Residential Magazine

Painted Into a Corner

It could be time to reconsider land-use laws that contribute to runaway housing costs

By Dick Lepre

There is a tendency to think of zoning as something that has always existed, but that’s not the case. Zoning and other land-use regulations emerged with the rise of cities to foster safety and bring order to the din of odors, noises and crowds. While these laws have been more or less effective, they also have produced an unfortunate result: escalating housing costs.

The lack of housing affordability should be a cause of concern for everyone involved in the mortgage industry and other parts of the real estate business. To truly understand what’s going on, it’s important to look at the historical context of how these land-use laws came into being, and then ask whether statutes fashioned over centuries still meet the challenges of today.

Emerging cities

Fire sparked the first movement toward land-use regulations in America during the Colonial era. In 1692, after fires caused “great desolation and ruins” in the town of Boston, the English Parliament ordained that all types of housing more than eight feet long and seven feet high must be erected “of stone or brick covered with slate or tile.” 

Land-use laws, however, remained limited until cities started growing in population. Urbanization and large cities are a more recent phenomenon brought about by the Industrial Revolution.

Industrialization started in England in the mid -1800s and came to the U.S. in earnest after the Civil War. Industrialization encouraged the rise of cities with dense populations. There were cities prior to this time, but they were different than modern ones, and were starkly divided between the rich and poor. They lacked a middle class and the opportunities for social advancement that have become a defining feature of cities today.

In 1800, 94% of the U.S. population lived in rural areas, according to the U.S. Census Bureau. By 1890, this share shrank to 65%. Urban populations overtook their rural counterparts by 1920. Presently, about 81% of the U.S. population is classified as urban, including cities and surrounding suburbs.

The start of the industrial age was a key to the growth of cities. Technology changed farming and ranching so that more goods could be produced by fewer workers. This enabled people to leave rural areas and move to cities where they had more opportunities. Cities were centers of industry, culture, entertainment and aspirations, containing both residences and commercial activities. 

Regulating growth

As cities grew, there was a lack of consensus for how to regulate growth. The federal government decided that it needed to provide direction. In 1913, the Fifth National Conference on City Planning —which has become an annual gathering of local government officials, planning commissioners and advocates — published a report that modeled city planning departments, which had the authority to regulate the planning of lots. Modern zoning was born.

This report included several model acts, including the authority for city planning departments to have planning jurisdiction up to three miles outside of the city’s borders. The report also authorized the taking of remnants of land in certain cases by eminent domain, as well as the acquisition of land either inside or outside their boundaries for public purposes, such as parks and playgrounds. Additionally, it authorized the establishment of building lines on all streets and the creation of districts to regulate building heights.

These were templates for legislation that would pass judicial muster. Cities merely had to fill in the blanks and make these models into law. These acts are examples of how the federal government manages to assume authority from state and local governments. The ability of the federal government to afford the expenses of creating model laws — and suggesting that local governments adopt them — amounts to a hidden power.

The initial federal report in 1913 led to zoning policies for one-unit detached homes becoming widespread across much of the nation. These policies were detailed in the Standard State Zoning Enabling Act, drafted in 1922, and the Standard City Planning Enabling Act, first published in 1927. 

In 1926, in Village of Euclid v. Ambler Realty Co., the U.S. Supreme Court upheld zoning on the grounds that it was not an unreasonable extension of local police power and did not have the character of arbitrary fiat, thus making it constitutional. This ruling made zoning laws legally untouchable.

Rising costs

Initial zoning laws were about height, setback and usage. Height and setback rules are established so that shadows aren’t cast on neighboring properties or on public sidewalks. Usage rules are about smells, noises and crowds, as well as for keeping commercial activities away from homes. While the intention of zoning may have been to create better cities, there have been significant unintended consequences. Most importantly, zoning and other regulations have made housing unaffordable for many people.

A lack of affordability is not the intention of zoning and land-use regulations, but it is an unintended consequence. Faced with a lack of affordable housing and the broad powers upheld in Euclid v. Ambler, it is up to local governments to solve the problem by changing their zoning and land-use regulations to allow more housing to be built. 

How to sell this to residents depends on community values. Affordable housing benefits the broad economy. The underlying fact is that if housing costs less, people have a greater portion of their income to spend on whatever they want. This is true for both homeowners and renters. 

The manner in which governments address affordable-housing projects misses the point. The usual manner is to let a developer build, say, 200 units as long as 40 of them are deemed affordable. These developers get tax credits, which can be sold to investors to raise money for construction, if a certain percentage of people living in the units earn less than the area median income (AMI).

What’s wrong with this is that people tend to move to areas where they can afford housing, which are becoming farther away from job centers. This adds to their transportation costs. The AMI also can exaggerate what is considered affordable in a high-cost area. In more affluent cities, the area median income is higher and people who fall into the low-income category earn wages closer to the U.S. median than the federal poverty line.

Attempting to come up with an objective definition of affordable housing is a thankless task because affordability is substantially subjective. Affordability is a function of everything else a family spends its money on. According to the federal government, housing is “affordable” if it costs no more than 30% of a household’s monthly income. What is important, practically speaking, is to have housing that is both affordable and located as close as possible to where the household members work.

The role of cities in the 21st century has not yet been determined. Cities with outdated housing policies may no longer be aspirational

Softening regulations

If housing can be made less expensive, then by any definition it will be affordable to more people. The more housing that is built, the more affordable it will tend to be. That’s what the law of supply and demand is about. A National Association of Home Builders study released this past May shows that, on average, government regulations account for 23.8% of the price of a new single-family home. 

A Zillow survey of 100 housing experts and economists released this past June found that relaxed zoning rules would be the most effective way to increase the supply of housing. High costs are expected to slow new construction, making it more difficult for younger generations to find housing that they can comfortably afford. Survey respondents said that less stringent zoning rules should be the top priority for spurring new construction.

This has started to happen. Minneapolis and Portland, Oregon, for example, have banned zoning exclusive to single-family homes. The California cities of Sacramento and Berkeley are in the process of doing so. Depending on the city, the construction of small apartments, duplexes, triplexes and fourplexes will be permitted in areas that in the past were limited only to single-family homes. California passed a set of laws in 2019 to make it easier for homeowners to add accessory dwelling units (ADUs). These laws require a quicker “yes” or “no” to requests for permits for ADUs, and they prohibit local governments from adding requirements for lot size and lot coverage. 

If governments soften zoning and land-use regulations, developers and builders could more easily address the problem of affordability. More housing starts means more competition. Increased competition will lead to lower prices and more affordable housing. If decreased regulation leads to more housing starts, it’s initially possible that these projects merely add to the profits of developers. In terms of lower prices and significantly greater affordability, success may well come from someone who becomes to housing what McDonald’s founder Ray Kroc was to burgers. Unfettered capitalism rewards those who cater to the masses. 

● ● ●

The role of cities in the 21st century has not yet been determined. Cities with outdated housing policies may no longer be aspirational. The future of successful cities must begin with enabling a broad set of people to live there, which necessitates affordable housing. Making housing affordable to a large set of people with a range of incomes has its advantages. 

This allows people who have lower-paying, service-industry jobs to live near where they work. It promotes a broader set of cultures within a city. Multiculturalism should be one of the values of large cities. When a city is large enough, it can support such things as museums, art galleries, performing arts and professional sports franchises. The greatest thing that a city can provide is social mobility. ●


  • Dick Lepre

    Dick Lepre is a loan agent for CrossCountry Mortgage LLC. He has been in the mortgage business since 1992 and has been writing a weekly email newsletter on macroeconomics, mortgages and housing since 1995. Lepre (NMLS No. 302379) is from New York City, but he has lived in the San Francisco Bay Area since 1968. He has a degree in physics from Notre Dame. Follow him on Twitter @dicklepre. 

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