In 2016, President Obama’s Council of Economic Advisers prepared a white paper that was remarkable in that it gently criticized the President’s own housing policy: “While President Obama’s budget calls for increasing investments to provide affordable housing and end family homelessness, HUD’s existing project-based and housing choice vouchers could serve more families if the per-unit cost wasn’t pushed higher and higher by rents rising in the face of barriers to new development.” In the face of local land-use regulations, which drive up the cost of rent, HUD policies were ineffective.
The new Secretary of Housing and Urban Development, Ben Carson, aims to succeed where the Obama administration failed. Carson’s department intends to revise one of the landmark housing policies implemented by the Obama administration, a regulation known as “Affirmatively Furthering Fair Housing” (AFFH). Implemented in 2015, AFFH was based on vague language in the 1968 Fair Housing Act that requires that HUD comply with the spirit of “fair housing.” The Obama administration argued that the requirement extends to grantees—states and localities that receive funding from HUD must also comply with the spirit, as well as the letter, of the law.
Carson’s HUD suspended AFFH in 2018 and plans to reframe it to challenge the exclusionary land-use regulations of cities and counties that receive HUD funding. This approach is promising and represents an appropriate exercise of federal power that restores property rights and, hopefully, will help to reduce poverty.
“As Obama’s Council of Economic Advisors understood, the housing cost crisis is primarily caused by local land-use regulation, not overt segregation.”
AFFH mandated that each jurisdiction perform extensive analysis of its demographics. If the jurisdiction could not show sufficient racial integration, it was required to identify its own failure and write a plan to address the inequity. The analyses and plans, and their approval by HUD staff, turned out to be quite time-consuming. And since the plan writers typically had no actual policymaking authority, the plans had little chance of being enacted.
As Obama’s Council of Economic Advisors understood, the housing cost crisis is primarily caused by local land-use regulation, not overt segregation. In their white paper, the Council damned AFFH by faint praise: The major policy initiative did not merit a single mention in a document addressing the very housing problems that AFFH purported to address.
High rent and shocking home prices along both coasts not only promote income-based segregation, they also slow productivity growth, stifle mobility, and take a big bite out of salaries. In a free market, the high cost of housing would induce a building boom. The boom has not materialized because housing markets are far from free.
Instead, highly prescriptive local regulations place strict limits on construction. Zoning codes allow a narrow set of land uses on each parcel. Minimum lot sizes, setbacks, maximum “floor-area ratios,” height limits, and other devices prevent landowners from building as densely as they wish. Parking minimums, infrastructure payments, and “affordable housing” mandates increase the cost of development to the point that only high-end units are economically viable. With supply tightly constrained and demand growing rapidly, prices shoot up. The only way to guarantee affordable housing is to build more homes.
To understand the power of land-use regulation, compare Los Angeles to Greenville, South Carolina. A recent Brookings Institution interactive study shows that the median earner took home $4,000 more per year in Los Angeles than in Greenville. But taking cost of living into account, Greenville earners actually come out $6,000 per year ahead.
The driving force behind the high cost of housing in cities like Los Angeles is not the salt water; it’s the land-use regulation. In Greenville, houses are quickly built in suburban tracts, and high-rises replace downtown parking lots. In Los Angeles, demand for housing is much higher, but growth is much lower. The city long ago exhausted the supply of flat land within a reasonable commute of downtown, and it has—like the majority of American cities—forbidden duplexes, small apartment buildings, or high-rises in most of its neighborhoods. This restriction of the supply has translated into soaring housing costs.
Another problem with zoning and other land-use regulation is that they severely constrain the traditional rights of landowners to improve and use their property as they see fit. Zoning began with a New York City ordinance in 1916 and spread rapidly during the 1920s, restricting uses (e.g. single family residential, apartments, retail, office, or industrial) to specific zones set by planners, with exceptions granted on a case-by-case basis. A second generation of land-use regulations in the 1970s—dubbed the “Quiet Revolution”—expanded the power of neighbors and environmental regulators to stop projects.
The practice of undertaking development primarily through exceptions to the rules—such as through “variances,” “planned unit developments,” and “overlay districts”—has made development a lawyerly business, pushing individual landowners to the margins. And neighborhood involvement in development, as affirming as it sounds, is usually negative. The most vocal neighbors are almost always in opposition to local change, and the process of neighborhood engagement has created confusion about property rights. What was once an owner’s clear prerogative is now subject to review and comment by his neighbors. And just as taxi operators opposed Lyft and Uber, homeowners usually oppose the expansion of their competition.
Restoring affordability to housing requires, at minimum, restoring clarity to property rights. Neighborhood engagement should lead to clear, stable development rights that accommodate growth without regulatory exceptions.
Recognizing the costs of local land-use regulation, HUD has formally asked for input on revising the AFFH rule to refocus it on barriers to housing supply rather than on demographics, as well as to ease the burden of compliance.
The federal government’s scope for appropriate involvement in land-use policy is limited. Land-use regulation is locally enacted and based on state enabling acts. Federal policymakers should move cautiously, and look first at undoing federal policies that subsidize local dysfunction. In that spirit, my colleague at the Mercatus Center Emily Hamilton and I have submitted a Public Interest Comment to HUD that proposes a revision of the AFFH that would make it less bureaucratically onerous and more impactful than the Obama-era rule.
We propose that HUD require each jurisdiction to pass either a market test or a policy test. A jurisdiction where rent is moderate or falling or which issued a sufficient number of building permits over the past five years would pass the market test. Failing that, a jurisdiction that enacted a significant reform restoring and clarifying land-use property rights would pass the policy test.
Jurisdictions that fail both tests—that is, jurisdictions where rent is high and rising, which do not issue enough building permits, and which have not expanded property rights by reducing land-use regulation—would not be eligible to receive Community Development Block Grant (CDBG) funds from HUD over the subsequent five years.
Withholding CDBG funding does not violate federalist or localist principles. CDBG funding, intended to promote projects like building affordable housing and infrastructure development, is already conditional and meant to primarily benefit low- and moderate-income communities. But right now, places like Brookline and Berkeley receive CDBG funds. Subsidizing exclusive jurisdictions is not in keeping with the spirit of the program. By contrast, revising the AFFH so that it awards these grants to communities that are using market mechanisms to lower the cost of housing is in line with the spirit of the Fair Housing Act.
“Restoring greater property rights will alleviate poverty, encourage upward mobility, and expand liberty.”
Since CDBG grants are a very small share of local budgets, a new market-driven AFFH will likely not have a revolutionary impact on land use. Instead, it will be a small piece of leverage to assist local leaders who are championing property rights, inclusion, and growth in their municipalities. Ultimately, restoring to property owners greater rights to provide housing for their neighbors at lower prices will alleviate poverty, encourage upward mobility, and expand liberty—goals that resonate across the political spectrum.
Salim Furth, Ph.D., is a Senior Research Fellow at the Mercatus Center at George Mason University and the co-director of its Urbanity Project.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
© U.S. Department of HUD.