Localities key to solving housing costs
Sky-high rents and home prices that are unaffordable to even solidly middle-class families were once phenomena safely confined to a few high-cost, coastal cities, and their suburbs. The turbulent migration patterns set off by the COVID-19 pandemic have made the high cost of housing a nationwide problem.
During the pandemic, millions of Americans decamped from their cramped, high-cost apartments in dense urban America for the relative freedom and affordability of sunbelt cities in Arizona, Texas, and Florida. It was an acceleration of a long-building trend. Its immediate result was a rapid increase in rents and home prices in these destination states.
By the end of 2022, average national rents were up 15% in core cities since the start of the pandemic, and were between 20 and 27% higher in the suburbs and exurbs, according to research from the rental listing website Apartment List.
Home prices were up nearly 40% nationwide since the beginning of COVID.
The National Association of Realtors reports that the median family makes almost enough to qualify for a loan for a median-priced home, but not everywhere. In the West, a median-income family can only afford a loan worth 75 percent of the median home price.
Some of the biggest pandemic-era price spikes have been in sunbelt communities like Tampa, Florida, Phoenix, Arizona, and Las Vegas, Nevada, that once offered people a high quality of life at a lower cost.
Home price appreciation and rent growth are both cooling in the first half of 2023, as demand settles and more construction activity picks up. Nevertheless, those pandemic-era price increases aren’t disappearing.
This has policymakers across the country asking themselves how best to accommodate growth while still being livable places people can afford to raise a family.
The good news is the solutions to high housing costs aren’t that complicated. Making housing affordable simply requires getting the government out of the way, and letting the free market add more housing supply to meet rising demand.
When it comes to housing, make no mistake: government is very much in the way. States and localities have erected a voluminous set of rules, regulations, red tape, and process that collectively prevents new, affordable homes getting built.
Single-family homes are often made unaffordable by minimum lot size regulations that require that each new home consume 5,000 or 10,000 square feet of land. The more land each home requires, the higher the price will be. That’s doubly true given that builders try to recoup the higher costs of larger lots by building larger, more expensive homes.
Sometimes local government regulation is explicitly designed to increase housing costs. Localities will often adopt design rules and aesthetic requirements with the intent of making new housing more upscale and their community more attractive. Everyone wants to be the new Scottsdale. But upscale housing is for most people unaffordable housing.
Making things more difficult still for homebuilders and homebuyers are delays in getting permits.
Builders can wait weeks, months, or even years for city hall to give them permission to get shovels in the ground. All the while, they’re paying financing costs and watching the price of materials and labor go up. Those costs get tacked on to the final sticker price of a new home. It also means some homes don’t get built at all. The National Association of Homebuilders estimates that regulation makes up 25% of the costs of a new home and 40% of the costs of a new apartment building.
Homes less than 1,400 square feet make up 8% of new single-family homes, according to The New York Times. They used to be 40% of the market in the 1940s.
All these rules are a major reason that the small “starter home” is an endangered species in today’s housing market. Homes less than 1,400 square feet make up 8% of new single-family homes, according to The New York Times. They used to be 40% of the market in the 1940s.
One reason for that is that people’s incomes are higher and they’ve spent those gains on larger homes. That’s a good thing. It’s a less positive development for people of more modest means who’ve seen housing stock that’s attainable to them regulated out of existence.
Primarily local regulations also conspire to make building other more naturally affordable types of housing exceedingly complicated and in many cases, downright illegal.
The most direct way this is done is through single-family zoning regulations. These allow only one home to be built on each property, even when land prices might justify a duplex, series of townhomes, or even a small apartment building.
Historically, people could economize on high land costs in desirable neighborhoods by splitting those higher property values across multiple homes.
Single-family zoning laws put an end to this type of small multifamily construction in much of the country. These types of homes are often called “missing middle” housing. They’re in the middle of the housing market between single-family homes and high-rises, and they’re missing because they’ve been banned. These same single-family zoning laws often ban accessory dwelling units that serve as a convenient home for an aging parent, or even a stream of rental income for a homeowner.
Even where multifamily housing is allowed, sponsors of these projects often have to drag them through lengthy, discretionary approval processes. A builder could spend months and hundreds of thousands of dollars trying to get approvals for a new apartment building, only to be told no by bureaucrats at city hall.
Local governments in search of sales tax revenue will often blanket their cities in exclusively commercial zoning, meaning no housing is allowed period.
The 2023 legislative session has seen a flurry of bills in state capitals that attempt to put some guardrails around the most restrictive local regulations. The hope is that slightly more permissive state standards will produce the boom in housing construction necessary to bring prices back to earth.
These state bills can take a couple different forms.
Some involve allowing more “missing middle” housing in single-family-only neighborhoods. This session, the Republican-controlled Montana Legislature, and the Democratic-controlled Washington Legislature both passed bills allowing duplexes, triplexes, and accessory dwelling units on most residential land statewide.
Less successfully, state lawmakers have also taken up minimum lot size reform. Bills in Arizona, Montana, and Texas all proposed a floor for how large local minimum lot sizes can be. (The former two bills failed. The Texas bill is still pending.)
States have also experimented with allowing housing in more types of zones. Montana and Florida both passed bills this year allowing housing to be built in commercial and mixed-use zones. A similar idea was proposed in Arizona, but failed.
All the above types of bills involve direct state preemption of local zoning rules. Other reforms require localities to plan for more housing, giving them more flexibility in deciding how to do that, while also threatening sweeping state intervention if they don’t get the job done.
A successful Oregon bill this session will require the state to analyze localities’ housing needs and then hand down housing production targets they’re supposed to shoot for. Local governments are then required to come up with housing production strategies detailing how they’ll change their zoning codes, permitting processes, and fee schedules to create that housing.
If a locality doesn’t hit its housing production target, the state government could adopt a range of remedies. That could include anything from more infrastructure funding to facilitate development to forcing a locality to adopt a state-drafted model ordinance.
New York Gov. Kathy Hochul’s ‘housing compact’ proposes a similar model.
The idea of state officials preempting local regulations is controversial, and for good reason. Local governments are the branch of government closest to their constituents. They’re said to know what policies will work best for their communities.
At the same time, local regulations can cause statewide problems. Local governments can take away individual rights that conservatives and free marketers cherish.
That’s certainly true in the case of housing. Local zoning regulations have stacked heaps of rules and restrictions on what property owners are allowed to do on their land. The result has been statewide housing crunches.
Local governments typically derive their zoning authority from a state zoning enabling act. It’s entirely appropriate for states to exercise some oversight over powers they voluntarily delegated to a lower level of government.
Done carefully, state zoning preemptions can enhance property rights and lower housing prices while still leaving cities and counties with plenty of flexibility to address local conditions and local concerns.
The best state reforms should be modeled on successful local policies and take aim at the most damaging, least productive local regulations.
While state preemption is becoming more popular, it remains true that some of the most productive zoning reforms have been locally initiated ones.
For instance, Houston, Texas, has managed to kick off a boom in townhome construction by reducing its minimum lot size rules. One recent study estimates the city’s reforms have led to the construction of 80,000 new homes. It’s a reason that Houston continues to grow while still being relatively affordable.
Texas’ minimum lot size bill, which passed near unanimously in the state Senate, is modeled directly off this local reform.
The elimination of minimum parking requirements—which require new development to come with a certain number of parking spots—has facilitated new housing in Seattle, Buffalo, and Minneapolis. These reforms could also easily be scaled to the state level.
There’s a risk that if free marketers don’t pass supply-side housing reforms at the state level, much worse reforms will end up winning the day. For instance, mounting housing costs have seen policymakers and activists take a renewed interest in rent controls—a policy that’s always tempting and always disastrous.
Federal lawmakers are also starting to kick around the idea of national zoning preemption as a way of addressing the housing crisis—an idea far more offensive to federalism and local control.
While state preemption is becoming more popular, it remains true that some of the most productive zoning reforms have been locally initiated ones. Houston’s minimum lot size reforms and Minneapolis’ elimination of parking minimums have both led to a lot of new housing. State-level duplex legalization in California has been less successful. Having local officials who are enthusiastic about reform and invested in getting the details and implementation right pays off.
Small government conservatives face an uphill battle on many policy issues. Housing affordability shouldn’t be one of them.
There’s a whole host of deregulatory reforms with a proven track record at the local level that could be adopted with zero cost to the taxpayer and immense benefit to homeowners and renters alike. Several states have done just that this year. More could get on board.
Christian Britschgi is an associate editor at Reason Magazine.
