A tiny teardown in Palo Alto recently sold for $2.5 million, essentially putting the cost of land for this 7,500 square foot lot at… $2.5 million.

The real estate agents who represented the buyer and seller in this transaction are undoubtedly excited. The fee on a $2.5 million sale is around 5%, equal to $125,000, split between the buyer’s and seller’s agents.

Now, the buyer will likely tear down the home and rebuild a new single family residence (SFR) for them to reside in for the next few years. In fact, they have little choice in the matter since the neighborhood is zoned for SFRs only.

But what would happen if zoning permitted builders to build to meet demand, rather than the restrictive zoning laws that bind California’s coastal cities?

A better alternative

Consider an alternate universe, where this property was zoned for whatever type of residence the builder can envision, including a multi-family property. Imagine the builder constructs a modest three-story, 6-unit condominium project. Each of these 1,000 square foot units sells for around $1.5 million in today’s market.

In this universe, each of the six units sold represents a fee for the buyer’s and seller’s agents of around $75,000, split. Together, this represents $450,000 in fees. Further, turnover on a six-unit complex is higher than an SFR, so fees will become available for agents more often.

Related article:

California tiered home pricing

In addition to the benefits to real estate agents, now five more households have a home in a great location near jobs, amenities and public transit. This is great for them personally, and the economy.

The economy would grow not only due to a more robust construction and housing industry, but also to the new freedom of movement workers would gain from (relatively) financially accessible housing near quality, high-paying jobs. Currently, it’s impossible for most to live in the urban areas where these types of jobs are found.

If looser zoning was enacted nationwide, total gross domestic product (GDP) would rise considerably. Researchers from the University of Chicago and U.C. Berkeley estimate eliminating land use regulation across the nation would cause the U.S. economy to grow by nearly $2 trillion.

Restrictive zoning — a public crisis?

Home prices have risen beyond the reach of all but the wealthiest in California’s desirable coastal cities. Most real estate agents who work in these neighborhoods would be unable to buy there today. And yet, we struggle to name these out-of-sight home prices as anything other than an economic victory.

A recent New York Times article puts it this way:

Rising milk prices are regarded as a household tragedy for some, and spiking gas prices stoke national outrage. But whenever home prices go up, it’s a “recovery,” even though that recovery also means millions of people can no longer afford to buy.

The thing is, there are safeguards in place to ensure basic commodities like milk and gas don’t become too expensive for people to obtain. The Federal Reserve (the Fed) uses several tools to keep inflation — the largest influencer on commodity prices — in check. But beyond the impact of mortgage interest rates on homebuyer purchasing power, they do little to influence home prices.

Is it time for the state — or federal — government step in and loosen local zoning restrictions and allow builders to build to meet homebuyer demand?

Agents — share your answer in the comments below!