Want More Affordable Housing? Try Free Markets

Exclusionary regulation at the local level is the root cause of unaffordable housing, and a rollback of exclusionary regulation is the best long-term solution, argue Salim Furth and Emily Hamilton, research fellows at George Mason University’s Mercatus Center.

“Contemporary American land use law embodies the bad idea that private land ought to be publicly planned. In practice, these plans routinely exclude low-income families by indirect means, causing income-based segregation,” they write in an attachment to April 2, 2019, testimony to the U.S. House Committee on Financial Services. 

Exclusion is widespread: most jurisdictions, through zoning ordinances, ban apartments and manufactured homes in all but a few locations. Single-family homes are usually allowed, but only in specified areas and often on lots larger than many buyers want. As a consequence, those states that give the most power to planners and the least authority to property owners have abysmal housing growth rates. When wages rise in those states, rents and home prices soar.

The debate over unaffordable housing is intensifying around Virginia. We hear it in Northern Virginia where community activists fear that highly paid workers at Amazon’s HQ2 project will drive up housing prices and displace the poor. We hear it in Richmond where community activists are fighting to make it more difficult for landlords to evict tenants. We hear it in Charlottesville, where gentrification is equated with racism. In almost none of these places do Virginia’s economic ignorami acknowledge that the underlying problem is the inability of the housing industry to build enough housing to keep pace with demand or, to put a finer point on it, to build enough of the specific types of housing that are in demand.

The Furth-Hamilton essay provides a valuable overview of the problem and concludes with a detailed list of policy points which, if enacted, would go a long way to addressing Virginia’s affordable housing issues. They write:

Rising  home prices in cities with growing populations are not a law of nature. In Living Downtown, Paul Froth describes how low-cost apartments, long-term hotel rentals, and single-room occupancies provided affordable housing for low-wage workers in America’s fast-growing cities in the past. Today, single-family zoning, minimum unit size requirements, and single-room occupancy prohibitions have largely eliminated new construction of these market-rate affordable housing typologies. 

In contrast, cities that have continued to allow new housing construction have avoided skyrocketing prices. Houston has exemplified a pro-housing regulatory approach, voting down zoning, shrinking minimum lots sizes, ending parking minimums downtown, and fast-tracking permitting. During a period of high demand, while the city’s population increased by half a million people, median Houston home prices topped out at $235,000, less than the national median. As a result of pro-housing policy, Houston households across a broad range of incomes can find housing that they can afford. … 

The emergence of the environmental movement in the 1970s provided a reason homeowners could organize against new development in their neighborhoods and cities while pretending not to benefit their narrow financial self-interest. Over time, this opposition resulted in regions where very little housing construction has been permitted, and increases in demand have driven prices up as a result. …

On the 50th anniversary of the Fair Housing Act, America’s housing markets are more segregated by income than at any time since the act was passed and possibly in the history of the nation. Housing is increasingly bundled with community amenities including schools, access to employment opportunities, public services, and neighborhood peer effects. This has occurred because local governments, including many [Community Development Block Grant] entitlement communities, prohibit housing construction in the quantity that would serve low-income families.

The rising inequality in cost between metro areas now overshadows the inequality within most metro areas. For instance, metro Dallas has maintained affordability even in desirable suburbs, while the San Francisco Bay Area has allowed rent to skyrocket even in poor areas. Thus, Zillow data shows that the median two-bedroom rental listing in Frisco, Texas — an affluent suburb of Dallas with an excellent school system — is $1,600 per month. In Oakland, California, where three out of four school children quality for free or reduced price meals on account of their low family incomes, the median is $2,895 per month.

The incentives of developers are generally signed with the goals of the Fair Housing Act. Where demand is high, they have an incentive to use land more intensively: building smaller units in denser clusters that accommodate more residents. Construction is a competitive industry that should be expected to bring real estate prices down to close to costs. The difference between construction costs and prices is a city’s “zoning tax” — as much as 57% of the cost of housing in Manhattan.

So-called “inclusionary” zoning is not an effective answer, the authors argue. Mandates make multifamily projects less financially viable and in some places actually may increase rent and exacerbate segregation. “Top-down land use requirements can be a poison pill that causes markets or local policymakers to shut down development altogether.”

Those who suffer the most from restrictive land use policies are, of course, low-income Americans… who are disproportionately minorities. More likely to be excluded from affluent cities and suburbs, they remain immobile and do not participate in the economies of regions where employment and wages are growing.

So, what is to be done? The authors offer these suggestions:

Expand by-right housing development

• Expand multifamily zoned areas by at least 1 percent of the land area of the jurisdiction
• Allow duplexes, triplexes, or fourplexes in at least one-fourth of areas zoned primarily for single-family residential
• Allow manufactured homes in at least one-fourth of areas zoned primarily for single-family residential
• Allow multifamily development in retail and office zones
• Allow single-room occupancy development wherever multifamily housing is allowed
• Reduce minimum lot sizes by at least 50 percent in at least 25 percent of residential zoned areas
• Reduce the number of buildings protected by historic preservation by at least 25 percent
• Increased the allowable floor area ratio (FAR) by at least 25 percent in multifamily areas that must cover at least 5 percent of the land in the jurisdiction
• Create transit-oriented development zones that account for at least 5 percent of the city’s residential zones and allow for a FAR of 10 or greater

Reduce costs of development

• Eliminate parking minimums
• Adopt parallel-process permitting
• Establish one-stop permitting
• Allow prefabricated construction
• Eliminate minimum unit size requirements
• Eliminate architectural standards other than those required for safety

Expand use rights in existing building stock

• Adopt land value taxation
• Adopt additive zoning
• Adopt form-based zoning
• Adopt non-zone-based regulatory frameworks
• Adopt pre-approved plans for accessory dwelling units, single-family homes, duplexes, triplexes, and fourplexes
• Reform subdivision regulations to allow for traditional mixed-density and mixed-use neighborhoods in new development

The main drawback of this presentation is that Furth and Hamilton do not address the “externalities” of greater housing density and the population growth it enables — particularly transportation congestion, water/sewer/storm water and other infrastructure, new schools, and taxes.

A couple of quick observations: First, as the authors themselves point out, every housing strategy has externalities. The primary externality of the prevailing housing policy is … unaffordable housing. Which is worse — traffic congestion or unaffordable housing? The answer, I suspect, depends largely on how much money one makes and how much value one puts on one’s time.

Second, higher density creates its own transportation solutions. With greater density, walkable, mixed-use neighborhoods, a greater variety of destinations are accessible by foot, mass transit becomes more economical, and car trips are shorter when they do prove necessary.

Third, mixed use development at higher density requires less investment in roads/public works/utility infrastructure per household than does low-density, sprawl-style development. The fiscal footprint is lighter, ameliorating some of the need for higher taxes.

Bacon’s bottom line: Let free markets work.

This commentary originally appeared in the June 2, 2019 edition of the online Bacon’s Rebellion.

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