One of the ironies of housing policy today is that many of the same analysts who complain the loudest about housing affordability are often the same individuals who support policies that increase development costs and reduce housing affordability. For example, inclusionary and exclusionary zoning policies act as taxes on new supply, increasing inventory scarcity and prices. Welcome to the bizarre world of zoning and land use policy.
The economics of zoning are clear. As with other regulatory requirements, the more restrictive and costly a jurisdiction makes land and real estate development, the higher local housing costs are. In an NAHB research effort conducted in 2011 and again in 2016, surveyed land developers and builders estimated the cost of various regulatory burdens throughout the home construction process for the single-family market. The 2016 research found that regulatory burdens in aggregate represented, on average, 24.3% of the price of a newly built single-family home.
The costs for the lot development stage in isolation made up 60% of the total. This component included costs due to zoning. For example, costs (including delay costs manifesting as interest expense for debt-financed land acquisition and development) due to subdivision and zoning approval added 3.1% to the final price of a home. These costs, in fact, made up 12% of total land development costs. The cost of land that was required to be left unbuilt or undeveloped (effectively land that must be purchased on the behalf of the eventual homeowners of the neighborhood) added on average 2.6% of the home’s final price. Such costs add up quickly in a death-by-a-thousand-cuts exercise. Each $1,000 increase in the price of a home prices out approximately 153,000 households from qualifying for a mortgage and purchasing a home.
A 2002 study by economists Edward Glaeser (Harvard) and Joseph Gyourko (University of Pennsylvania) used a measure of the intensity of local zoning (the Wharton Land Use Control Survey) and found that in markets with fewer zoning- and land use–related delays, home prices roughly corresponded to construction costs. On the other hand, in markets where significant policy-based delays exist, new-home prices exceed construction and development expenses, a clear indication of policy failure. And, of course, higher homes prices reduced housing affordability. Glaeser made his perspective clear in a 2016 Brookings Institution report: “Arguably, land use controls have a more widespread impact on the lives of ordinary Americans than any other regulation.” Given the growth in government regulations in recent years, this is quite the statement.
The question is what can be done? State governments could play a helpful role by requiring new local zoning rules to undergo cost-benefit analyses that are common for other regulatory policies. State-level policy review is appropriate because local land use rules ultimately determine development activities in nearby areas. And such review would certainly conclude that most land use regulations are terribly inefficient. If only affordable housing advocates and voices in support of property rights and growth could come together with trade associations, like local home builder and building industry associations, and push for reform.
