Jun 1, 2022

Colorado Moves the Ball on Housing Affordability Reform—Will Other States Pick It Up?

How the Centennial State’s encouraging new policy works and why other states can build off of it to lower their own housing costs.
Emily Hamilton Senior Research Fellow

Legislators in Colorado have passed a bill intended to wage a multifront war on the state’s ballooning housing affordability problem. Like many states, Colorado has remaining funds from the American Rescue Plan Act (ARPA), and the bill allocates $400 million of this money to build and preserve subsidized housing. In addition, it would address the root cause of the state’s housing affordability problem--local rules that obstruct new home building--with a competitive grant program for localities that implement zoning rules that facilitate more, low-cost housing construction.

Leadership from Colorado’s state policymakers on this vital issue is welcome in a state where more housing is badly needed. Policymakers elsewhere have an opportunity to learn from Colorado’s example while potentially improving on the program design to better reward localities that prove themselves truly open to low-cost housing construction.

Local zoning limits that constrain the quantity of housing that can be built have caused the affordability problems that plague Colorado cities and towns today. In an effort to address these regulatory barriers, the bill allocates $40 million for a competitive grant program. These grants would be based in part on localities adopting zoning rules that facilitate infill construction, including permitting accessory dwelling units on existing properties, gentle density (duplexes, triplexes, or fourplexes) or transit-oriented development. The grants would pay for infrastructure that supports this housing, so it makes sense that the funds would be allocated to localities that are open to housing. 

Policymakers in several states have passed laws that set some direct limits on the extent to which local governments can restrict housing construction. For example, policymakers in California have passed a series of laws that legalize accessory dwelling units at single-family properties across the state and have made them easier for homebuilders to build over time. Most recently, Maine policymakers legalized duplexes, and in some cases fourplexes, on land that was previously zoned for exclusively single-family houses.

The Colorado bill follows a different model of encouraging local governments to reform by leveraging grant money rather than mandates. This approach has recently been implemented in Massachusetts as well. As my colleague Salim Furth explains, encouraging zoning reform with state funds preserves local decision rights over land-use planning and leaves them with the opportunity to opt out of reform if they choose to forgo state grants.

Using the state purse strings as an incentive to encourage local zoning reform does have some inherent limitations compared to automatically preempting some of the strictest local zoning rules. Broadly speaking, localities with the most exclusionary zoning rules and highest housing prices tend to be wealthy ones where state grants typically are more expendable than in communities with smaller local tax bases.

Given the difficulty of encouraging the most exclusionary localities to reform zoning with grant money, such programs must be designed with some things in mind. The Colorado law targets the most-needed types of reforms--those allowing for infill construction--but localities may be able to comply with the letter of the grant program requirements without complying with the law’s admirable spirit. In other words, it may not always lead to the permitting of more housing to be built, particularly in areas with existing infrastructure. 

Localities may be eligible for the grant program if they permit the construction of more than one unit per lot in residential zones. However, in research with Edward Pinto and Tobias Peter, I’ve found that many localities that technically permit infill construction in existing residential neighborhoods see little of this construction in real life due to other regulatory barriers. For example, some New Jersey localities permit duplex construction, but only if they’re configured “up/down” with one unit on top of the other. Localities with more flexible rules that also permit side-by-side duplex construction have seen much more construction because it’s a model that works better for homebuilders and homebuyers. The side-by-side duplexes are easier to turn into condos, and they allow residents to avoid having upstairs neighbors whose noise travels down more than noise across the party wall between two units.

Rather than rewarding localities that still have these types of zoning rules limiting construction, state policymakers seeking to encourage more, lower-cost housing construction through grants should instead reward localities based on actual housing market outcomes, such as their rate of permitting. This approach leads to a genuine housing abundance rather than further encouraging localities that may appear compliant on paper but not in reality. 

State policymakers have many options to do so, such as creating competitive grants on the basis of housing starts per capita. A program intended to reward localities for permitting housing to be built where demand is highest could reward localities that are able to reduce land costs per unit over time. Under this system, local policymakers would be eligible for grants by permitting denser construction that allows households to economize on land.

Colorado policymakers have taken an encouraging early step and highlighted an opportunity to use their remaining ARPA funds to make long-term improvements in housing affordability. By using these funds to reward housing market outcomes rather than rules on paper, they can be sure these dollars go as far as possible.

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