Podcast Project Final Draft William Shih

Script:
Hello, my name is William Shih, a first-year statistics student at UC Davis. I grew up in
Fremont, California. Fremont, CA is located in the East Bay of the San Francisco Bay Area,
north of Silicon Valley but southeast of San Francisco, and is one of the most expensive cities in
the US. I became interested in the topic of housing prices after I heard about the relatively high
housing prices in the Bay Area. It was interesting to look at the influence of the tech boom in
Silicon Valley of housing prices in California. It is interesting that nearly all of California has
high housing prices, with only Fresno and Bakersfield close to the national average (Alamo,
Uhler, and OMalley 2015). Since 1970, growth in California housing prices has consistently
outpaced growth in other cities. California housing prices were 30% above the national average
in 1970, 80% above in 1980, and 150% above in 2010. Note that Californias housing prices
were relatively very high 15 years before the tech boom started in the mid-1990s. It was
interesting to hear people blame technology companies for high housing prices, and some of my
teachers who complained about housing prices in high school did too, which was quite
suspicious. One teacher said something like Housing prices in the Bay Area are really high, and
its because of the technology companies in Silicon Valley. The primary research involves
looking around Fremont, CA and looking at the housing that has been constructed around
Fremont. The research question is this: What clear signs of differences and trends in construction
that research has said is the reason for Californias high housing prices? What are the causes in
these differences and trends in construction?

In this investigation, I went to an area of Fremont, CA that displayed high diversity in different
zoning areas and density types. I went to the intersection of Grimmer Boulevard and Broadmoor
Common at the following coordinates: a latitude of 37.553460 degrees north and a longitude of
121.967943 degrees west. This is approximately 70 miles straight line distance from UC Davis.
Fremont designate five different types of density types for residential zones. There is hillside
residence, low density, low-middle density, middle density, and urban density (Fremont General
Plan-Land Use). There are many different types of residential districts, which determine all of
the specific requirements of construction in a small area, which is independent of the density
zone. I am only mentioning this to point out the high complexity and restrictiveness of these
policies. More about how these requirements relate to housing prices later. This area contains
mostly middle density housing, but also some urban density housing. Low density housing
surrounds the entire zone . The first thing to note is that in the middle density areas, there are no
backyards and front yards. Nearly of all of the space is covered by the house itself, and most
other space is just roads and a small park in the center area. The houses are three floors tall, each
of equal size, and the first floor is just a garage. This type of housing is referred as townhouses in
the US. Although all houses have a garages, on-street parking can be found as well. Just north of
this middle density zone is an urban density zone, which is clearly denser. This urban density
zone is a large three-floor apartment. There is underground parking for residents, yet there is still
on-street parking on ground level anyways, which is designated as for guest use. There are also
apartments in the middle density zone, but the buildings are small and theres a lot of space
between them. Space probably exists between the apartments so it fits into the middle density
zone instead of the high density zone. It is very important to note that these areas of middle to
high density are much poorer than areas of low density (Census Bureau, links to map of Fremont,
CA). This is logical and is actually a good thing, from a perspective of aggregate welfare. More
on that later.

Low density areas surround the small area of middle and urban density. The vast majority of
Fremont consists of low density areas, basically the same as all American cities. A large space
exists between the front of the house and the sidewalk, in other words a front yard. All houses
also have a backyard. In houses that have a second floor, the second floor is not the same size of
the first floor, but is instead always smaller. Obviously, this will sound like a typical American
suburban area to you, but why is it the way it is and should it be that way in the San Francisco
Bay Area? On to some research.

I looked up the Fremont Municipal Code and found the relevant section about zoning, which is a
ridiculously long section at 472 pages long (Fremont Municipal Code, Title 18). Looking at the
relevant laws, it is not hard why the differences in the middle density zone and the low density
zone exist. There are strict minimum and maximum parking requirements in residential areas,
which explains the on-street and garage parking. In all low density zones, the second floor can
only be a maximum of 60% floor space of the first floor, a strange arbitrary rule, that I believe is
only there for aesthetic purposes. I cant find research that would make this a logical rule. That
rule does not exist in higher density zones, so the floors are all the same size. There is also a
minimum front yard depth of 20 feet, which requires a significant front yard. The first floor also
cant be more than 40 percent of the lot area. There are strict limitations on almost everything
which probably goes to explain why houses are the way they are. To me, this is the complete
lack of freedom to build what you want. Note that although I think this applies in Fremont, it
may not apply or be as extreme in less supply-constrained cities. Where I live in Fremont, our
family couldnt expand the house as much as we wanted because another rule is that the house
can not extend in front the garage and also front-yard length limitations. Anyone living in
supply-constrained American city aka expensive can probably do this for their own
neighborhood. The type of construction in the area is pretty much determined by zoning and
land-use restrictions. At this point, you might be conflicted whether this is a good thing or not.
Although it depends on your perspective, I argue that these restrictions are bad for the vast
majority of Americans, based on economic research.

An interesting observation is that newer housing is usually denser than older housing in
established areas. Older housing was established when there was a lot of space and new housing
was established when there was little space left. Thus, new housing is naturally going to be
denser to accommodate a constantly growing population. This is kind of problematic, because I
should expect the older housing to become denser over time, but this doesnt happen. A primary
purpose of zoning and land-use restrictions is to preserve neighborhood characteristics. It is
impossible to change the density of older housing districts because of rejections from local
homeowners, who want to minimize risk. These types of people are known as NIMBYs or not
in my backyard, which youve may heard of. Homeowners wants to maximize the profit they
get from their home, while minimizing risk (Fischel 2001). It turns out that restrictive zoning is
the best way for homeowners to meet this goal. Thus, concerned homeowners elect local officials
to install these zoning restrictions. Even housing in new districts undergo a huge amount of
controversy among homeowners. Our house in Fremont have gotten letters from people who
want us protest new housing before. So you may ask, whats so bad about this?

Housing supply elasticity is how much housing supply changes in response to changes in
housing demand. For example, a rapidly growing technology industry in a productive tech zone
would rapidly increase housing demand in that area. If constructors could build homes without
limitation, housing demand would be met by construction, who do not discriminate on
geography. Studies show that housing elasticities vary from city to city, which could only mean
differences in zoning and land-use regulations (Saks 2004). San Francisco is found to have one
of the least elastic housing supplies in the US. This means that supply grows slower than demand
does and housing prices rise rapidly. This effectively causes inflation in San Francisco and
prevents labor from flowing from low productivity to high productivity areas. San Francisco Bay
Area is the most productive major urban area in the US, also the world (Bureau of Economic
Analysis, in OECD). High housing prices benefit homeowners, but negatively impacts renters, so
this worsens inequality. It also increases inequality since wealthy people can afford high housing
prices more easily than poorer people and so wealthy people can migrate to high productivity
areas where they will earn a higher wage (Boeing 2015). Studies have shown this results in a
significant reduction of income for the average American by 13% (Hsieh and Moretti 2015).
Technically, to maximize average income, people should move from poor cities to rich cities
until the average income of all cities in the US are about the same. This is why the earlier
example of cheap housing in high density areas that attracts poor people increase overall welfare.
As this phenomenon is widespread across the world, effects of supply restrictions can be
measured in other countries. Across developed countries, high housing prices cause higher
inequality, caused by a higher capital share (Rognlie 2015). Capital income is more unevenly
distributed than labor income, so a higher capital share due to housing prices will increase
inequality. Restrictive land-use policies have also have caused increased rent-seeking by local
government, because these land-use policies give the local government more market power by
reducing supply elasticity as mentioned before (Diamond 2016). This rent seeking can help a
select few government workers, but negatively impacts everyone else. In most of these scenarios,
aggregate output is decreased and inequality is increased, both arguably contributing to
decreased aggregate welfare. In my opinion, essentially, what are we doing here is weighing the
concerns of the few people who live in supply-restricted high demand areas and everyone else.

If we think from an economic perspective, it makes sense to restrict your own area as much as
possible to reduce uncertainty in housing prices (Fischel 2001). For homeowners, a change in
their local housing creates uncertainty, which is problematic, since houses are usually the only
sizable asset they own and diversification is impossible. Thus, for the purposes of insurance, it is
logical to restrict housing through draconian laws, regardless of the expected value of new
housing. It can be seen how such thinking can reduce aggregate output, as insurance is preferred
over expected value. Anyways, these local laws are made by local people, who are going to be
homeowners. Thus, these housing requirements are really only determined by homeowners who
already live there which have their own personal interests. Interests of other groups, are ignored,
and thus, the demand of the overall market does not match up with the zoning requirements that
are in place. Looking from an American perspective as a whole, these laws are unfair because
they are entirely selfish. Not everybody is an homeowner in an area of very high demand. This
likely reduces the income of the majority of Americans and increases the income of just a few
Americans based on current economic research, mentioned before, but reiterated to emphasize.
Economists refer to this as rent-seeking behavior, which is bad.

Zoning laws and land-use regulations are clearly evident in the landscape of urban cities. All
construction in Fremont correspond closely to the land-use and zoning that regulate them. These
type of restrictions and regulations correspond to the housing supply elasticity and lead to high
housing prices. Then, we must look at the two different sides and find out which side is more
important. From the perspective of tech companies, high housing prices are very bad, because
the restriction of housing also restricts the supply of labor. Tech companies also derive no
income from housing, and thus cannot be responsible for high housing prices. In my own
personal opinion, I believe that 100% of high housing prices is from homeowners and voters and
no blame should be on tech companies. Evidence suggests Californias housing prices are due to
the lack of construction in coastal areas since the 1970s. Of course, the debate is now how
restrictive zoning should be to bring the most optimal result. No zoning at all would likely cause
problems, but my opinion here is evidence that the current level of zoning in most major
American cities is too excessive and based on the concerns of selfish minority of upper-middle
class homeowners. Of course, this is simply my own opinion and there are many interpretations
or justifications based on the available evidence. Its worth noting that I think that zoning
regulations should be decreased for sure in certain supply-constrained cities, but the extent of
this decrease is arguable. It is also worth debunking some popular ideas now though. It is well
known by now that rent control doesnt work at all and requiring affordable housing doesnt
work at all (The Economist, SFGate). An important question is really what YOU think about
zoning and land-use regulations. What do you think about all the economic research about the
negatives of excessive zoning? To what extent should zoning regulations in supply-constrained
cities be changed to match that of lesser supply-constrained cities? There are many economic
articles out there for you read about if you are interested and want to make your own argument.
Thank you and bye!

References
California, F. (2017). City of Fremont municipal code: a codification of the general ordinances
of the City of Fremont, California (United States). Seattle, WA, CA: Code Publishing Company.
http://www.codepublishing.com/CA/Fremont/

United States. California. Legislative Analyst's Office. Californias High Housing Costs: Causes
and Consequences. By Chas Alamo, Brian Uhler, and Marianne OMalley. March 17, 2017.
http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx.

California, F. (2017, October 3). General Plan Land Use Diagram [Map]. In City of Fremont,
California. https://fremont.gov/611/Maps

Saks, R. E. (2004). Housing Supply Restrictions Across the United States (Working paper No.
498). http://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/498.pdf

Fischel, W. A. (2001). Why Are There NIMBYs? Land Economics, 77(1), 144-152.
doi:10.2307/3146986
Bureau of Economic Anaylsis; OECD
https://stats.oecd.org/Index.aspx?DataSetCode=CITIES

Boeing 2015-The Effects of Inequality, Density, and Heterogeneous Residential Preferences

on Urban Displacement and Metropolitan Structure: An Agent-Based Model
https://arxiv.org/ftp/arxiv/papers/1703/1703.08539.pdf

Hsieh and Moretti 2015-Why Do Cities Matter? Local Growth and

Aggregate Growth
http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1045&context=housing_law_a
nd_policy

Rognolie 2015-Deciphering the Fall and Rise in the Net Capital Share: Accumulation or
Scarcity?
https://www.brookings.edu/wp-content/uploads/2015/03/1_2015a_rognlie.pdf

Diamond 2016-Housing Supply Elasticity and Rent Extraction by State and

Local Governments
https://web.stanford.edu/~diamondr/gov_housing_supply.pdf

The Economist-Do Rent Controls Work https://www.economist.com/blogs/economist-

explains/2015/08/economist-explains-19
SFGate Opinion-Requiring affordable housing units doesnt address key issue
http://www.sfgate.com/opinion/article/Requiring-affordable-housing-units-doesn-t-
11042667.php