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Davis, California

Thursday, December 9, 2021

Assessing the ‘Davis premium’

The law of supply and demand: It is a basic tenet of economics that holds that more of a particular commodity drives down its price.

This may not be the case, however, in regard to the prices of Davis homes, according to a recent data analysis conducted jointly by Mayor Sue Greenwald and Mark Siegler, chair of the economics department at California State University, Sacramento.

Comparing median price data on homes in the city of Davis to homes in Sacramento County since 1994, the findings show that the two have almost perfect correlation in regard to their respective rises in price.

However, Davis homes have also been consistently higher in price than Sacramento County homes during this time period, a phenomenon known as the “Davis premium.”

This ratio, which divides the median price of Davis homes by Sacramento County homes, was then plotted against amounts representing the total number of residential building permits granted by the city over various years during the same time frame.

While the number of permits has fluctuated, the value of the Davis premium has more or less remained flat, indicating that building more or less homes in the city has had little influence on its relative price.

Greenwald said the data analysis is like a “little experiment,” and the study was conducted to explore the possibility that additional housing may actually decrease affordability, as championed by various government agencies including the Sacramento Area Council of Governments, an association of local governments in the Sacramento region.

While Greenwald conceded the data was preliminary and does not go back far enough or include all variables to be conclusive, she did say the data was indicative enough to influence the city’s growth policy.

“For ownership housing, I am not convinced that building more would lower prices,” she said. “Based on the law of supply and demand, housing would be cheaper in metropolitan areas because they build so many houses.”

Greenwald said the key factor which influences the Davis premium lies in external demand – people not living within the community are attracted to the city because of its quality of life – and drive up the price of homes. However, this phenomenon often prices out low- to middle-income individuals and families, as well as those with ties to the university.

“I would like to build a lot more housing that would attract more people to the university,” she said. “While I don’t think that would have the effect of lowering prices necessarily, smaller houses would provide more options for people that don’t have as much money.”

Solutions proposed by Greenwald include a housing development at the current PG&E site on L Street and price-controlled, limited equity housing built by the university at the 27-acre site formed by Toomey Field and the surrounding area. Both options would be attractive to students because of their proximity to downtown and campus, she said.

On the other hand, Greenwald said she was against “sprawling growth,” attractive to non-university oriented individuals.

“It’s just not essential to keep growing in that regard,” she said.

Other councilmembers either agreed with Greenwald’s assertions or moderately disagreed.

“I would say the data speaks for itself,” said Councilmember Lamar Heystek. “I don’t know if we can build enough houses to even make a dent in housing prices.”

Possible solutions proposed by Heystek included limiting the appreciation amount on homes and providing more ownership opportunities for the low- to middle-income class ranges. Heystek cited the Aggie Village development as an example of the latter possibility.

Heystek said that while the city has provided several opportunities for affordable rental housing, circulating more affordable ownership housing would increase the diversity of stock and force market rate homes to compete.

While Heystek said these owners would see a lower rate of return on their investment, the opportunity is a good tradeoff because of the reduced price. Still, the councilmember advocated against the idea that more houses mean lower prices.

“Building more houses just to build more houses doesn’t do anything, and we can’t build enough of these houses without impacts on quality of life,” he said.

Councilmember Stephen Souza said one flaw in the study is that it looks at the data in the aggregate. Categorically looking at various types of homes and in different price ranges might lead to different results, he said.

“I’m not an economist or real estate broker and she isn’t either,” he said. “You can make data say what you want it to say based on how you extrapolate it.”

Souza said the main problem with housing in Davis lies in the need for affordable housing that is not being met by the community.

The councilmember also cited the fact that the city’s homes have not been vastly affected by the recent United States housing market correction. Davis homes as a whole have seen a 3 percent drop in the value of homes compared to 20 percent or more in other regions, he said.

“[The low price drop] is very telling and it’s because of supply and demand,” he said. “One of the things we need to do is build more than the 44 permit houses that we did last year.”

In particular, Souza proposed that the city develop more small square footage homes designed primarily for the lower to middle income class.

Approved affordable housing projects in the city include one at Cassel Lane on the north end of Sycamore Lane which will provide five ownership units, one at Willowbank 10 in South Davis off Montgomery Avenue which will provide eight, and one at the Willowcreek Commons in south Davis on the north side of Albany Circle which will provide four.

 

CHINTAN DESAI can be reached at city@californiaaggie.com.

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