressure is growing to build new homes in places that are already built out, like the District. That will inevitably lead to fights between homeowners, new residents and homebuilders.

"We're always going to be challenged at this point," Jacobson says. "We have to reshape our city while people are living in it. That's going to lead to a lot of static."

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