Page 88 - ABHR MUD BOOK 2022

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A residential lot in Texas that would sell fur $30,000 still sells for nearly $75,000 in
Colorado, despite the slowdown in construction there. Indeed, low land costs associated
with significantly reduced development costs are a major reason Texas home prices are
extraordinarily low and have been so for several decades.

In other states public sector constraints make development a long, drawn out nightmare,
significantly raising the costs ofcreating new residential lots. Part ofthe problem is that
local governments are attempting to manage development to their fiscal advantage since
most have to bear the burden ofputting in place much ofthe social infrastructure needed
to support a new subdivision. As a consequence, they are often excessively cautious in
permitting developments that entail uncertain fiscal consequences. Indeed, many
communities in the U.S. practice what urban and housing economists call "fiscal zoning",
permitting only the development they are certain will produce a fiscal dividend for them.
While many developments do eventually get permitted, the costs ofthe lengthy permitting
process is often extremely high, both in terms oflegal and administrative fees and in terms
ofthe opportunity costs ofa much longer period oftime that the developer must hold zero
income producing land while negotiating all the obstacles to get a permit. Ofcourse, these
extra costs ultimately get passed on to the consumer ofhousing in terms ofhigher lot
prices and hence home prices. Recent research published in the economics literature also
suggests that the consumer gets hit with high prices because the restrictive nature ofthe
permitting process typically results in an under-supply ofdeveloped land ready to be
utilized in residential building.

The use ofMUDs in Texas eliminates many ofthe administrative problems and fiscal
worries that development might impose upon the local public sector. MUDs are a
remarkably easy way to eliminate the risks to the public sector ofhaving to "front end"
much ofthe infrastructure cost ofnew home development while at the same time
eliminating the developer's costs and risks associated with the onerous permitting process
fuund in so many places in this country. MUDs are a win-win solution for all parties
involved: the developer's costs are lower, home owners buy housing at much lower prices,
and the public sector is not laden with fiscal burdens that can stretch their budgets,
entangle them in debt issuance issues, and risk shifting tax incidence on to their existing
constituencies. Ultimately, the home buyer does pay for the benefits ofthe infrastructure
provided through annual tax levies and user fees, but this is how it should be. Those who
receive the benefits pay. But, in paying through MUDs monthly and annually, the home
owner can indirectly take advantage ofthe tax-free borrowing capabilities ofthe MUDs
(unavailable to developers who would pass the costs on in form ofhigher home prices)
and this will lower the amortization costs ofthe infrastructure improvements and allow
them to pay for the benefits over time as they are enjoyed. Furthermore, in harmony with
homeowners associations they are able to retain a remarkable degree ofselfgovernance
over future capital improvements in the neighborhood.

At the Institute for Regional Forecasting, we've stressed for decades the important
comparative advantage ofa low cost environment (for both households and businesses)