In May, 2013, the city of Moore, OK experienced its third violent tornado in 14 years resulting in over $2 billion in damage and 24 fatalities including 7 children at Plaza Towers Elementary School. As a result, in April 2014, the city adopted the strongest building code for wind hazards in the nation becoming the only municipality to take such an action. Estimates by consulting engineers and the Moore Association of Home Builders expected construction costs to increase by $1 per square foot. Actual costs, are closer to $2 per square foot. No other city in OK followed Moore’s lead, making this a natural experiment testing how real estate markets respond to an isolated regulatory action which increases production cost. Economic theory suggests such an action would decrease supply as producers shift production to cities with less regulation driving up price and lowering quantity supplied in Moore.
Data
Data for the study comes from 5 sources, MLS data for both Moore and an adjoining town, Norman, building permit data from both Moore and Norman and macroeconomic data to control for the effect of interest rates, employment, state GDP and the price of west Texas intermediate crude oil, the dominant commodity in the state of Oklahoma. The data covers 4 years, 2012-2015.
Methodology
To test for price effects from the change in building codes, an initial series of regressions are performed on all home sales in Moore followed by regressions on new home sales only. To test for changes in quantity supplied a regression is performed on building permits. Next, a difference in differences regression is performed combining transactions for Moore and its neighboring city Norman for new home sales only. A similar difference in differences regression is run on permits.
Results
If theory holds, prices for homes in Moore would increase relative to Norman and permits in Moore would decline relative to Norman. Contrary to theory, neither result occurs.
Policy Implications
Municipalities in wind hazard regions are reluctant to adopt strict building codes for fear of driving desired development to neighboring towns with more relaxed codes. This study suggests that the fear of losing development is unfounded and potential residents may value the added safety of better construction.
JEL Codes: L74, R31