Jan 11, 2019

Cities and States to Watch in 2019

A Conversation With State and Local Policy Experts
Salim Furth Senior Research Fellow, Emily Hamilton Research Fellow

To ring in the new year, Mercatus Center scholars Salim Furth and Emily Hamilton exchanged a series of emails to trade key developments in state and local policy in 2018, and what they're watching in the year ahead. Their lightly-edited conversation is below.

Salim: Happy New Year! This was my first year at Mercatus and first year as a full-time urbanist, and I got to visit some really interesting places. I made my first trip to Silicon Valley—I had a meeting in San Francisco but made a point of staying at a hotel in Redwood City. San Francisco gets a lot of grief, but the Cal Train corridor is really the epicenter of America's housing crisis. At the other end of the price spectrum, I got a tour of Akron from Jason Segedy, who has one of the coolest jobs I’ve ever heard of: planning director for his hometown. Akron has been under the microscope for all the right reasons, and Jason showed me places where the city is taking creative approaches to declining demand. I also went—on vacation—to Monaco, which is exploring the limits on how much can physically be squeezed into 499 acres. 

My wish-list of cities to visit in 2019 includes Greenville (SC), Cincinnati, Missoula, Houston, and Burlington (VT). Lyman Stone has made the case that Cincinnati is replacing Pittsburgh as the most vibrant city in its region, and the city's approach to the rising coolness of its walkable core was to eliminate parking minimums. Coolness isn't a topic urban economists write about much, but there's no denying that it matters—Pittsburgh and Portland, Oregon, are two cities that strike me as benefiting heavily from their cultural cachet. It would probably be good for everyone if Berkeley and Brooklyn became a little less cool while Cincinnati and Akron got some more respect from the in-crowd.

What cities have your attention?

Emily: I had a great time starting up our Urbanity project this year!

Houston is also at the very top of my list of cities I would like to visit. Since 1990, 600,000 people have moved to the city of Houston, but its house prices are still below average for the country. Houston shows that it's possible to be a prosperous, rapidly growing city while remaining affordable. It's also the only large city in the country that doesn't have a use-zoning policy. It's allowing densification in some of its inner-city neighborhoods and lots of new low-density housing at its edges. I also hear that Houston is home to great Vietnamese food and Dim Sum, which is reason enough to visit in my book.

I'd also love to spend more time in Seattle. Since July 2016, Seattle has led the nation in the number of cranes on its skyline. Seattle has allowed for a huge building boom through its Urban Village policy that allows for high-rise development in parts of the city that are well-served by transit. House prices are responding to all this new supply. Rents have fallen 1.4% in the past quarter.

At the state level, I think California is the one to watch in the coming year. As you point out, Silicon Valley and California as a whole are in the midst of an affordability crisis. At least 33 housing bills are under consideration in the state legislature for 2019 that attempt to ameliorate tight housing supply and stratospheric prices. The one that's sure to get the most attention is Senate Bill 50. If passed, it would preempt some local land use regulations to allow 45-foot multifamily housing in neighborhoods that are close to transit. 

Salim: Houston, Seattle, and California represent three different approaches to housing policy. On a scale of Houston to Berkeley, with Seattle as the midpoint, where would you put the Minneapolis reforms?

Emily: Great question. Minneapolis passed a reform to its comprehensive plan to allow duplexes and triplexes in its single-family neighborhoods. In some cases, goals set forth in a city’s comprehensive plan never make it into the zoning ordinances that actually define what’s allowed to be built. My understanding is that in Minnesota, state law requires that cities’ zoning ordinances reflect their comprehensive plans, and the process is expected to be smooth in Minneapolis.

Assuming the plan is implemented, Minneapolis will become one of the most liberally zoned cities in the country. From New York to San Francisco, even the country’s densest cities dedicate large swaths of their land to single-family houses. By allowing small multifamily throughout the city, Minneapolis will open up to residents who couldn’t otherwise find housing that’s affordable to them. I’d put Minneapolis as the least constrained city after Houston.

What do you think of Minneapolis’ missing middle approach compared to Seattle’s approach of allowing lots of high-rise construction in a limited part of the city?

Salim: As a matter of aesthetics and neighborhood feel, I'm a huge fan of the Minneapolis approach: it enables gradual change and keeps ownership diffuse. Streetscapes can change bit by bit, in ways that develop character and granularity. If you think about the neighborhoods that people love, they usually have lots of unique, narrow buildings. Minneapolis has its share of new, large-scale apartment buildings—check out N 2nd St—that don't look like they'll ever have the feel of the Twin Cities traditional mixed-type neighborhoods (check out Colfax Ave. S).

But here's a reality check: projects take time, even small ones, and in most cases it will be uneconomical to knock down a single-family home to build a triplex. Seattle's urban village approach allows a much faster accommodation of new growth, especially since the urban villages are concentrated on land that was already low-density commercial. Check out the 2011 and 2018 Google streetviews of this block in West Seattle's urban village. A 389-unit apartment complex replaced a bunch of small, suburban-style businesses which used most of their land for parking. When you have a housing affordability crisis, you need to build homes by the hundreds on cheap land. Of course, that same land could have been used for triplexes—by my estimate, that block could have been about 15 triplexes on 5,000 square foot lots, which gets you just over a tenth of the units delivered by the apartment complex. 

I'd prefer if Seattle had both mid-density upzoning of single-family neighborhoods and high-density urban villages, but if they could only pick one, they picked the right one. In Minneapolis, where demand growth is more slow-and-steady, the gradual densification of urban neighborhoods seems like a wise approach.

Let's get back to California, which has been lurking in the background since the beginning of this conversation. The new legislative session just began there with a bevy of new housing-related bills. What are you hopeful for, and what are you afraid of? And what other state-level policies around the country should we watch in 2019?

Emily: Yeah, in California, the failed preemption bill SB 827 that we wrote about earlier this year has come back as the less-ambitious SB 50. It would set limits on how much cities can restrict housing density in areas that are well-served by transit and in high-income, high-opportunity areas. I’m excited about state preemption of local land use regulations because zoning is so difficult to reform at the local level. While most people can agree that California needs more housing, few want to accommodate it in their neighborhoods.

Yesterday, however, outgoing Governor Jerry Brown was very pessimistic about housing in California in an NPR interview. He said,

“I don't think you can mandate lower prices because people want the value in their homes. I don't think you can build housing and pay for it by taxing hard-pressed middle class people, among others, to pay for it. So I'd say this remains an issue and a topic that I know people will address. But if you want to come back and talk to me in four years, I assure you we're going to have the same problem that we have today.”

As California shows, high house prices make reform incredibly politically difficult because homeowners stand to lose equity if new supply causes home values to fall. In markets where prices are not yet so inflated, pro-affordability reforms shouldn’t be as difficult. So in the next year, I’ll be watching red states with rising house prices as likely candidates for other preemptions bills. A state senator in Utah recently introduced a reform bill, and I wouldn’t be surprised to see preemption efforts in Texas or Idaho.

What else do you think 2019 might bring in housing reform?

Salim: The other place to watch in 2019 is Washington, DC. There's been growing interest from federal policymakers on both sides of the aisle in finding ways to address housing affordability at the national level. They have to be cautious—there are plenty of voters and donors who want higher home prices, and plenty of places in the US where vacancies and decay are the pressing issues. Still, it looks like every 2020 presidential hopeful has to have a plan to make housing affordable. And that includes the Trump Administration, which is looking at using a revision of the flawed "Affirmatively Furthering Fair Housing" rule to promote better local policy. As you and I wrote earlier this year, the federal government can take some small steps to identify and cheer on good local policy and pull subsidies from cities that are using local regulation to prevent growth and keep prices high.

The other federal policy I'm watching in 2019 is the Tax Cut and Jobs Act of 2017. Taxpayers will file returns this year under the new rules for the first time. The mortgage interest deduction has been a major subsidy for homeownership, and TCJA took a hack at it from three directions. First, the standard deduction is a lot higher, so a lot of homeowners with smaller mortgages will switch to the standard deduction and no longer claim the mortgage interest deduction. Second, the state and local tax deduction was capped at $10,000. Lots of taxpayers who take itemized deductions do so because their state taxes plus mortgage interest add up; this change will push some of them over to the standard deduction. Three, the mortgage interest deduction cap was lowered to $750,000 mortgages. Not many people have mortgages that large, but that policy change might help moderate prices at the very top of the market.

What I'm curious about is whether homebuyers have already fully taken these changes into account. Mortgage interest rates have been low for a decade, so the tax savings aren't as big a deal as they were back in the 1980s or even the early 2000s. But I still suspect that lots of people will be surprised to learn that they no longer benefit from being in debt when they fill out there tax forms this spring.

Happy New Year!

Photo credit: Nicole Harrington/Unsplash

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