February 1, 2018

Zoning and Land Use Regulations Make Housing Less Affordable

Letter to the Department of Housing and Urban Development

I appreciate the opportunity to respond to Housing and Urban Development’s request for input on potential improvements toward effectively achieving its strategic plan. HUD’s mission to support affordable housing is one of the most important issues facing policymakers today. Home prices and rental rates in the country’s most productive cities are increasingly out of reach for typical households. State and local regulatory constraints on housing supply are the primary cause of high and rising house prices, so HUD cannot achieve its mission without reform of these rules that prevent new construction.

Rising home prices in cities with growing populations are not a law of nature. Until the 1970s, regions generally accommodated new residents by allowing new housing construction and maintaining a housing stock affordable to households with a range of incomes. And cities that allow housing construction see this same pattern today. For example, in Houston, housing supply elasticity was 0.42 percent for the period of 1996 to 2016, well above the national average of 0.17 percent. During this period, the city’s population increased by half a million people, but today the median Houston home price is $235,000. Households across a broad range of incomes can find housing that’s affordable.

When housing is available at prices accessible to low- and middle-income households, subsidies from HUD can be reserved as a safety net for those with serious temporary or permanent hardships. But in many American cities, it’s not just a community’s most vulnerable residents who struggle with access to housing. Most economists researching housing prices agree that zoning, other land use regulations, and complex approval processes are constraining housing supply and putting upward pressure on housing prices in growing regions where the best job opportunities are located. In the most productive cities in the country—San Francisco, San Jose, and New York City—even high-income households may struggle to find housing. In the Bay Area roughly one-third of units are affordable to the median renter, and in New York City the proportion is less than one-quarter.

When supply constraints prevent new construction in the places where people want to live, only zoning reform can increase access to housing. Using taxpayer dollars to subsidize the housing of a large portion of a city’s population would be self-defeating, as the subsidies would further drive up the price of housing while supply is held constant. The costs of land use regulation fall hardest on low-income residents who are least able to compete for scarce housing in the markets where the best jobs are located. One estimate finds that hourly wage inequality could be 10 percent lower if housing supply in high-income states allowed for more in-migration from low-income states.

Why do cities pursue policies that burden their renters and restrict population growth by limiting housing construction? It’s a problem of social benefit-cost myopia. Population growth in productive places produces social benefits and costs, and local jurisdictions take only a fraction of the total benefits while absorbing the full burden of the costs. Consequently, local governments prioritize homeowners’ preferences (to constrain new developments) at the expense of regional welfare gains. Economists use the term “agglomeration benefits” to describe the social benefits of population growth. Denser urban areas have higher productivity because of spillover and network effects. The higher productivity extends beyond political boundaries because it invigorates economic activity in adjoining cities and fosters innovation with a regional and even global impact potential; in other words, cities receive but a fraction of all the agglomeration benefits they ignite.

The opportunity for residents to “vote with their feet” by choosing to live and work in the places where they can best pursue prosperity and happiness is essential to the American system of competitive federalism. When local land use regulations limit this process, higher levels of government have a responsibility to preempt them. At the state and federal levels, policymakers can better internalize the costs of weighing homeowners’ demands for zoning against the value of agglomeration benefits and economic opportunity.

Facilitating access to affordable housing proximate to economic opportunities is an essential component of a growing economy and income mobility. Without reform to supply constraints, however, HUD will not be able to increase the number of people who are able to live in job centers. Because local policymakers are incentivized to prioritize homeowners’ preferences over those of potential future residents, they pursue policies that restrict both housing supply and economic opportunity. Please see the enclosed research for a literature review on the regressive effects of land use regulations that lead to price increases, as well as a policy essay on the role that state governments have to preempt local rules.