Anthony Downs Argues That Local Government Regulation Reduces Housing Affordability

Introduction

Most people who know anything about housing recognize that local government regulations substantially increase housing prices. In particular, much new housing costs a lot more than it needs to because of lengthy delays in obtaining planning permission and building permits, unnecessarily expensive additional construction requirements, minimum lot-sizes or building-sizes and set-back requirements, severe obstacles to creation of multi-family units, and widespread suburban hostility to anything approaching low-cost housing anywhere nearby. Therefore, the interesting issues are not whether or how local government regulations affect housing costs, but why do local governments keep adopting such regulations, and what can be done to change their behavior?

I must modestly admit that I am exceptionally well qualified to discuss this topic, because I have been on two federal commissions that investigated it. One was the National Commission on Urban Problems (the "Douglas Commission") in 1967, and the other was the Advisory Commission on Regulatory Barriers to Affordable Housing (the "Kemp Commission") in 1989. I also submitted a paper in 2002 to the most recent federal commission on the same subject – the Millennial Housing Commission.

However, my approach differs from that of most other housing analysts. I will not focus on the particular obstacles posed by local regulations or how to modify them. Rather, I believe the really crucial issue concerns the political forces that create strong local government incentives to create and maintain such obstacles. However, I must warn readers that my views on this subject are considered by most elected officials too radical to be used as the basis for public policy. To prove that point, I will begin with my fundamental conclusion.

Why Local Government Regulations Raise Housing Costs

I believe a majority of suburban governments deliberately pass regulations aimed at maintaining or raising housing prices within their jurisdictions because they are politically dominated by homeowners, who want to maximize the market values of their homes. This view has been well stated by William Fischel in his recent book The Homevoter Hypothesis. Those homeowners believe any less costly housing in their neighborhoods might threaten their ability to achieve home value maximization. Since their homes are their major financial assets, they pressure their governments to oppose cost-reducing changes in regulations – such as permitting apartments or other lower-cost housing nearby.

Therefore, as long as we leave full regulatory power over housing planning and construction in the hands of local governments, there is no realistic chance that housing costs can be reduced by changing regulations that increase those costs. Simply urging local governments to change their behavior because doing so would benefit society as a whole will have no effect whatever. That is what all past housing investigatory commissions have done for over 40 years – including the Millennial Housing Commission – with no visible impact.

This economic motivation to maintain high housing costs is reinforced by two widespread social desires among Americans. One is to live in neighborhoods occupied by other households who are at least as well-off economically as they are, and surely not worse off. The other is found among most whites, who do not want to live in neighborhoods where African-Americans comprise more than about 25 to 33 percent of the residents. Both these social goals are served by high housing prices, in part because household incomes – and therefore the ability to buy or rent homes – are on the average much lower among African-Americans and Hispanics than among whites.

Thus, I say again that merely urging local governments to change their regulations in recognition that society needs more affordable suburban housing will not alter their exclusionary behavior. Each suburban government is put into office by its local electorate, which is almost invariably dominated by homeowners. The latter comprise over two thirds of all households – and higher fractions in most suburbs. So local officials normally do what most of those voters want. In fact, such behavior responsive to citizen desires is one of the great strengths of democracy. Hence most suburban officials have feeble or no incentives to change such policies, and strong incentives to retain them. And almost no one has any incentives to base his or her behavior on maximizing the welfare of the region as a whole. As long as we keep disregarding this reality, we will not make any significant progress towards reducing housing costs in suburban communities.

Those who seriously consider this subject agree with me privately. But no one in authority has the guts to come out and say it, because local "sovereignty" over housing policies is a sacred cow that very few are swilling to challenge.

The Nature of the "Housing Affordability Problem"

Before examining the above conclusion further, it is necessary to explore the real nature of our national "housing affordability problem." This problem arises because millions of American households cannot afford to buy or rent shelter that meets prevailing middle-class standards of "decent quality" without spending more than 30 percent of their incomes for housing. This situation arises because many households have low incomes, and because "decent" homes – especially new units – cost too much due mainly to the high quality building standards we require. Those standards have little to do with health and safety, even though the underlying legal justification for the zoning codes that impose such standards is based on the police power – that is, the protection of household health and safety. The disconnect between the high quality standards we require for new units and the actual health and safety of residents is clearly shown by the much lower minimum sizes and higher maximum density standards used in most of the rest of the developed world – without any negative impacts upon the residents concerned.

There are two ways to "solve" this problem. One is to raise the incomes of poor households, or provide them with subsidies. The other is to reduce the cost of "decent" units in various ways. They include reducing the minimum quality standards we demand, improving the terms of ownership, and reducing various regulatory barriers.

Examined more closely, American housing affordability problems have five different manifestations. The first is the simple "gap" between the incomes of the very poor and minimum costs of reasonably adequate shelter. Our economy needs many low-wage workers who do not earn enough to close this "gap," but who need to live somewhere near their jobs. This aspect is found in all metropolitan areas. It relates to the next manifestation.

That is the absence of affordable housing in new-growth areas, especially affluent suburbs. Yet these are the areas where most new jobs are being created; hence low-wage workers need to live in or near such areas. But such areas often adopt building and zoning codes that prevent construction of low-cost housing. This causes many poor people – especially minorities – to become concentrated in older inner-city neighborhoods, with highly undesirable consequences. This is the manifestation on which I will concentrate my analysis.

The third manifestation is regional. Housing costs vary immensely among specific metropolitan areas. As of 2002, home prices were over six times as high in the most costly – the San Francisco Bay Area – as in the least costly – Ocala, Florida. Incomes among metro areas were much less extreme – only about 2.5 to 1. Why do these regional disparities exist? Regressions show that the most powerful factor underlying high regional housing prices in 2000 was high prices there in 1990. Removing that factor, the most significant positive factors are percentage increases in regional jobs and income, warm winter climate, share of apartments in the central city, and the percentage of old housing therein. The presence of central city decline is a strong negative factor. Housing affordability problems also affect middle-income people in high-cost regions. Those regions include California, Boston, New York, Seattle, and Washington D.C.

The fourth type of housing affordability problem concerns revitalization of older in-city neighborhoods through the process of gentrification, which causes housing prices to rise. This may cause poorer residents there to be displaced or to experience hardships due to rising rents. This problem is inherent in any up-grading of older areas, so it cannot be eliminated without condemning older city neighborhoods to permanent slum status.

The last manifestation arises from the immigration of many very poor people from abroad, who arrive in this nation with almost no money, often illegally. At first, they cannot afford "decent" accommodations and do not qualify for subsidies. Hence they must live overcrowded in older quarters until they amass enough money to move into "decent" shelter. Their occupancy of slum dwellings is usually temporary, but when they move out, others move in. This problem is unavoidable as long as poor immigrants keep entering the United States. To accommodate this constant flow, which we cannot stop, the nation at every moment needs a sizable supply of low-cost, substandard housing that can become overcrowded without being dangerous. In short, we rely on slum housing to accommodate both this ever-changing group of very poor people, and some poor households who have permanently low incomes. Maintaining a significant number of slum units is now, and always has been, a key element in the nation's housing policy, even though Congress in 1949 adopted "a national housing goal of . . . a decent home and a suitable living environment for every American family."

The Potentially Most Effective Remedy

I believe that, in the long run, we will be unable to build or otherwise create sufficient affordable housing – especially in the suburbs where it is most needed – as long as full control over where all housing is located is left entirely up to local governments. There are two ways to moderate that local control to gain affordable housing.

One is for state governments to create some type of region-oriented authority that has a role in assigning affordable housing "targets" to each locality. And each state government needs to fund incentives for localities to pursue those "targets" by tying state infrastructure financing aid to doing so. New Jersey has done this.

The second method is to empower developers to appeal local zoning decisions that "unreasonably" block affordable housing in communities with inadequate amounts. To be effective, this "builders' remedy" approach requires that such appeals usually prevail if a community has less than a "target" share of affordable units. This in turn requires an agency to set "targets" for individual communities, and special courts to adjudicate builder appeals. Both Pennsylvania and Massachusetts have tried this approach with limited success; in Massachusetts, the "target" share is 10 percent.

Until those things happen, the desire of local homeowners to protect their home values through exclusionary zoning and other regulations will perpetuate the difficulty of coping with housing affordability problems. Up to now, almost no elected officials have been willing to face this situation realistically. They fear the wrath of the suburban homeowning majority and the political power of mortgage finance institutions.

Conclusion

One of the lessons learned from September 11, 2001, should be refocusing the priorities in our daily lives so we do those things that are really important. One action that is surely important to the entire nation is providing decent shelter for the low-income households whose contributions to all our lives are crucial – both personally and socially. But doing that will require the political courage to call for changes in the locus of authority over at least some housing regulations. Up to now, neither housing industry leaders or political leaders have exhibited such courage. I hope you will help persuade them to do so, starting right now.