Baltimore Ecosystem Study Institute of Ecosystem Studies

2011 BES Annual Meeting Presentation and Poster Abstracts

Time Is Money: An Empirical Examination of the Dynamic Effects of Uncertainty on Residential Subdivision Development.
Wrenn, Douglas

Abstract: Economists have long recognized that supply side factors, in addition to demand, play a critical role in our understanding of housing and land markets. This includes their effect on aspatial investment decisions as well as their effect on spatial outcomes such as subdivision location and size and how scarce land resources are allocated in the production of housing. The size and location of residential development and its geographic location is at least partially determined by the interactions of decisions made by individual landowners and the local public policies that affect their ability to their develop land. They are also determined by the amount of uncertainty that each landowner faces about the regulatory environment in which they exist. In this paper I investigate how regulatory uncertainty [in terms of expected time until completion] affects the decision to development, the number of lots created, and the location the spatial outcome of the development process. Specifically, I focus on whether historically stringent regulations for larger subdivisions has created an incentive for landowners to develop smaller developments [in terms of lot quantity] and whether this can help explain the scattered development pattern in our study region. To test this hypothesis I estimate a joint Probit-Poisson random effects model using maximum simulated likelihood. The model is estimated using original data sets on historical subdivision development, house price transactions, and subdivision approval timing for an exurban county in Maryland. These data were constructed by combining historical data records from various public agencies throughout the county. To measure uncertainty over development returns I use my house price data and nonparametrically estimate local price drift and volatility values for each parcel in each period. To measure regulatory uncertainty I use the data on the subdivision completion times. In each period the actual realized completion times [in months] for all previously-developed subdivisions are used to estimate a conditional survival model. Using the estimates of each of these models I predict, for all undeveloped parcels in that period, the expected completion time to fully develop that parcel. These values are updated each period and serve as my measure of intertemporal regulatory uncertainty. In addition to these factors, I also control for parcel-level factors such as slope and soil quality and local and regional factors such as local lot inventory and distance to local labor markets. The results from the joint Probit-Poisson model show that regulatory uncertainty does, indeed, affect the decision of a landowner to convert her parcel. As basic investment theory would predict, the model indicates that more stringent regulations decrease the probability of development and decrease the number of lots created following the decision to develop. The model also indicates that regulation may be contributing to the more scattered development pattern in the county as the effect of regulatory uncertainty is significantly diminished for parcels located in the restricted zoning areas. The result is particulary important given that these are the areas of the county in which officials would most like to control development.