We Could Have More Housing--If Building it Weren't Illegal

On March 27th, the Portland Tribune published a story with the subhead "Washington County needs 3,500 more skilled laborers, but there's nowhere for them to live." 

This article attempts to provide more insight into how we've come to find ourselves in this situation not just in Oregon and Washington, but across the country. 

Many people ask HFO's brokers, "Why is new housing, especially affordable housing, so expensive?" 

Below is a commentary that was written by Michael Munger. It appeared recently in CNSNews, a division of the Media Research Center. It has been lightly edited.

All housing is affordable housing. If developers build cheap housing, the price of all housing except the very most luxurious will fall. Alternatively, and perhaps less obviously, if we build more luxury housing, the cost of all housing will fall, as there will be less pressure for gentrification or “teardowns.” This is hopeful: All we need to do to quickly solve the housing crisis is make it legal to build housing.

Generally, in functioning market settings, price signals convey information rapidly transmitted to three sorts of actors. If there is scarcity, prices rise quickly (if allowed). The result is:

•   Consumers buy or use less
•   Producers make more (if they are allowed to do so)
•   Entrepreneurs come up with substitutes (if they are allowed to do so)

In housing, this system is not working because it is not being allowed to work. The regulatory agency Freddie Mac has estimated that the shortage approaches 4 million units nationally. That undercounts the need for people who would like to move to larger or “closer to work” locations. So why is the price mechanism not working?

The short answer is that it is effectively illegal to build housing, so #2 is blocked. And innovation—microunits, accessory dwelling units, etc.—is discouraged, so #3 is ruled out. The only “solution” offered by America’s city governments is scarcity, as far as the eye can see. In a growing consensus that crosses partisanship and ideological boundaries, including this remarkably candid Obama administration report, analysts have concluded we need to make it legal to build housing.

How could it be illegal?

The housing advocacy group “Up for Growth” estimates that between 2000 and 2015, 23 US states used intentional restrictions to block more than 7 million new dwellings that would have been built without the regulations. Even more importantly, perhaps, is that even for units built, as much as 30 percent—and sometimes more—of the final cost was caused by (a) regulatory uncertainty, (b) waiting for approval, or (c) the submission of repeated traffic reports, environmental impact statements, and jumping through other regulatory hoops.

What, specifically, makes building new housing illegal? The following categories of zoning, regulatory, and licensing restrictions all play a role:

• Minimum unit size/maximum number of units in new development
• Height restrictions on buildings
• Setback and lot size minimums or extorted greenspace concession
• Off-street, often underground, parking requirements, even in poor neighborhoods near mass transit

New developments require an inefficiently large amount of land, much of which must be used as parking, in buildings no more than 4 or 5 stories tall. The housing units themselves generally must be 1,000 square feet or more. 

You can do the math. A Brookings Institution study documents the problem, noting that all three major cost components—land, labor, and materials—face substantial, unnecessary, and unintentional cost bottlenecks. The result is that costs for almost any new unit in areas with burdensome regulations and high land prices will exceed $250 per square foot.

For a 1,000 square foot apartment—smaller than many cities allow without expensive variance permit processes—a developer would need to charge at least $2,750 per month to break even. The usual definition of “affordable” is housing that costs 30 percent or less of the renter’s income. But let’s expand that, and call 40 percent of income-affordable. A worker would still need a pre-tax annual salary of $75,000 to afford our hypothetical minimally legal new apartment.

Worse, municipal restrictions are also the main driving force behind “gentrification,” where (relatively) rich people occupy parts of what little affordable housing exists. Since cities allow wealthy neighborhoods to make it illegal to build market-rate housing, it’s hardly surprising that newcomers, or current residents looking to expand their living space, look to poorer neighborhoods. A recent working paper—by Dr. Kate Pennington of the US Census Bureau—has an interesting finding. We might say “static” gentrification displaces low-income housing. But it’s the more “dynamic” form of gentrification (building new market-rate multifamily buildings in poor areas) reduces renters’ costs. Unfortunately, building new multifamily units is prohibitively expensive and faces regulatory and legal approval delays.

The entire system is oriented toward hypersensitivity to local concerns, with requests for “public comment” built into a system that requires prolonged and expensive petitions for the “right” to build new housing. 

Michael Munger is a Duke University professor of economics, political science, and public policy and serves as an American Institute for Economic Research senior fellow. CNSNews is a division of the Media Research Center, an IRS (501)(c)(3) nonprofit focusing on research and education.