US should bribe landlords to accept higher density
President Joe Biden has placed housing at the top of his priorities. In June, the White House laid out a long list of efforts to address the shortage, from urging states and localities to ease zoning restrictions to deploying money from the Covid 2021 bailout program to affordable housing and investment to maintain public housing that is falling into disrepair.
But for all the punch the president and his advisers hope to signal, the laundry list isn’t up to the task. “Small carrots,” notes Gilles Duranton, an economist specializing in real estate at the Wharton School of the University of Pennsylvania. The administration, he added, is “chasing trillions with billions.”
America faces a housing shortage primarily because existing homeowners don’t want anyone building more homes — at least not in their neighborhoods. And they have the power to bend the political system to their will. Think of state referendums and city council meetings that limit building heights, mandate green space around new construction, and require homes to be at least two acres — enough space to raise a few cows.
These restrictions increase construction costs and therefore the price of housing, pushing it beyond the means of young families and other first-time buyers. Current homeowners know that if restrictions were lifted, their home prices would drop.
Research on the greater Boston area by economists from the University of Warwick, the University of Toronto and the Federal Reserve Bank of Boston found that the number of housing units increases sharply when density constraints are relaxed – whether by allowing more multi-family buildings, relaxing height limits or simply allowing construction on smaller lots. Rents in multi-family buildings drop by as much as $144 per month for each new unit added due to the new rules.
The problem is that the value of single-family homes also falls, in part because the additional housing weighs on the perceived quality of the neighborhood: house prices fall by 9.17% per unit when density regulations are relaxed and multi-family homes are permitted. “While reducing housing costs through zoning reforms may help first-time homebuyers and low-income renters,” the economists wrote, “it comes at the expense of current homeowners and will therefore likely generate substantial political opposition from them”.
What will it take to reduce the opposition? Owners can be bribed. Or, to put it in a nicer way, they might give in if they are reinstated, compensated for the drop in value of their homes. The problem is that such a bribe would cost far more money than the American political system seems willing to tolerate.
Duranton and Spanish economist Diego Puga tried to get a sense of that amount by putting a price tag on regulations that limit housing construction in more than 100 cities across the United States. Using data from 2010, they took the value of farmland near the city limits, which had not been subject to zoning limits and other city regulations, and added construction costs. typical premises for single-family homes plus a gross profit to the developer of 17%.
Then they compared that figure with the market price of a similar house in the city. The difference, which averages about $100,000 per home (up to half a million dollars in cities like San Francisco and San Jose, Calif.), equals the cost of regulation. Multiplying that by the number of homes in America’s urban areas yields a staggering total cost of $12 trillion. The price of our NIMBY housing policy.
This figure dates back more than 10 years, when the housing market was still reeling from its 2008 implosion. Today, the price is likely much higher. Suppose we decide that half of the housing restrictions make sense, perhaps from an environmental point of view, the useless half would have cost homeowners $6 trillion, or just under six months of product raw interior.
Contrast that with the costliest policy in the federal government’s real estate arsenal: the mortgage interest deduction. In 2017, before it was cut as part of President Donald Trump’s tax reform, it was worth just $66 billion. And nothing in the current list of Biden administration initiatives is so broad.
Can we do something cheaply? The kind of competitive grant process envisioned by the Biden administration to encourage municipalities to ease housing restrictions, at a cost of a few billion dollars, could encourage more construction, for example, in Dallas – where regulations are relatively lax and housing is already relatively cheap. But to trigger a construction boom in super expensive cities, it will take real money.
In 2018, Minneapolis became the first city to loosen single-family zoning and allow two- and three-unit homes on land previously zoned for single-family use. Berkeley and Sacramento, California, and Charlotte, North Carolina, as well as Oregon State, followed suit.
But not much happened in these places. Indeed, the changes may have only been politically possible because they would not work. Research in Boston found that allowing builders to build multi-family buildings, without accompanying changes to allow for greater density, had negligible impact on housing. In Minneapolis, the Star Tribune reported last year, only 23 building permits had been issued for new duplexes and triplexes in areas where they would not have been permitted before the change.
“Simply lifting bans on multi-family housing may not create more housing options,” wrote Sara Bronin, who teaches law and architecture at Cornell University. Many other obstacles – mandatory public hearings, rules on lot configuration, building size and occupancy regulations – are also at work. “These zoning requirements are killing housing by a thousand cuts.”
It costs us dearly. Inflated housing values insulate American society. They impose a huge transfer of resources from the young who do not yet own a house to the old who do. Additionally, economic research has established that workers benefit from a productivity boost when they move to a large, bustling city like Los Angeles or New York. To the extent that housing costs prevent this from happening, they impoverish the nation.
Unfortunately, it looks like we can’t afford the bribe.
More other Bloomberg Opinion writers:
• Want to solve the housing crisis? Kill Zoning: Virginia Postrel
• Can we escape an accident? The housing market says yes: Conor Sen
• Home inventories can’t lower prices after all: Jonathan Levin
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost”.
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