America’s housing shortage stretches budgets and costs jobs

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Introduction: America’s Housing Crisis

The United States is currently experiencing a housing shortage of nearly 4 million homes for those who need them. Home prices have increased 11% over the past year despite the COVID-19 pandemic-induced economic slowdown, while the number of homes for sale has fallen drastically. Meanwhile, the median rent has doubled between 2005 and 2021 and the homeless population has grown by 5.5% since 2016, or 2.2% each consecutive year, which translates to 30,538 more people in total. Both the homelessness and housing crises are concentrated in large metro areas where renting or buying property is difficult to afford. So, what is causing such a shortage of housing and stretching Americans budgets to the point of homelessness and poverty?

The housing crisis in America is as simple as a supply constraint, in which land use has become too centralized and over-regulated.

Cities have imposed requirements that are too restrictive on the housing supply, thus causing this shortage. These restrictions come in the form of exclusionary zoning, minimum lot sizes, parking minimums, and more. A lack of housing is contributing to homelessness, reducing economic growth, and contributing to existing income inequality. Affordable housing is necessary to remove the economic barriers that are holding back America’s cities. In order to address these interconnected and pervasive problems, bold housing policies must be enacted. These are local issues with national implications.

Exclusionary Effects of Zoning Policy

Exclusionary zoning has contributed to increasing levels of income and wealth inequality over the last 40 years. Subtle and implicit income segregation through zoning ordinances have effectively banned the creation of homes affordable to low-income and lower-middle income people. The most prevalent method has been single-family zoning, which only allows a single home to be built on a given plot of land. San Jose, Seattle, and Los Angeles each have at least 75% of their land zoned for single-family homes, and are some of the most expensive cities to live in. And as more land is zoned for single-family homes, the more racially and economically segregated the surrounding city becomes. 

Single-family zoning is exclusionary and traps working families in communities lacking economic opportunities. Building multi-unit homes such as townhouses, duplexes, triplexes and small apartments works to alleviate this income segregation by placing affordable homes where the opportunities are.

Moreover, cities have created zoning ordinances that make it prohibitively expensive (or illegal) to build multi-unit housing, restricting poorer families from moving to safe and economically advantageous areas. This prevents millions of families from achieving the income growth, let alone stability, they need for upward mobility in the United States. For instance, the story of Kennetha from Tennessee is familiar for far too many. Kennetha, along with her husband and their five children, are homeless and live in a neighborhood where their children are statistically estimated to earn just $20,000 annually in adulthood. Compare that to the wealthier suburbs not too far away, where the same children can instead expect to earn around $53,000 annually. These policies limit the mobility of families with the misfortune of living in neighborhoods distant from opportunity. 

Exclusionary zoning also significantly reduces rental housing availability. Since low-income families are much more likely to live in multi-family housing, single-family zoning excludes them from wealthier neighborhoods near better schools and jobs. By re-zoning and allowing the construction of multi-family housing, rents can be lowered and people of all incomes can be allowed to participate in more economically productive areas. A study from Harvard University finds that, as low-income families move into low-poverty neighborhoods, their children increase their chances for earning significantly more in their adulthood and they have a higher likelihood of attending college. Ending exclusionary zoning benefits entire cities by improving educational outcomes and raising earnings, which directly produces better lives and communities.

There is a growing recognition of the lasting adverse impacts of exclusionary zoning on inequality and poverty among large cities. Recently, Berkeley, Sacramento, Minneapolis, and Portland, for example, have moved to eliminate single-family zoning. Each of these cities is experiencing rising homelessness and housing costs and see ending exclusionary zoning as a step to solve their housing shortages.

Monetary Costs of Exclusionary Zoning

Exclusionary zoning has not only harmful societal effects but also significant economic costs. By restricting the supply of housing, the supply of labor cannot flow into economically active areas. Research shows that when cities limit the supply of housing, income inequality becomes worse as only the wealthy can afford the costs. This supply constraint also reduces employment in the area because there are not enough homes for potential workers. Because people are unable to move to cities where more jobs are located, U.S. workers lose as much as $1.32 trillion in wages per year and trillions in GDP. As a result, America’s housing shortage is not only affecting low-income families. Middle income households are now seeing their budgets being eaten up by rent as well, even as their wages fall or stagnate. Prior to the pandemic, 37 million households were cost burdened by their rent or mortgage. That is, these households spent 30% or more of their income on housing, leaving them with little room for all other expenses. Families in poverty suffer far worse outcomes and barriers to jobs, banking services, insurance and other necessities. If these burdens are reduced, poverty can be prevented and/or alleviated. Since housing costs are typically the largest expense for working families, it should be a priority to lower costs. Countless amounts of research shows new market rate housing is effective in reducing local rents. By having enough homes to meet the demand, it reduces the upward trends on rents, thereby making rents affordable.

 Zoning Is Only the Beginning

Minneapolis, as previously mentioned, has begun to allow duplexes and triplexes on residential land that had been previously zoned for single family zoning, yet this has not started a housing boom of these types of homes. Eliminating single-family zoning alone will not be enough to spur the creation of the missing “middle housing,” like townhouses and smaller walk up apartment buildings. While eliminating single-family zoning is an important step, there are a few more critical changes that are required.

Minimum lot sizes prevent housing from being built by requiring a higher square footage of land than is necessary. Builders and developers in Texas, for example, stick very closely to the minimum lot size allowed. When homes are built with more land than they need, it removes the opportunity for homes to be built on that extra land. In the most desirable cities especially, minimum lot sizes increase the costs of homes by requiring they take more space than necessary. With large lot requirements a triplex or a fourplex could be allowed. But Dr. Emily Hamilton, Senior Research Fellow and Director of the Urbanity Project at the Mercatus Center at George Mason University, disagrees. In an interview with the Davis Political Review, she explained, “It’s just kind of a weird outcome to have a fourplex on a two acre lot. Reducing or eliminating minimum lot sizes allows for more houses of all sizes to be built in high demand areas.”

Similar to minimum lot sizes, parking minimums also impose higher than needed land use. Parking minimums determine the number of parking spaces for a development. “Right now we have parking requirements that are very arbitrary … like requiring the number of parking spots based on the number of bedrooms in an apartment when apartments with more bedrooms are often going to have kids in them that don’t even have cars,” said Hamilton. Often, this leads to more parking spaces than is needed, which consequently takes up land that could have otherwise been used to provide more homes. Cities have become so stringent about parking minimums that housing proposals for the homeless have been denied because of lack of parking spaces. Recently, when Seattle implemented a reduction in parking minimums, developers built less parking spaces, saving hundreds of millions in construction costs. These cost savings are passed onto renters and buyers as the cheaper construction translates into cheaper housing. By reducing and/or eliminating parking minimums and allowing developers to assess how much parking space is needed by their customers, cheaper housing can therefore be made more available.

Regulatory barriers also drastically reduce the number of housing units built and increase rents by making the building process more risky, time consuming, and expensive. It seems uncontroversial and important to shorten the review and processes of permitting designs on a local level. For example, San Diego county and the city of Stockton provide pre-approved and free Accessory Dwelling Units (ADU) plans that save time and money for builders. These ADUs (also known as “granny flats,” “casitas,” and “in-law units”) are often one or two bedroom units built in backyards or in empty attics or garages. In 2016 and 2017, California eased restrictions state-wide and since then the number of ADUs built per-year has more than doubled from about 5,000 units in 2017 to 12,000 units in 2019. Here pre-approved ADU builders can get permits within hours, instead of the usual four to six months.

What About the Public Sector (and how to get cities on board)?

Public housing has a tumultuous history of being high-cost, unsafe, and helping to enforce segregation. But the Biden administration has proposed monumental budget increases to the Department of Housing and Urban Development (HUD) to address the problems of cost and safety that still persist. It seeks to boost the ability of the agency to build and provide affordable housing to low-income residents. Biden has advocated for a $500 million increase in the HOME program which provides grants for the construction and rehabilitation of affordable housing. Additionally, the administration proposed another $180 million to build affordable housing for the elderly and disabled. 

Governments at the local and state levels have shown willingness to adapt innovative policies to combat homlessness. Renovating hotels and abandoned buildings for affordable and homeless housing has made a cost effective impact in those communities. In this way, governments have become more capable of providing supportive housing for the homeless until they find a home. But, alone, government programs to subsidize public housing will not solve the housing shortage. Most of the needed housing is market-rate housing. This is a nationwide issue impeding further housing development. And exclusionary zoning and other sources of the shortage are local decisions. 

To incentivize city governments to adopt more relaxed regulations, the White House proposes providing competitive grants to cities that show they are removing some of their exclusionary housing policies. The HUD would allocate $5 billion to eligible cities, with the cities able to use the money for a wide range of projects including parks, schools, and transportation. A similar bill called the bi-partisan Housing Supply and Affordability Act would focus on rural and mid-size cities. The bill seeks to provide $1.5 billion in competitive grants to cities that apply and show progress through “housing plans'' to remove obstacles to build housing. A similar model of the bill was tested in Washington state; it provided $5 million to cities that created a “housing plan”. The program was a success, with about 70% of eligible cities receiving grants for their plans. Proposals like these from the federal government and individual states have proved their usefulness  in incentivizing cities to allow more housing. It is important to note that these policies are aimed at small and mid-size cities that are more willing to accept the grants for their cash-strapped budgets. The larger metro areas, where the majority of issues are, could require direct state-level and local action where lawmakers have authority to make these changes.

What’s next?

Often, people’s lives are determined by their neighborhoods and access to good schools and jobs. But many are being denied access to these good jobs and schools because America’s land use has put a large distance between them. Rising rents and home prices leave households looking over the fence in favor of city skylines. By opening America’s most desirable and opportunistic cities to more housing, we can work to guarantee everyone has access to their best possible future.