Eisenberg outlines the law of unintended consequences

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Microeconomics is the study of behavioral changes – including the relationship between changes in price and changes in behavior.

Regulatory changes create price changes.

Therefore, “using microeconomics, let’s look at behavioral effects due to price changes resulting from regulatory changes,” said Dr. Elliot Eisenberg, senior economist for the National Association of Homebuilders, the keynote speaker at the Housing & Building Association’s reception at Stargazer’s Theatre and Event Center on Tuesday.

Eisenberg, in his forthcoming style, sprinkled with sardonic asides and youthful enthusiasm, made what he called “general observations” about cities that have affordable housing, versus those that don’t.

“Forty years ago, Los Angeles, Seattle and Washington, D.C., were not expensive places to live,” he said. But now they are because “these cities have been aggressive in imposing regulatory and legislative ‘solutions.’ And every time a new law is passed, it increases house prices.”

Prices in these cities and Boston range from $332,700 to $391,400 (median, single-family house prices, third quarter of 2008, National Association of Realtors).

Of course, he realizes that some of the price increase is because of proximity to the ocean, or being a sought-after place to live, etc.

But all such reasons don’t account for the disparity in home prices between those cities and other “normal, growing happy cities,” such as Atlanta, Cincinnati, Dallas, Houston and Minneapolis, where home prices range from $136,000 to $205,100.

Artificial supply restrictions, including zoning, taxes or government regulation are to blame for those cities with higher home prices, Eisenberg said.

“The proposed solution to the latest housing problem is … um … more government regulation,” Eisenberg said. Why?

Well, politicians know the problem is serious, and politically, a solution is needed; therefore, we all follow the law (goes the reasoning) and regulations “must” work, and regulations of this type are “free and easy.”

And, voila – regulations are mandated, politicians are relieved and look heroic, and – the unintended consequences begin.

“We economists actually think about the unintended consequences – but we are regrettably not consulted,” he said, smiling. “Seemingly good ideas have bad consequences. If you want to pass legislation, make a list of all the ways people will think to bypass it – legally and illegally – and then, if the benefits outweigh the consequences, then go ahead.”

As things get more complicated and interconnected, the ability of regulatory “solutions” to fix the problem is reduced, Eisenberg said.

Take the 2009 International Residential Code, which states that all single-family detached residences shall have fire sprinklers. For now, local code prevails in the Pikes Peak region. But the push for sprinklers is a national/international phenomenon – it’s only a matter of time, said John Kisiel, HBA vice president of government affairs.

Eisenberg explained what effect (aka unintended consequence) such a mandate would have.

“Fire sprinklers in residential homes is a solution for which there isn’t a problem,” he said. “The majority of fires take place in older homes with codes that don’t require upgrades.”

So, the older homes need codes to improve safety, but requiring all new homes to have sprinklers will only cause other problems – without saving lives. New homes already have egress for basement windows, smoke detectors and other improvements that have become part of code over the years.

“Let’s impose a solution on the continuum where the problem is – the old homes – not the new homes,” Eisenberg said. “Residential fire deaths have been trending downward for a long time – roughly half of what they were 20 years ago. They need to look at what’s common to the houses where there are fires.”

Nationally, it costs about $6,000 to $7,000 to install fire sprinklers. Locally, Kisiel said, the cost is closer to $14,000.

“It’s expensive to install for the builder, developer, plumber, real estate agent,” Eisenberg said. “You’re getting a product you don’t need, so it raises prices and doesn’t save lives.”

For every $1,000 increase on a $337,699 home, it prices 346 households out of the market. So, they buy a cheaper home.

“But, at the bottom is a low-wage worker who could have afforded a $115,000 home,” he said, which is now, for argument’s sake, $120,000 because of mandatory fire sprinklers. “You have prevented them from gaining the opportunity of home ownership.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

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