Friday, May 11, 2018

California and solar panels

Apparently, California has passed a new law requiring homes to have solar panels.  Even if solar is becoming a viable energy source, I suspect that decentralized rooftop panels are not the optimal form of energy production.  Centralized, efficient solar farms are probably the long term form that will end up being the most productive.  This seems like the sort of thing that tends to be popular but doesn't work in practice, like Mao Zedong's backyard furnaces.  Maybe something like Tesla's solar tiles can become practical, since they serve a double purpose.  But, for the purposes of this post, I am agnostic about the idea, and I will argue that even if the solar panels are completely useless, they are still an improvement over the status quo in California housing.

Let's say that in a typical new development in California, the cost of building a new home is $150,000, but the market price is $400,000.  The gap between the cost and the market price will be filled.  It is filled by a high price for the land, the cost of meeting various local regulatory demands, developer fees and taxes, and the costs associated with waiting.  Given the cost and market value, these expenses that fill the gap must exist.  If they didn't exist, the market price would converge with the basic cost.  For instance, if long waiting times for permits were eliminated, more homes would be built, and the market price would decrease.  This is a sort of natural law.

The high price of the land is simply a transfer of economic rents to an unproductive owner.  It simply allows someone to claim some portion of the market's production from others without producing anything themselves.

Queuing is pure waste.

Taxes could be useful.  High property taxes, imposed fairly and universally, as they are in places like Texas, work pretty well.  In theory, it would reduce real housing consumption (reducing the average home's square footage, for instance).  But, when paired with elastic housing supply, as it is in Texas, the effect of supply outweighs the effect of the tax, and housing remains relatively inexpensive, in rental terms, and especially in price, since the government is essentially a silent owner in the property and claims a portion of the rent.  But, in California, property taxes are assessed unequally.  Long time owners pay very little tax and frequently new properties are assessed with various forms of taxes, fees, and payoffs to local municipal agencies.  Taxes assessed in this way increase the market value of all properties by limiting supply, but instead of capturing that value as public revenue, existing owners pocket it as economic rents, and so in California, development taxes also create poor social outcomes.

So, what about the solar panels?  Let's assume that they don't quite pay for themselves.  Let's say that they cost $10,000, but they only provide about $5,000 worth of electricity over their working lives.  So, on economic terms, new homeowners would not install them.  The market value of the house, without the panels is based on supply and demand.  The value of living in that location, given the quantity of homes available.  Adding $10,000 to the cost of building the house just changes the gap between cost and value.  So, now, the house costs $160,000 to build, but it still has a market value of $400,000.  Maybe, if buyers have the means to pay more, and they recognize the value of the solar panels, they will be willing now to pay $405,000 for the house.  But, the market value of the house will only rise to the extent that the buyers actually value the solar panels.  In this context, adding a cost to building the structure doesn't make much difference.  The market value of that home is unrelated to the cost of building it.

So, this means that the gap between the cost of the home and the market value has been reduced from $250,000 to $245,000.  Now, instead of transferring money to real estate owners, or wasting it in queuing, that money is wasted on the production of solar panels that aren't worth the cost of producing them.  To the extent that home values don't rise the full $5,000 or that there are some positive externalities from having solar panels, some of that wasteful gap between cost and market value gets filled with activity that is useful.

That is how messed up the California housing market is.  It is so bad that forcing home builders to spend $10,000 for solar panels that are worth $5,000 would be an improvement over the status quo.


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  2. I enjoyed this part for its entirely idiosyncratic and accurate take on California housing markets.

    BTW, there are gigantic warehouses dotting the Inland Empire, where it is brutally hot and sunny. If solar ever gets cheap enough, I have though that would be the place for mandated solar power…not dinky little houses with trees etc.

  3. Kevin, I don't know whether to laugh or cry, but either way, I really appreciate your analysis.


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