Land Use Regulations, the Rise of NIMBYism, and Options for Reform

A Macro Musings Transcript

David Beckworth: Our guest today is Salim Furth. Salim is a colleague of mine and a senior research fellow at the Mercatus Center where he studies regional, urban, and macroeconomic trends and policies. Salim joins us today to discuss some of his work on the housing supply in the United States and its implications for policy. Salim, welcome to the show. 

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Salim Furth: Thank you so much David. It's great to be with you today. 

Beckworth: Well, it's great to have you on. You work just down the hall from me when I'm in the office. So I see you quite often when we're here working. And you've done a lot of interesting work on regional and urban economics, a lot of work on housing, and I'm curious, how did you get into that field? 

Furth: Well, it was really an accident. I'm a recovering macro-economist and my training was at Rochester in international econ. So lots of traditional macro models. And I did a lot of that work and macro policy stuff at the Heritage Foundation, which was my first real job after grad school. And while I was there, I sort of stumbled into the importance of housing and housing regulation for the US macro-economy. 

There's a series of papers that got a lot of attention that sort of linked what was traditionally a kind of micro field of studying land use regulation and housing supply to the macro-economy through the channel of spatial misallocation. So essentially if wages and productivity are much higher in some places, but people can't move there because they can't get houses, then that at a certain point gets macroeconomic implications. So I became interested in it, I wanted to write about it and I couldn't find kind of quite the right paper for the estimate that I needed. So I decided to do the estimate myself and three years later, here we are. 

Beckworth: And that's the paper we're going to discuss today. It's called *Housing Supply in the 2010s.* And so you are innovative, you're novel in this paper, you have your own model, some interesting results. But I want to go back to your background. So you would now classify yourself as a regional urban economist. Is that fair? 

Furth: Yeah, I usually say urban and housing. 

Beckworth: Urban and housing. Okay. Well I want to still claim you as a macro-economist since you've said you've given up. I'm a macro-economist as our listeners know, but I'm going to still claim you as one of ours because as you just said, this ultimately does affect long run trend growth. Right? And that's part of macro, macro is both the business cycle and a long run trend growth side. So you're still really in that side, right? I can still put you there? 

Furth: Yeah, sure. And I can certainly understand and build those bridges. 

Beckworth: Okay. Thank you. Glad to have you on board. Let's begin with your paper, *Housing Supply in the 2010s*. Give us an executive summary. 

Furth: So this is a giant omnibus paper because what I wanted to do was look at the entire country, not just one region, and just get a basic understanding of where was the housing built? It turns out that that's not as easy as it sounds. We don't kind of track year to year where housing is built. We track permits at a jurisdictional level, but not all permits turn into housing units. Some projects are abandoned, actually a fairly large share, and jurisdictions are sometimes quite large. So we don't know where in say Indianapolis, the houses are going just because Indianapolis issued so many thousand permits. So I'm able to drill down to the census tract level. Census tract is like a small neighborhood, 1700 homes on average though there's lots of variants in that. 

And then I wanted to say, okay, well we know this sort of two competing stories about housing supply. So one is, housing supply happens where there's land available and where the market wants it. And that's the sort of regulation doesn't matter too, too much story that the regulators, they’ll allow some crazy things, but generally what the market wants, they allow and the market really only wants to build on vacant land or in maybe some really nice waterfront high-rise places. Then the other story is [that] land use controls everything around me and the regulations dictate exactly where everything goes and there's no market forces at all. And so, okay, neither of those extremes is correct, but we need to carry both of these perspectives with us when we go to studying it. So I essentially tried to say, okay, where was all the housing built nationally? 

Then, do a comparison between apples to apples places. So instead of just saying, “well the exurbs are building more than the inner cities so therefore people like the exurbs.” Well, the inner cities are pretty full, so maybe it's really easy to build in the exurbs. Maybe people don't really like the exurbs compared to the inner city or the flip side, while prices are much higher in the inner city that in the exurbs, so people like the inner city, they don't like the exurbs. Well that's also not necessarily true. Prices are high for a variety of reasons. So I'm able to sort of get further down this road in resolving some of these debates. In some sense it's very boring, it's very high level. I'm looking at the whole country. I can't kind of give you one punchy “all the suburbanites are evil” or what some people are looking for out there. 

But I am able to drill down on a neighborhood by neighborhood level when somebody comes and says, "Hey, I represent this little town that no one's ever heard of. Can you help me understand what's happening?" And I actually can. And I think that's really exciting.  

Beckworth: Yeah. And later we'll go look at some of your growth surplus measures, at least some of the big metro areas. But as you said, you can drill down even farther if you wanted to. But let's motivate this paper, this discussion, with some of the facts of housing, if we can call them that. Some of the reasons we care about this issue in the first place. Why is housing such a hot issue? So how would you start that off? Why do the paper in the first place? 

Furth: Well, studying housing is great compared to studying macroeconomics when you are at parties or other social situations. In macro, people's eyes glaze over as soon as you talk about your work. 

Beckworth: Fair point. 

Furth: But housing, everybody lives in a house or wants to. And everyone has the experience of going through rental contracts. A lot of people have purchased a home, which is a pretty complex economic action actually, I just did it, it's very complex, can confirm. So it's actually a really interesting conversation starter and it's really important precisely because homes are sort of like you really need shelter like we're really, really low on Maslow's hierarchy of needs here. And the other interesting thing, and I think this actually helps with crossing the sort of traditional partisan divides in the US is that people typically only live in one housing unit. The size and quality of that housing unit will vary with their income. But the difference in how much housing someone consumes is a lot less than the difference in say how many restaurant meals they consume or how much air travel they consume. 

So there's this sort of sense of, well, everybody needs a housing unit of their own and maybe we don't worry about getting everybody mansions as long as some people can't find apartments. And if you sort of count the people or count the families and then count the housing units, if those numbers don't match up, you've got a problem and everybody left and right seems to appreciate that. 

Beckworth: And there is a problem. Is that fair? We have a housing shortage problem in the US? 

Furth: Yes, that's absolutely right. It's obviously most severe at the coasts in the really expensive metros, but this has these macro spillover effects to everywhere else.  

Beckworth: Okay. And you outlined some of these issues in your paper, really interesting observations that I was not aware of. You note that the price of housing varies far more across US metro areas than do wages, construction costs or commute times. Any the examples of that?  

Furth: Yeah. So we expect people to pay more to live in better places. So maybe I'd pay a little bit more to live on the beach or to live in LA where the weather's great versus San Bernardino. I'd pay more to live where my wages are a little bit higher, but the difference in housing costs is a lot bigger than what we'd expect if it was just a matter of people paying a little bit more for better access to things. And so it's routine in conversation. So I went to school in Rochester and I go back there regularly to see my in-laws and friends up there. And people are complaining that it's really hard to find a house in the 100 to 150 range right now. There's cheaper houses and there's more expensive houses but that sort of sweet spot between 100 and 150 grand, it's just hard to come by. 

And in DC where I live, 150 grand doesn't get you a dumpster. Right? So, and we see this in rent as well, right? So you can rent a room in a house in Rochester for 300 or $400 a month. And in DC it's two to four times that depending on where you are. 

Beckworth: Yeah. And the point is that that variance doesn't match up to wages between those cities or commute times or any other kind of comparison you would think would be important in driving those differences. Is that right? 

Furth: Yeah. This doesn't just look like the kind of natural variation that you get, it's true also, if we look historically, right? If you go back 50 years, there was certainly variation in prices, but it was a lot less and it was tied more to kind of basic things like how much does it cost to build a house? So if wages are higher somewhere you have to pay the construction workers, et cetera. Maybe materials are more expensive. So say Alaska and Hawaii, you expect prices to be more expensive because things have to be shipped in. But that's not what's driving home prices. It's not just a matter of well it costs a lot to build in San Francisco so prices are higher. It's wow, there are way more people who would like to live here than there are housing units. So the result is that every home sale is an auction with prices getting pushed up and up and up. 

And the same again is true on the rent side that when a landlord has a unit that comes on the market and has 10 or 20 applicants, they can charge a much higher rent than when they're chasing somebody to fill the unit. 

Beckworth: And that leads to the next observation that you make in your paper, a set of observations that there are these urban land use regulations or institutions that derive this scarcity relative to demand. The first one you highlight is there's tax incentives, mortgage subsidies. I think most people are aware of those, but briefly mention them. 

Furth: So land use regulation is one of the most intrusive forms of regulation that you'll find anywhere in the US. So, imagine that when you turned 18 years old, you sort of sent your school records to the government and they sent you back a license to work in three or four fields that they think would suit you. So you can be an astronaut or a garbage man or a nurse and those are the only things you can do in your life. And maybe you aren't actually smart enough to be an astronaut. So that one's actually out and you just were really into spaceships when you were a kid and you can't stand blood, so then you're stuck being a garbage man. So that's basically what we do with land. So there's a process of zoning where in almost all municipalities and counties in the US some level of government takes a look at the land and says, "Well, we kind of think this would be good as a shopping center." 

Okay. It can only be a shopping center. And if anybody wants to change it, they have to come and beg for permission. Or this can only remain agriculture for as long as we want. And then you can buy the land speculatively and come and apply to change it from agriculture to industry or residential, but we might not give you permission. And so maybe your whole investment is lost and you can't find out ahead of time if you can make that change. You've got to make the investment upfront so developers can work around this. And people think of this as a very corrupt system traditionally. And that's largely because you've got to be monied to play. You can't kind of play the zoning game unless you've kind of got enough cash to take some losses when you rolled the dice and ask the government to give you permission to do something else, because otherwise you can lose a huge amount of money when you bought something thinking that there was a good chance that you could do something there and then you find out, "Oh, I can't." 

So it's really unbelievably intrusive. And I think people don't appreciate… they live in a neighborhood, they see what's built there and it's sort of like, "Okay, well that's what's there." But usually what is there is literally the only set of things that is allowed to be there. If you go to your local strip mall, if you read the regulations, the regulations will usually say what kinds of stores are allowed in that particular commercial zone. And if someone wants to open a guitar store rather than a drug store, they actually have to go and apply for permission in many cases. 

Beckworth: Wow. 

Furth: Guitars, they’re terrible. 

Beckworth: That's amazing. So you use a term in your paper, kind of a funny snarky term that's been given to zoning that speaks to this. So what is that term? 

Furth: So we call this kind of zoning Euclidean zoning, which is a reference to Euclid, Ohio, which was the famous Supreme Court case from the early 20s, which established that this type of zoning was legal, that you could separate apartment buildings from single family homes, from shops, et cetera and do it fairly arbitrarily. And then it's sort of a joke on Euclidean math which has lots of straight lines and a kind of top down view of the world as something that you can just control. 

Beckworth: Yeah. And you highlight in your paper how obtrusive some of these land use regulations are. If you're a local government, it's in your favor and it's in your self-interest to cater to those types of development that are going to bring in the biggest tax revenues for you, nets like commercial development, right? 

Furth: That's right. So, in theory, the idea behind the Supreme Court gave in the Euclid case was that local governments should have this authority because there are lots of effects that a different land uses can have on their neighbors. They change the nature and character of a place. So the government and all its wisdom should be able to govern what goes where. But one of the obvious problems with this is that the government is not an outside actor. So it's not that some disinterested commission is deciding, "Well I'm sorry David, you can't put a Walmart in the middle of the subdivision. All these people would drive past somebody's kids playing. This is not fair." It's an active player, right? So it's the tax collector. It's the not so silent partner in your real estate. The local government typically makes most of its revenue off property taxes. So it cares about property values. And then it also can make money off sales taxes and then it has expenses. 

And so it cares about all those things. And if you go to a local government, you say, "Hey, I want to build a mobile home park or a really big apartment complex that's going to be quite cheap and has lots of low income immigrant families." They'll say, "Well, we're not going to collect a whole lot of property tax revenue off that and we are going to have all those people move into the neighborhood. And they're going to use social services. They're going to send their children to the schools, which if you're a local government runs the schools, that's almost certainly the most expensive thing they do. And those people are going to go there, they're poor so some of them will use uncompensated care at our hospitals, which maybe we have a financial interest in. And so no, we don't want that." 

On the other hand, if you're going to bring in an office development, which is going to provide a bunch of quiet office workers who all drive home at five o'clock and don't use our social services and the offices are just going to sort of quietly pay its taxes, well then yes, you can build that. 

Beckworth: And that makes it tough for people who really do need the housing. The people who find that toughest to go locate housing, the low income individuals, so it's kind of biased or stacked against them. You also mentioned there's a set of institutions in place that you have to go through just to build and those lead to kind of cookie cutter, very familiar forms. You mentioned you have to include institutional investors, land assembly, private and public planning, regulatory approval, journal construction contractors, sub-contractors, real estate agents, mortgage lenders and so forth. And they're all kind of catered to a very familiar product. So it's hard to use that system to get a trailer lot going or some other unconventional product. 

Furth: Yeah. So this is sort of the flip side, right? So occasionally in my circles, there's  traditional urbanists who go to Paris or Geneva and there's like, "Oh my gosh, it's so beautiful. Why can't we have a city that looks like this?" And if we just removed the regulations, we'd get funky architecture and a radical mix of uses, et cetera. And I think it's important to discipline that with, we live in a postindustrial economy. And so there's a lot of these non-regulatory market institutional factors that just like mass production of toothbrushes or shirts, it's a lot cheaper to mass produce housing finance. It's a lot cheaper to mass produce real estate deals than it is to do them bespoke one by one. So with lower regulation we certainly would get more diversity of housing types. 

And right now, have you noticed that like every new development has these kind of like, the fronts aren't flat, the fronts are all really bumpy and they mix brick and some kind of siding? 

Beckworth: Yeah. 

Furth: That's because a lot of regulations think that multi-material fronts are somehow better looking and so they require that you use multiple materials in your fronting because they want to avoid you using just like a blank brick wall or some... It's true that like the very cheapest thing you can do is usually a single material. The result is really ugly. It turns out that regulators are not great architects. Shocking, right? But they put in these requirements, the results as we get everything that looks kind of the same and it's basically built to the regulation. So that happens and with less regulation we could get more diversity. 

But I think we also need to temper our expectations and say, in a world that is highly organized and centralized where there's these big efficiency gains from organization, we should just respect those institutions and understand we are going, even in a low regulation world, we are going to have large scale development that follows certain well-worn paths. And if you want to change things like say the New Urbanist Movement which started around 1990. You have to work at it and sort of create new pathways to show that every step of this very multistage process can work. That people who invest money way up front are going to get their money back even if the product is slightly unfamiliar. So we see these New Urbanist principles now what, 30 years later being incorporated into maybe a majority but at least a large minority of new suburban projects. But it takes time to change because the market institutions are large and they run on bureaucratic rather than artistic principles. 

Beckworth: And they're geared towards single family owner occupied homes most often. Is that right? Or Commercial? I guess. 

Furth: Yeah. Yes. So commercial and residential are usually completely separate markets. But I think that's actually a case where federal regulation is really the kicker. So we have really big subsidies for single family homes relative to either condos, which are owned homes, but in a multi-unit building or rentals. So there's an incentive to borrow to buy your home. Right? So there's a mortgage interest deduction. The value of that has been reduced thanks to the Tax Cuts and Jobs Act which raise the standard deduction so it pushed a lot of relatively low small mortgage borrowers into the standard deduction away from itemizing so that which lowered the value to them of borrowing more money. 

And it also lowered the cap from I think a million to $750,000 of mortgage, which at the very high end lowered the value of the deduction. We actually see that playing out in the market now where housing price growth is actually weaker in the very top tier than it is in nearly affluent. So those are big subsidies for ownership. Then there's also subsidies or relatively better regulatory treatment in terms of the what Fannie and Freddie will reinsure, they're very comfortable with single family homes and condos, they take a much stricter view of essentially they won't reinsure those until the project is 50 percent sold. Whereas they'll start, if you have a new suburban subdivision, they'll start insuring each home as soon as it's occupied, they don't wait for the subdivision to prove that it can be a going concern. 

I think that the concern with condos is legitimate, right? If you have a building that doesn't fill up that indicates that the units are not worth much and are going to resell for much lower, but I also think that's true for a subdivision, right? If you build a new subdivision and it's just too far from the city, nobody actually wants to live that far out. The commute is too long. That's also not going to sell well. And so they sort of, I don't know, they have to draw lines somewhere in the way they've drawn the lines favors single family owned homes over rentals and over multifamily owned homes. 

Beckworth: Okay. One other set of regulations that you've looked at and you have another paper. The paper's title is, *Do Minimum Lot Size Regulations Limit Housing Supply in Texas?* You coauthored this with Nolan Gray. So there's apparently these minimum lot size regulations that have a very binding constraint on what's being built. 

Furth: That's right. So not only does Euclidean zoning say you can only build this type of building in a specific place, but it also tells you specific parameters for how that building can be shaped and on how much land it must set. So I alluded to this with the aside about materials and construction, but one of the most universal, perhaps the most universal regulation, at least with single family housing is minimum lot sizes. So when you build a new house, when you subdivide a farm say, or an old industrial site that you're going to build housing on, you divide it into lots because each home owner gets their own lot, and you can generally make more money if you divide into more lots though not always. 

And the government restricts how small the lots can be. So they restrict basically in this area and they'll do it differently by areas. And notionally these are supposed to be related to maybe some areas are more urban and dense and kind of close to your walkable downtown and others are further out. But if you look at the sort of the lived experience, the actual implementation of this, it's usually a total patchwork where semi-arbitrarily, this subdivision gets 7,000 square foot lots. This one gets 12,000 square foot lots and it's not at all clear whether it was the developers’ connections that got them a better deal or the mood in city council that day or something else. But essentially they set a minimum lot and you can't build any lot in that subdivision smaller than the minimum. 

And this leads to similarities obviously in the type of housing that can be built. And large lots tend to be complimentary goods to large homes, for obvious reasons you can put a large home on a large lot where it wouldn't fit on a smaller lot. And the kind of people who can afford to buy a lot of land are the kind of people who can afford to buy a lot of house. So minimum lot size regulations tend to push up not only the amount of land that every prospective homeowner has to buy, but they also tend to lead to larger and higher quality homes, which are pitched at the higher end of the market. And one thing that my colleague Kevin Erdmann has documented is that in the last 10 or 15 years, homes built for the middle and low ends of the market have really evaporated in terms of their shares relative to what they were before with more and more new housing being pitched towards the high end of the market. 

And he concludes that that is primarily a regulatory phenomenon. So in this paper, Nolan and I looked at four cities in Texas that do a good job of publishing their data. That was basically the criteria we looked for. We looked for really high quality data that Nolan who can do GIS analysis could sort of pull out and identify the zoned minimum lot size and the actual built lot size for every residential parcel that was built recently in these four cities. All four of them are places that have grown exponentially in the last 20 or 30 years. So we're talking about sort of the bleeding edge of 21st century development in Texas, which is a really easy place to build, right? Typically, the land that's being built on is flat, dry, and had nothing built on it previously. So this is kind of a really clean case to study. 

And what we found is that in three of the four cities, the minimum lot sizes are high and appear to be binding. Lots and lots of homes are built very close to the minimum. What's also interesting is that lots and lots of homes are built below the minimum. That is the developers went and got variances from the city that allowed them to build below the minimum lot size, sometimes for a concession. We'll let you do this whole street at 50 percent of the minimum lot size in exchange for you contributing something to the infrastructure or in exchange for you building them out of brick instead of wood or something else that kind of keeps quality up.  Which is often one of the things that the city wants or sometimes it's the variance is just, "Hey, we want to build the way the lot has shaped, can we build this one in 6,998 square feet instead of 7,000?" 

And they say, "Okay, sure that's close enough." But you still have to go and get that signed off. You can't just average over all of your lots and say, "On average there are 7,000." Every single one has to meet the minimum. So we look at these and three of the four, we find lots of evidence that the developers are either jumping through hoops or saying, "Well that hoop is too high for me to jump through building right at the minimum." And the result is not much diversity in the sizes of lots that are available to purchasers. So if you want to live in Pflugerville, Texas, you're very probably going to be living on a 9,000 square foot lot home. One of the cities we studied, which is right outside of Houston, which is famously lax for zoning and has lots of small lot sizes that has significantly smaller minimum lot sizes, five and 6,000 in a couple of zones. 

And it really, even in those zones didn't show any strong evidence that a large share of its lots were bound. That is, there wasn't a lot of evidence that developers would have liked to build smaller and weren't able to. And I think that's really interesting for a couple of reasons. So most importantly, when we're communicating with planners or people who are afraid that if they deregulate, they'll get way too much development. The market didn't just go as low as the regulators allowed them. Once the regulation got relaxed enough, the developers just started ignoring it and building at whatever size they thought the market wanted. So Pareland which is the one that we studied outside of Houston, that has a really diverse set of home lot sizes, much more so than the other three. And the regulators said, "Okay here you can build 6,000 here. Oh, you want to build 9,000 square foot lots? Okay, that's fine. That's allowed." 

And I think it's important for people to know that at a certain point when once you deregulate enough, the regulation no longer matters and you aren't just going to get, okay well we need to deregulate because the people need to build teeny tiny lots. Well, maybe they don't want teeny tiny lots and maybe Houston is right next door providing tons of small lots. And so there isn't much demand for those in Pareland. But if you have a broad deregulation like you have in the Houston area, then you can get a mix of housing uses. You're not just going to get a race to the bottom. And I think that was a really interesting take-away from that paper.  

Beckworth: Okay. So it was purely market driven. Then the resulting in lot sizes, you mentioned earlier there's this institutional, these well-traveled paths, kind of inertia. I mean, could that have played a role in the size of these lots? 

Furth: Yeah, certainly I would never say purely market driven and housing. We have no idea what a modern, laissez-faire market for housing would look like. It's as long as the government builds and owns the roads even if you totally deregulated private land, the transportation options that are available dictate what can be. So you can't say free market in any really meaningful sense here. And I don't think that's an ideal that I'm even aiming at. The institutional stuff matters. So it may be that the market viewed from top to bottom, got what it wanted in Pareland but that the end purchasers would have been happier with something else, but they have to go through these institutions. So you go to Walmart, it's in a sense of free market for toothbrushes. 

The toothbrush manufacturers can manufacturer whatever they want, but you'd really like a green toothbrush that's in this shape. But in this shape, they only have red toothbrushes, if you want green, you have to get another shape. And that's just because of the industrial process. And so maybe that happens in housing. Your ideal house doesn't get built because it's got turrets and Civil War cannons and 10 battlements and that just isn't built because you're the only one that wants that. And if you want that, you're going to have to build it yourself. So we can't say, oh, this is exactly what the final buyer wanted. But we can say with this particular regulation, relaxed, allowing the market to, through its various institutional manifestations, allowing the market to kind of find its own equilibrium. It doesn't just do a race to the bottom. It provides a variety, a diversity of housing sizes and therefore price points.  

Beckworth: Okay. One other force I want to bring up here. In addition to the ones we've mentioned, we've mentioned land use regulation by the government. We've mentioned kind of institutional inertia by market forces. But a third one we often hear about is NIMBYism, “Not In My Back Yard.” So local owners themselves, they don't want development. They don't want their housing values to be affected by some low income housing project down the road. I mean how, how important is that to causing the regulations to be what they are, maybe all these other forces are kind of what we'd say endogenous as to what the local land owners want? 

Furth: Yeah, that's certainly true. So a lot of local land use regulation comes because localities are democracies and represent the people who are already there and who vote there. It's actually not obvious that cities should be based on residential voting as opposed to voting by people who are employed there or people who own land there or a variety of other stakeholders. Even if you say, "Oh well we clearly want a democracy." Well, who should be represented in the city? There's a lot of people to whom the city governance matters a lot. Not just the residents, but typically residents are the ones with the voice. And also typically home owning residents of fairly long standing are the ones who participate. So even though your local zoning officials probably have a lot more influence over your life and over say your property value than I don't know Donald Trump or Barack Obama might, you pay a lot more attention to the people at the very top of the food chain. 

And there are a very small number of neighbors who have loud voices and have a very outsize influence in local political processes. That's been documented again and again and in lots of different contexts. The good news there for listeners is if you want to open up markets in your own backyard, it's really easy to get involved and you can have a lot more influence on whether your city allows apartment buildings than on whether the US has a trade war with China. 

Beckworth: So you can be that person who shows up and is obnoxious and causes the commission to change their plans? 

Furth: You don't have to be obnoxious, in fact. Showing up is enough. 

Beckworth: Okay. All right. I want to get to the findings in your paper. But one last thing, and this is a figure, figure two where you showed Los Angeles and it was just a fascinating chart and I'm going to explain to the listeners, I want you to explain why it evolves, the way that it does. But in there you show in 1960 that the city was zoned for 10 million people, but only two and a half million were actually in the city and then by 1990 the amount of zoning has fallen to 3.9 million and there's three and a half million. So the amount of zoning has fallen dramatically and converges with the actual population. And then you show that it does kind of keep up incrementally with the growth in population. But it's just remarkable that there's this huge gap start off with and then it collapses. What's the story there? 

Furth: So first of all, the figure comes from Greg Morrow in his dissertation, which is great work. So he went and did this research of essentially estimating, given the regulations in place every year in Los Angeles, if the city were built out to the legal limit. So if every lot, whatever was there was demolished and what was built was the densest residential thing that could be built legally. And then you make some estimate of how many people live in each unit, how many people could live in Los Angeles? And yeah. So what he found was in the 1970s and before there was zoning, but it was relatively relaxed. You could build multifamily housing in lots of places. It wasn't built in lots of places because prices weren't particularly high. This maybe shocking to people now, but it was cheap and easy to move to LA until fairly recently. 

You could just move there and buy a house with an average income, you didn't have to be a movie star. But as this graph shows, there was this very steady year by year down zoning. So what that means is that every year there were a little local fights about this street or this neighborhood or this parcel, and whether it could be built up and every neighborhood, once it was kind of built out as single family said, "Actually we just want to stay single family and we don't want apartments anywhere near us. People who don't earn like us might live here. People who don't look like us might live here. So we'll down zone these." So they only allow single family housing. And then the result was that sort of by 1990 essentially the population had grown and the zoning limit, what we call the zoning envelope had shrunk till they almost matched. 

And the gap, they're used to like 3.5 to 3.9 million. That's almost entirely accounted for by places that already have something but could be a little denser. So it's normal again, like I said with Texas, people don't build up to the absolute legal maximum. So you allow apartment buildings maybe of 10 stories. Plenty of the buildings that get built are going to be six stories or eight stories or four stories. So to get to that maximum, you'd have to demolish tons of buildings and then rebuild them to the maximum. So you can't just go get that 400,000 easily. It's going to take a lot of demolition work, which is obviously very expensive, you're destroying capital. And then since 1990, all population growth has basically been forced through the bottleneck of up-zonings. So it's the sort of spot up-zonings of somebody comes and says, "Here's a blighted neighborhood with an abandoned factory. I want to turn this abandoned factory into luxury condos." "Okay, you can do that." 

And it's island hopping. It's fight by fight of here, we're just going to squeeze a few more people into the Los Angeles, we're going to squeeze a few more people into Los Angeles. And instead of just a general, you have the right to build apartments, you have the right to build townhouses if you want to. If there's demand, it becomes, mother may I, housing. And the predictable result is that those who can afford to and those who are going to be a net positive in terms of the city's finances and who are desirable neighbors, they typically get permission. There was a case of somebody who wanted to build a trailer park. In fact, they actually had a right to build the trailer park, but there was some political tools in place that the politicians could pull to stop them. They didn't build the trailer park. 

Beckworth: Interesting. I don't want to belabor this point, but that graph is just so striking. It speaks to me that there's some kind of cultural shifts or something that's happening in the background where people would go from this tolerance where they would allow anyone to come move in and build a house to the 1990 where it kind there's inflection point where they don't. I mean, is there a story behind that shift? 

Furth: Yeah. So some people have called it the quiet revolution in land use regulation a circa 1970 essentially a couple of things happened at once and it's hard to untangle these and you don't want to be irresponsible and call people racists or environmentalists when they aren't. But there were some racists and there were some environmentalists and they discovered that their goals worked really well together. And there was also just a sense of kind of that postwar, "Hey, everybody gets a home. We're going to build Levittown." That had sort of spent itself and people started to become a lot more nervous. Cities got scary, right? So the crime rate went from being extremely low in 1960 being quite worrying in 1970. So it's really, it's hard to remember how rapidly crime grew in that era.  

So we have a whole bunch of things happening at once. So all of a sudden in 1970 you've got civil rights legislation that no longer allows racial covenants. So a lot of restrictive covenants that were on the books get wiped off. So people who had some racist control of their neighborhoods lost it. People who weren't afraid of crime because it wasn't a big deal to have an apartment building go in and become more urban safe. You are in a single family home neighborhood of Chicago and some people started building apartment buildings, in 1960 that wasn't scary because crime was so low. By 1970 going from kind of suburban to kind of urban becomes a little scary because this is enormous shift in crime. Congestion or the automobile ownership goes again from being something where a large number, but not all families have one car in 1960 to, people are starting to get their second car in 1970. Everybody's driving and everything is congested.  

Beckworth: They were big cars, too. 

Furth: And they were big. Yeah. So this again, all of these things tangled up and there's clearly racism mixed in and we shouldn't forget it, but we also shouldn't say like, "Oh, every person who said that they cared about the environment." And then these are the environmental movement where people who maybe just like to go for a hike in Yosemite once a year in 1960 by 1970 realize, oh, the rapid change in the Bay Area is shrinking the San Francisco Bay as more and more parts of the shallow bay get filled in and developed. And that view that I used to have of some mountain outside of LA is now house going halfway up the mountain and in 1960 a wetland was just a swamp that bred mosquitoes, by 1970 wetland was a beautiful example of nature at her finest with enormous biodiversity, right?  

If you said, biodiversity at a cocktail party in 1960, people would look at you like you were crazy, right? And so there's this huge shift in all these attitudes and the result was sort of a, everybody said, "Freeze. We're not sure that any change is good anymore. Building anything might hurt the environment. It might lead to more congestion. It might bring brown or black people in my neighborhood. It might lead to an increase in crime." It's all these things that people weren't so sure they wanted. And the one thing they could agree on was let's just stop building anything. This has gotten a little out of control. Everybody's freeze, stay where you are.  

Beckworth: Very interesting. So this is another point that highlights how awful the 1970s were. I mean as macro economists, we look at 1970s, we see a decline in productivity growth rate. There's high inflation. Culturally I might say the music wasn't the greatest, people could argue about that but man, this is another kind of another strike against that decade. It all comes to a head, at least in the 1970s so. 

Furth: Yeah. And then it takes a while for that impulse to then filter through the institutions. So you see by 1990, this has sort of been completed, but that's essentially the- 

Beckworth: The 70s is a turning point. 

Furth: Yeah. 1970s is a turning point where people move from being relatively permissive. And I think before 1970 zoning is thought of as like what Bill Fischel calls, good housekeeping, right? You don't build Walmarts in the middle of suburban subdivisions. You don't build factories right next to residences anymore. And just kind of keep things clean, make development, just go through some kind of basic parameters, maybe a few bribes along the way, it was always the accusation. From 1970 on, it's been much more of the burden of proof shifted from the government needs to prove why we would not want this thing built in our community to you need to prove why you're going to benefit everybody around you. And that's, it's just a very different attitude. And now with a generation that for most of the homeowners today have bought their homes in this post 1970 regime. So they bought in and they bought with the expectation they were buying some local control. 

So it's really hard to undo now because if you bought on the street where I live, say you bought saying like, "Well this is a single family street and people aren't allowed to do duplexes or commercial establishments here and well, what if this changes my property value?" And so part of what you're buying nowadays when you buy a home is a share in local control. And that gets really, really messy.  

Beckworth: It's in our DNA now, huh? It's been around long enough since the 70s. 

Furth: It's in our portfolio. 

Beckworth: NIMBYism in this kind of post 1970s phenomenon because of these changes. All right, let's move to the results of your paper. We've talked about the motivations which are important for why we're having this discussion, why you wrote the paper, but what did you find in your paper that it helps us understand this conversation? 

Furth: So I looked at how much did demand for housing grow in each neighborhood from 2012 to 2018? And how much did supply grow in each neighborhood? And I looked at for each neighborhood compared to similarly dense neighborhoods elsewhere in the country that faced a similar increase in demand, how much supply do they add? So if you're already pretty dense and demand grows, you can't add that much more because you have to knock something down to add new supply. So that for two reasons, that makes it harder to grow. So we don't want to compare a place in the middle of DC with a 20 percent price increase to a place in Loudoun County with a 20 percent price increase. Even so, what I eventually found was a U-shaped increase in housing supply. So not surprisingly, the fastest growing areas were those with the least density other than truly rural areas where it's often, it's so rural that there's not jobs nearby. 

If you get out of those extreme cases, ex-urban areas grew the fastest. But then highly dense urban areas grew the second most, which is not what you'd expect just based on the physics of what do you have to take down to put something new up? 

Beckworth: Maybe like in the city?  

Furth: Yeah. So that's downtown DC, Arlington here where we live. Downtown LA, places like that grew quite a bit. And that's actually true even in Nashville where you live that the fastest growth was in the very small downtown and where the growth was slowest was in kind of moderate density places. So, and when you look at those on the map, you see, okay, these are the well-established suburban neighborhoods that don't have any unbuilt land left. And those neighborhoods, regardless of how much demand increased, grew very, very little. 

So essentially we've kind of got this barbell or U-shape of growth in the inner cities, growth in the exurbs, no growth in the suburbs or very low growth. If you look at across demand, it's much more unsurprising for a place of a given density. The places that had the biggest demand growth grew the most, which is what we would expect and hope for. Then for each census tract, they can essentially say, compared to your fellows, how much did you grow? And that's the growth surplus. It's not a surplus relative to what you should have grown. It's just relative to what other places like you did. So if you're a suburb, you actually get really favorable treatment. You're compared to other suburbs so you're not compared to the exurbs or the inner city, it's just, well all suburbs seem to be really low growth. But even relative to those other low growth suburbs, how well or poorly did you do? And so you get some results that are completely expected and I get some that are kind of surprising.  

Beckworth: Well, why don’t you go through them, you have a table six for some or the metro areas at least, why don't you talk through some surprises.  

Furth: So I think the biggest surprise to me was that a lot of the metros in the South don't actually have much surplus growth. So Charlotte, Nashville, they are growing fast because they have really high demand growth and a lot of available exurban land. If you compare apples to apples, their suburban and exurban areas aren't actually growing faster than expected. Their downtowns are but their downtowns are really small. So don't read too much into that. And what that suggests to me is it's going to go poorly for them in the long run. They'll end up like Atlanta with a huge amount of congestion and not necessarily actually being built densely in ways that sort of facilitate being a big city. If you're a big city, you don't want people to have to drive 15 miles for every errand, you want to keep car trips short, allow walking trips and be built in such a way that you can sort of all live together in peace. 

And that's not what the southern cities are doing. Yeah. Sorry to report that to you. The other surprise was that California is not the worst place in the country. California has real land shortages, right? So it's got the ocean and it's got very steep mountains right next to its major cities, which my calculations sort of implicitly take into account because that land is not there to do my calculations for. So California is actually less bad than New England, particularly and New Jersey where you have a lot of exurban density development that isn't getting denser. And that's what's really interesting in the Northeast is you've got these areas that are, they're not rural anymore, they're low density suburban two acre lots. And those places are very strictly protected by land use regulation and you aren't getting the kind of suburban densification in New England that you are getting in a lot of other areas of the country. Like say the DC area where areas in the edge of the city do get built up.  

Beckworth: Okay. Well let's look at some potential solutions to this problem. So there's a shortage of housing. You've identified where and why this is happening in certain places. And you have a policy brief with two of our colleagues, Kevin Erdmann and Emily Hamilton. And in there you go through some of the problems that we've already discussed and you talk about how changes can be brought about that will address some of these problems. And you start at the local level. So what are some of the local reforms that could be done? 

Furth: So this is primarily something to be solved at the local level because it is primarily local regulation that is the problem. So the biggest thing is to start removing restrictions that are based on exclusion and essentially trying to manage someone else's property rather than restrictions that are based on trying to control major externalities. So saying that you have to have a sewage connection and you can't build a Walmart in a suburban subdivision. Like those make a lot of sense. I don't think it'd be really wants to do those things, but okay, it's reasonable to have a regulation against it. But regulations that say you can't build housing in commercial zones, like why, what's the problem if somebody goes onto the strip mall and says, "Well, instead of strip mall here, we want to have a small apartment building." Who exactly is being hurt by that? Or regulation that says single family homes need to be on 9,000 square feet of land. 

Again, we know that people won't build single family homes on a postage stamp. So why the regulation? What exactly are you doing? You're just trying to push prices up and prevent more people from coming into your community. Those are the kinds of things the local level to relax or remove so that more multifamily housing can be built and denser single family housing can be built. Again if the market wants it. If you're a low cost place, you can deregulate and you're probably not going to get any of this because land is cheap. Housing is cheap in say, a Rochester or a rural Iowa and you can deregulate and probably not see much difference. But if you're a place with high demand, you will see more people moving in and a more income diversity and more housing diversity if you deregulate. 

Beckworth: So if you're a city, a big urban area, and you mentioned like Houston, Atlanta, Minneapolis, Seattle, they've gone in that direction. Is that fair?  

Furth: Yeah. So I don't know about Atlanta. Minneapolis certainly has, they are in the process of allowing up to three family homes in every residential district in the city. So, which is actually traditional development there. So when Minneapolis was first built, you could build in virtually every neighborhood up to four units in a structure and they down zoned, like we talked about it in LA and now they're reversing that to say, okay, you can subdivide existing large homes into three or you can tear down a decrepit old home and build a triplex. So those are some really good steps. I'd also say suburbs are where the action is, right? So the cities already have density and they're comfortable with idea of apartment buildings, suburbs are these kinds of, that's the middle of the U, right? 

Lots of people want to live there. Those are places with pretty good commute. It's relative to the exurbs, more amenities. They often have walkable centers, so you don't have to take every trip 10 miles on the highway. But they also are the strictest in regulation. So allowing mid-sized apartment buildings near the center of your existing suburb, that's the kind of high impact that would make a big difference in growing your community in a positive way. 

Beckworth: What about at the state level? What can they do to promote reform? 

Furth: So states ultimately, that's where the buck stops. So they can preempt local regulation, There are state zoning enabling acts that were passed mostly in the 1920s that specifically set up the framework for local government's power to regulate and the states can amend and narrow those. And I think there's a new paper by John Infranca who is a professor at Suffolk Law School that looks at a few different types of preemption and he concludes that narrow preemptions that just say you can't regulate X. Those work well because there are clear preemptions that are kind of formulaic and say some kind of you have to permit this number of housing units per this number of residents and such and such percent have to be affordable. Those don't work as well because they end up being gamed. So I would support states doing something like saying you can't have a minimum lot size that's greater than 5,000 square feet or you can't have a minimum unit size on a house. 

If somebody wants to build a house, they can build it as small as they want. If somebody builds a 10 square foot house, nobody's going to buy at the market will protect you from ridiculously small homes and low income people or retired people aren't something you should be protected from and the state doesn't want to delegate to municipalities the power to exclude.  

Beckworth: Okay. Finally, how about at the federal level, what do we got there?  

Furth: So the federal level, there's not a lot of direct connections, but the big kahuna is the mortgage interest deduction, which creates a large tax incentive for people like you and me to consume more housing than we need and more housing than we would if it- 

Beckworth: Guilty as charged. 

Furth: Treated. Yeah. We consume more housing than we would if it was treated just like any other consumption good. And so shrinking or removing the mortgage interest deduction would be a major step towards rationalizing the amount of housing that Americans consume. 

Beckworth: And that is a tough political call to make.  

Furth: Yeah, stick to the local level. 

Beckworth: I mean, it makes a lot of economic sense, but who's going to be the first person to raise their hand and volunteer to give up that subsidy? All right. Well, our time is up. Our guest today has been Salim Furth. Salim, thank you for coming on the show.  

Furth: Thank you. It's been a pleasure. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.