Executive Summary
Opponents of 3A zoning assume that it will lead to a decrease in value for existing properties in Marblehead
While the classic supply and demand model predicts lower prices from increased supply on average, that does not mean that all houses are affected equally because not all houses are the same
In particular, single family homes, representing 75% of the housing in Marblehead, are fundamentally a different product to multifamily housing and are effectively a different market
Well-managed development creates positive benefits, or externalities, such as a broader tax base and a more vibrant community, which can increase housing prices within a community
Data from neighboring towns bear this out: those that built more housing than Marblehead in recent years have seen single family home values rise faster than Marblehead's
Marblehead's anemic housing growth and limited economic progress mean the town has missed out on these benefits. Compared to a town like Newburyport, which has built more housing than Marblehead, single family home prices have lagged as consequence
This has cost Marblehead home owners about $86,000 since the year 2010, when compared to the rate of single family home price growth in Newburyport
—-------------------------------------------------------------------------------------------------------------------------
Among the many objections raised against Marblehead's proposed 3A zoning reform is the allegation that construction of new housing necessarily leads to a decline in the value of existing properties. This idea comes from the microeconomic model of supply and demand: Increase the supply of a good and its price must necessarily fall.
This claim, that building houses induces decline in the value of existing homes, is worth close scrutiny given its weighty implications. If true, it would mean that building new units of housing makes the owners of existing units of housing poorer.
Given this idea flows from well-trodden economic theory, we ought then to observe it in the real world. Thanks to the state's extensive data collection, we can do just that. In the below chart, the Marblehead Housing Coalition has calculated the change in total housing units (i.e., single family homes and multifamily) among a cross section of North Shore towns between 2010 and 2022.
These towns differ in terms of size, geography, average home price, and amount of new housing constructed so they offer a valuable cross-section for understanding how new housing has affected home prices in communities close to Marblehead.
If the claim is that an increase in supply must necessarily induce a reduction in the value of existing homes, we ought to observe that those communities which built the most housing had either negative home price growth, or relatively slower home price growth.
That is not what we observe. The below chart compares the percent change in the value of a single family home, adjusted for inflation, between 2010 and 2022 with the change in housing units over the same period. Note that 75 percent of housing units in Marblehead are single family homes making this the most relevant measure of property values in the town.
Of the towns in our comparison set, Marblehead has seen the weakest growth in the value of single family homes over this period at 34.1 percent. We have also had the lowest growth in new housing at just 1.3 percent. Contrast this with Newburyport, which has constructed more than twice as much new housing on a relative basis compared to Marblehead but where a single family home's value has appreciated by 46 percent. That's 12 points in additional price appreciation.
If you are wondering what that would be worth to you personally, the Zillow Home Value Index estimated the price of a typical single family home in Marblehead at $723,000 on an inflation-adjusted basis in 2010. That home was worth about $970,000 by 2022. Had Marblehead's single family homes appreciated in price at the same rate of Newburyport's that same home would have been worth $1,056,000 at the same point in time.
We will get to how this result can be possible in a moment, but first, we should be clear on the implications here. If you have owned a single family home in Marblehead since 2010, rather than worrying about the impact of new housing construction reducing the value of your home, the data says you should be asking yourself "where is my $86,000?".
Reconciling the observed result with the theory is actually straightforward in this case and requires understanding the assumptions that sit behind the supply and demand model taught in Econ 101. In this case, the crucial assumption that needs to be accounted for is that all goods are homogeneous. To say two things are homogeneous is to say that they are the same.
On page 40 of this microeconomic textbook used to teach undergraduate economics at MIT you will find the following quote (emphasis added): "One of the assumptions we will make there is that all the goods produced by firms in a particular market are identical. Of course, real economies and real markets are not that simple."
What this means in practice is that the market for a three bedroom home in a duplex is not the same as the market for a single family home occupying an entire lot. Imagine a town comprising just two residential parcels of land. Both parcels are currently occupied by single family homes. If you convert one of the single family homes into a two family duplex, you now have two related but distinct markets for housing in the town.
And, in fact, this example points to one potential source for faster rates of single family home price appreciation in the face of constructing new housing. In this example, what has happened to the supply of single family homes alone? The supply of single family homes has fallen. Holding all else equal (ceteris paribus), its price should rise not fall, even though the total supply of housing in the town has increased by 50 percent.
If you are familiar with Newburyport's geography, you will know that there's more undeveloped land than there is in Marblehead. So, without looking at where new housing has been constructed, one might argue that some other factor could be at play because the new housing may have been constructed on undeveloped land.
And, indeed, there likely is another factor at play: Externalities (page 790 of our textbook). An externality occurs when the actions of one person or firm create an economic benefit or cost for others. When you build new housing, a lot of things happen. The increased population incentivizes new businesses to form. A broader tax base enables capital investments that are attractive to real estate buyers like playgrounds, public spaces and transit. Additional taxpayers can provide more funding for schools, a crucial factor for the willingness to pay of homebuyers with families.
Clearly, the positive externalities of housing construction in Newburyport, and all the other towns in our sample have outweighed any negative externalities and as a result, Newburyport's single family homes have appreciated at a much faster rate than Marblehead's.
The question this should prompt is affordability: How can the Marblehead Housing Coalition simultaneously advocate for housing affordability while supporting a zoning proposal which might accelerate the price of single family homes? This is simple: a three or two bedroom housing unit in a duplex or triplex structure will be more affordable than a single family home. According to Zillow, the price of a typical single family home in Marblehead is just over $1,000,000 whereas a multifamily unit of housing is closer to $590,000. Still expensive, but much more affordable on an absolute basis than a single family home (to reconcile these figures to those above, note that the earlier figures referred to 2022 and these figures are from 2024).
Perhaps, you retain doubts. Frankly, we were as surprised as you by these results! And to verify our findings, especially as it relates to construction of multifamily housing, we turned to literature. Here is a list of academic studies which find either positive impacts on the price of single family homes or no impact from constructing proximate multifamily units of housing:
Targeted smart growth planning initiatives in the suburbs: Effects on home values, (Wang and Immergluck, 2014 - Georgia Institute of Technology)
Smart Growth and the Challenge of NIMBY: Multifamily Dwellings and their Association with Single‐Family House Selling Prices in Tallahassee, Florida, USA, (Gibson and Becker, 2013 - Kansas State University)
Examining the Impact of Mixed Use/Mixed Income Housing Developments in the Richmond Region, (Sturtevant and McClain, 2010, George Mason University)
Effects of Mixed‐Income, Multifamily Rental Housing Developments on Single‐Family Housing Values, (Pollakowski, Ritchay, and Weinrobe, 2005, Massachusetts Institute of Technology)
In closing, hopefully this has helped you to understand the subtleties in the classical microeconomic model of supply and demand and how it interacts with single family housing. So the next time someone tells you that 3A zoning will crater Marblehead’s property values, instead interrupt them to ask if they're willing to risk costing you $86,000.
Comments