Guest Opinion: Putting A New Effort Into Expanding The Housing Supply

WRE News September 30, 2023

Buyer

Guest Opinion: Putting A New Effort Into Expanding The Housing Supply

The past decade has seen increasingly tight housing markets due to strong demand and limited supply. Since the Great Recession, the U.S. has not built enough housing to keep pace with the demand created by job and population growth, leading to historically low vacancy rates and rapidly rising costs.

Researchers estimate that the U.S. needs roughly 3.8 million additional homes nationally to address this gap. Regions with strong labor markets, such as coastal California, Greater Boston, New York City, and South Florida, have built too little housing for more than 30 years.

The increasing prevalence of hybrid and remote work since the COVID-19 pandemic has exacerbated housing shortages in previously affordable regions, including Columbus, Ohio; Nashville, Tennessee; and Salt Lake City. Rural resort areas, such as Jackson Hole, Wyoming, and Sun Valley, Idaho, have also seen increased demand for seasonal and vacation homes, but face a severe shortage of moderately priced housing for workers in hospitality, retail, and service industries.

Housing costs as a share of income have grown steadily since 2000, with the greatest stress for low- and moderate-income households.6 Both rents and prices increased sharply during the pandemic. Between 2020 and 2023, nominal housing prices increased by 37.5% and rents in professionally managed buildings increased by nearly 24%.

Tight housing supply and rising housing costs are not just a problem for individual families; regional economies function better when workers across a range of incomes can afford housing within a reasonable commute of their jobs. Employers have trouble hiring and retaining workers in high-cost regions.

A variety of market forces contribute to the overall housing shortage and rising housing costs. The costs of land, building materials, and construction labor have risen since the start of the pandemic. Higher interest rates affect developers’ financing costs, as well as the ability of households to purchase a home. Smaller communities and rural areas face additional challenges, including a lack of infrastructure, fewer economies of scale in construction, and a prevalence of older, poor-quality housing.

Reducing regulatory barriers to new development, especially for smaller homes, could help increase housing supply and improve affordability. America’s housing shortage is not simply the result of market forces. Local governments across the U.S. have adopted policies that make it difficult to build more homes where people want to live.

Policies such as zoning laws and building codes have been used for over 100 years to regulate what kinds of structures can be built in which locations. However, these laws have become more complex and restrictive over time, especially in high-opportunity communities that have the strongest demand for more housing.

Single-family-exclusive zoning is one of the most common—and most problematic—zoning practices. More than three-quarters of the land in U.S. cities and suburbs is reserved exclusively for single-family detached homes, meaning that rowhouses, duplexes, and apartment buildings of all sizes are simply illegal to build. This rule creates challenges both for affordability and for expanding housing supply.

Single-family homes with yards require more land per home than other structures and therefore are more expensive to buy or rent. In job- and amenity-rich places with expensive land, allowing multiple homes on a single lot could substantially reduce per-unit development costs.

Revising zoning to allow more diverse structure types and smaller homes is also necessary to expand housing capacity in high-demand cities and inner-ring suburbs. Many communities that were developed as low-density, single-family neighborhoods in previous decades when the land was less expensive are now “built out” under their current zoning—they have no remaining undeveloped land.

To expand housing supply in those communities, local governments need to update their zoning in one of two ways: allow somewhat higher density in single-family residential neighborhoods or reallocate commercial and industrial land for housing.

In addition to legalizing a wider range of housing types, local governments could undertake a variety of policy changes that would increase housing supply and improve affordability. These include reducing minimum lot sizes, increasing building height limits, and reducing off-street parking requirements.

Additionally, states and localities often impose complex discretionary development processes—such as requiring multiple public hearings or lengthy environmental reviews—that make new housing more expensive. Making the development process shorter, simpler, and more transparent would reduce the “soft costs” of construction, which can amount to 20% to 30% of total development costs.

The past several years have seen an unprecedented amount of housing policy experimentation, with state and local governments across the U.S. taking actions intended to boost housing production and improve affordability. In 2018, Minneapolis passed a historic comprehensive plan that legalized duplexes and triplexes in all residential neighborhoods.

Other local governments, including Anchorage, Alaska; Raleigh, North Carolina; and Salt Lake City, have passed similar reforms aimed at legalizing “missing middle” housing types, such as accessory dwelling units, rowhouses, and small multifamily buildings. State legislators from Oregon to Montana to Massachusetts have passed statewide laws aimed at increasing the diversity of housing options and encouraging the development of apartments near transit stations and in commercial corridors.

Notably, local and state pro-housing policies have been adopted through bipartisan efforts in a wide range of housing market types. It is important to note that the types of regulations that currently limit housing supply—and therefore what policy changes would help—differ across places.

Single-family exclusive zoning with a two-acre minimum lot size in Greenwich, Connecticut, will severely constrain new development, relative to what developers would choose to build in the absence of such rules. However, a similar policy in exurban or rural communities with less expensive land will have far less impact on the size and type of homes that are built. Limitations on manufactured and modular housing are particularly relevant in rural areas, where manufactured homes have traditionally been an important source of moderately priced housing.

The federal government can more effectively support state and local pro-housing Innovations. While state and local governments have primary responsibility for regulating housing production, the federal government can provide essential support to state and local efforts through three channels.

First, the Department of Housing and Urban Development (HUD) could serve as a useful connector and facilitator between state and local policymakers and other stakeholders who are currently experimenting with pro-housing policies. Because of the decentralized nature of land use regulation, there is not established venue or network for policymakers to connect with their peers. HUD could organize periodic convenings among policymakers and researchers to share their experiences on how policy changes are working in real-time and identify knowledge gaps that are most important for policy design and implementation.

Second, HUD and other federal agencies can assemble and disseminate clear, accessible guidelines on the types of policies that support housing production. Many local and state policymakers are seeking information and advice on how to design policies that are effective in their local or regional housing markets, and how to achieve specific policy goals.

Developing and sharing information on “best practices” as well as “poison pills”—based on research and evaluation—would reduce knowledge gaps, especially for smaller communities with limited staff capacity. Local governments and regional planning agencies would also benefit from federally funded technical assistance when they choose to rewrite their regulations.

Third, Congress should work with HUD, the Department of Transportation, and other relevant federal agencies to create well-targeted financial incentives that encourage local and state governments to better integrate investments in housing, land use, transportation, and other infrastructure. These types of policies already have bipartisan support in Congress and are included in the bipartisan infrastructure law.

A key challenge is to ensure that these funds are awarded to communities that develop feasible plans that will be effective in boosting the housing supply. Making sure that competitive grant applications have clear, direct guidelines for applicants and that agencies have sufficient expertise to evaluate applications is essential to the success of these programs.

All these tasks fall well within HUD’s mission and would require limited additional resources. However, to coordinate the activities, HUD should hire or designate at least one staff member to focus on housing supply and land use as their primary responsibility. Because housing supply and land use have not been part of HUD’s historic portfolio of funded programs, the agency has not previously invested in building staff capacity on these topics.

Housing affordability has become increasingly urgent for many Americans over the past decade due to insufficient production and rising demand. Across the U.S., an increasing number of cities and states are experimenting with changes to zoning and related regulations intended to increase housing supply and create more diverse housing options, especially in high-opportunity communities.

The federal government can better support those efforts by facilitating conversations between stakeholders, sharing information about what policy changes are most effective, and offering financial incentives to remove regulatory barriers.


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