Analysis: Data Shows No Relationship Between Housing Prices and Rate of Growth in Davis

For those who are regulars on the Vanguard, these are the data that underlie a long time debate over the impact of the rate of growth in Davis on housing prices. Be forewarned, if you are allergic to math, you might want to skip to the graphs that illustrate some of the relationships between new building permits and housing prices. The data show in a number of different ways that building more in Davis does not reduce the price of housing in Davis when compared to Sacramento or other cities in the region.

The Mayor Sue Greenwald requested that someone analyze the relationship between the number of building permits and housing prices.

The price data come from RAND California through 2002 and since 2002, the data come from Trends in California Real Estate from the CA Realtors Association for July of each year.

The analysis looks at a number of different iterations here–current building permits, lagged building permits, all permits, or only single-family permits. None of these changes impact the overall findings.

The first chart here just shows the raw numbers.

There are some pretty interesting features of the raw numbers. You can see that housing permits peaked in the late 1990s with 1013 new permits in 1998 and 954 permits in 1999. Measure J comes in just after that and you can see the number of new permits really fall off after that point. You can also see the price of homes increases by a large margin after 1994. But as you can see, the price of homes in Sacramento increases as well over the same period of time. The last column is what is called the Davis premium–basically the ratio of housing prices in Davis divided by the housing prices in Sacramento.

Now that’s the key variable right there, because that is used as an indicator for the regional housing prices.

As you can see in this graph, the two median sales prices of homes in Davis and Sacramento County track almost perfectly. Davis is higher throughout the period, but the increase in home prices is matched by the increase of home prices in Sacramento County. In fact, the correlation coefficient for the two is .99. The correlation coefficient for the non-statistics person is basically a measure of how interdependent two variables are to each other. The value indicates how much of a change in one variable is explained by a change in another. .99 means that 99% percent of the change in the Davis median sales price is explained by the change in the Sacramento County Median Sales price. That means it is almost a perfect relationship between the two. Frankly in my background in the social sciences, you are often happy if you can explain 30 or 40 percent of the relationship.

The next graph looks at the relationship between building permits and housing prices, once we control for the housing prices in other areas in the region. To do this, we use the Davis premium and plot it against the number of building permits. We use the lagged variable to approximate the time it takes for a home with an approved permit to actually hit the market. But as I said earlier, it does not matter if you use the lagged variable or unlagged variable.

Let’s go back through this graph again. The Davis Premium is the median cost of housing in Davis divided by the median cost of housing in Sacramento County. The higher ratio means that Davis home prices are growing faster than Sacramento County home prices. The lower ration means that the Sacramento County home prices are growing faster than Davis home prices. Throughout most of the period the premium is between 1.4 and 1.6. That means that Davis home prices are 140% to 160% higher than Sacramento home prices. However, when we plot those ratios against the number of building permits we see that there is no relationship between the building permits and the relative price of housing in Davis. Even with two outliers, you have pretty much a flat ratio between the two.

Analysis and Implications

The argument on this blog has been that Davis is subject to the market forces of supply and demand just like any other community. That is correct, however, as some have contended the problem with such a simple view is that it does not take into account the much larger regional market. What we see in these data is that housing prices have gone up about the same rate in the fast growing market of Sacramento County as they have in the relatively slow growing market of Davis.

There is a differential between the cost of housing in Davis, but it is created largely by its desirability rather than its rate of growth.

It is important to note that these data do not resolve the issue of whether and how much Davis should grow. What it does suggest is that we cannot expect that more houses and more residential growth are going to result in a reduced cost of homes. Therefore, we should not tailor our growth policies in terms of number of units around the issue of affordability and the concern that middle class people are being priced out of Davis. We likely cannot change that by building more units unless we build so many units that we begin to reduce our quality of life.

If we built thousands of new homes, then we could possible begin to cut into the differential in housing prices between Davis and the surrounding communities. But how much would it take? And such an endeavor would likely result in a whole new set of problems. It is not as though much faster growing communities have fewer problems than we do in Davis. Nor is it true that they have better school systems than we do in Davis.

These data do have enormous implications for our land use policies however. They tell us that we are likely not going to gain affordability through growth. That means that if we are concerned about declining enrollment, we need to find ways to build the type of homes that young families want to live in. The natural starting point would be the university. The city of Davis clearly needs to work with the university in partnership to supply housing for young faculty members and staff–people who are likely to have children of school age. What we face in Davis is not unique to other college towns, we simply have to find ways to provide that kind of housing–not through faster growth, but through innovative approaches, that maintain the desirability of this town while providing real options for people who work at the university.

—Doug Paul Davis reporting

Author

  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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Categories:

Land Use/Open Space

136 comments

  1. Well put-together and insightful. Thank you! The most obvious conclusion is the same as the one that the University has drawn. It cannot expect market forces to solve its problems about having lower-priced housing to attract key professors to Davis.

  2. Well put-together and insightful. Thank you! The most obvious conclusion is the same as the one that the University has drawn. It cannot expect market forces to solve its problems about having lower-priced housing to attract key professors to Davis.

  3. Well put-together and insightful. Thank you! The most obvious conclusion is the same as the one that the University has drawn. It cannot expect market forces to solve its problems about having lower-priced housing to attract key professors to Davis.

  4. Well put-together and insightful. Thank you! The most obvious conclusion is the same as the one that the University has drawn. It cannot expect market forces to solve its problems about having lower-priced housing to attract key professors to Davis.

  5. Thanks for the very accessible, mostly jargon-free analysis. You might be a little more careful about phrasing the explanation of inter-dependence. In my first read I thought you were saying that Davis prices are a function of Sacramento prices. This is not what you wrote, but it took me two reads to clarify your point.

    It would be even better to look to earlier decades – at least as long as UCD has existed in its contemporary form. The analysis shown only looks at one cycle. I’m especially curious about the price relationship during periods of market decline.

    thnak again.

  6. Thanks for the very accessible, mostly jargon-free analysis. You might be a little more careful about phrasing the explanation of inter-dependence. In my first read I thought you were saying that Davis prices are a function of Sacramento prices. This is not what you wrote, but it took me two reads to clarify your point.

    It would be even better to look to earlier decades – at least as long as UCD has existed in its contemporary form. The analysis shown only looks at one cycle. I’m especially curious about the price relationship during periods of market decline.

    thnak again.

  7. Thanks for the very accessible, mostly jargon-free analysis. You might be a little more careful about phrasing the explanation of inter-dependence. In my first read I thought you were saying that Davis prices are a function of Sacramento prices. This is not what you wrote, but it took me two reads to clarify your point.

    It would be even better to look to earlier decades – at least as long as UCD has existed in its contemporary form. The analysis shown only looks at one cycle. I’m especially curious about the price relationship during periods of market decline.

    thnak again.

  8. Thanks for the very accessible, mostly jargon-free analysis. You might be a little more careful about phrasing the explanation of inter-dependence. In my first read I thought you were saying that Davis prices are a function of Sacramento prices. This is not what you wrote, but it took me two reads to clarify your point.

    It would be even better to look to earlier decades – at least as long as UCD has existed in its contemporary form. The analysis shown only looks at one cycle. I’m especially curious about the price relationship during periods of market decline.

    thnak again.

  9. and I knew the sky was blue. just sometimes covered by clouds

    –hopefully this study helps in discussions about growth—

    Thanks sue!

  10. and I knew the sky was blue. just sometimes covered by clouds

    –hopefully this study helps in discussions about growth—

    Thanks sue!

  11. and I knew the sky was blue. just sometimes covered by clouds

    –hopefully this study helps in discussions about growth—

    Thanks sue!

  12. and I knew the sky was blue. just sometimes covered by clouds

    –hopefully this study helps in discussions about growth—

    Thanks sue!

  13. Excellent argument overall.

    Here are a few things to think about from another perspective.

    1. Davis home building operates in the extremes where it is so below the demand that the amount of new housing cannot affect or mitigate prices. More homes would have to be built.

    2. Home prices rarely go down anywhere except after the market tops out or in the event of natural or manmade disaster (e.g., like the tornado that hit Oklahoma today or yesterday). However, changing the supply does affect price. This happened in Davis during the development of Mace Ranch, where homes in Mace Ranch during the late 1990s might have been $100K less than homes downtown. Prices may not go down, but their annual appreciation decreases. Upward pressures force homeowners to sell under certain thresholds (e.g., when the $200K and $300K levels were broken in the early 2000s). Sue’s argument glosses over these factors.

    3. It would be interesting to see a similar comparison with the Bay Area housing growth because that housing price phenomenon also drove Davis home prices higher.

  14. Excellent argument overall.

    Here are a few things to think about from another perspective.

    1. Davis home building operates in the extremes where it is so below the demand that the amount of new housing cannot affect or mitigate prices. More homes would have to be built.

    2. Home prices rarely go down anywhere except after the market tops out or in the event of natural or manmade disaster (e.g., like the tornado that hit Oklahoma today or yesterday). However, changing the supply does affect price. This happened in Davis during the development of Mace Ranch, where homes in Mace Ranch during the late 1990s might have been $100K less than homes downtown. Prices may not go down, but their annual appreciation decreases. Upward pressures force homeowners to sell under certain thresholds (e.g., when the $200K and $300K levels were broken in the early 2000s). Sue’s argument glosses over these factors.

    3. It would be interesting to see a similar comparison with the Bay Area housing growth because that housing price phenomenon also drove Davis home prices higher.

  15. Excellent argument overall.

    Here are a few things to think about from another perspective.

    1. Davis home building operates in the extremes where it is so below the demand that the amount of new housing cannot affect or mitigate prices. More homes would have to be built.

    2. Home prices rarely go down anywhere except after the market tops out or in the event of natural or manmade disaster (e.g., like the tornado that hit Oklahoma today or yesterday). However, changing the supply does affect price. This happened in Davis during the development of Mace Ranch, where homes in Mace Ranch during the late 1990s might have been $100K less than homes downtown. Prices may not go down, but their annual appreciation decreases. Upward pressures force homeowners to sell under certain thresholds (e.g., when the $200K and $300K levels were broken in the early 2000s). Sue’s argument glosses over these factors.

    3. It would be interesting to see a similar comparison with the Bay Area housing growth because that housing price phenomenon also drove Davis home prices higher.

  16. Excellent argument overall.

    Here are a few things to think about from another perspective.

    1. Davis home building operates in the extremes where it is so below the demand that the amount of new housing cannot affect or mitigate prices. More homes would have to be built.

    2. Home prices rarely go down anywhere except after the market tops out or in the event of natural or manmade disaster (e.g., like the tornado that hit Oklahoma today or yesterday). However, changing the supply does affect price. This happened in Davis during the development of Mace Ranch, where homes in Mace Ranch during the late 1990s might have been $100K less than homes downtown. Prices may not go down, but their annual appreciation decreases. Upward pressures force homeowners to sell under certain thresholds (e.g., when the $200K and $300K levels were broken in the early 2000s). Sue’s argument glosses over these factors.

    3. It would be interesting to see a similar comparison with the Bay Area housing growth because that housing price phenomenon also drove Davis home prices higher.

  17. Anonymous 9:37 AM:

    Again, the issue is not whether the rate of price increase declined during the Mace Ranch build-out, the question is whether the Davis price premium over surrounding areas decreased, and it did not.

  18. Anonymous 9:37 AM:

    Again, the issue is not whether the rate of price increase declined during the Mace Ranch build-out, the question is whether the Davis price premium over surrounding areas decreased, and it did not.

  19. Anonymous 9:37 AM:

    Again, the issue is not whether the rate of price increase declined during the Mace Ranch build-out, the question is whether the Davis price premium over surrounding areas decreased, and it did not.