Focusing on zoning in hot-market urban centers misses economic realities—and major opportunities.
For the past couple of years, there have been a growing number of voices saying that to address the housing affordability problem, what we need to do is build more housing— not necessarily more affordable housing, but more housing, period. Sound bites like “yes, you can build your way to affordable housing” are showing up more and more.
A key part of that case is that what’s needed to make that happen is changing zoning ground rules. The poster child for this argument is San Francisco, which, as everyone points out, has mind-bogglingly high housing prices, a desperate shortage of affordable housing, and a metastasizing homelessness problem.
There’s a decent argument that, under some conditions, building more housing for the market will moderate some prices to some degree, and that zoning has something to do with it. But ultimately it will take a lot more than building more expensive market housing in downtown San Francisco or Seattle to begin to tackle those cities’ housing crises. In fact, the realities of building in high-demand, already built up urban areas mean that zoning changes in those areas will have relatively little effect.
Most of the zoning conversation is missing if not the entire point, a big part of it. Spoiler alert: The real zoning issue is what happens in the suburbs. While that gets periodically acknowledged, too few people are talking about it and even fewer are focusing on making change in specifically those places.
The Tangled Relationship Between Supply and Demand
A lot of the people who argue that regulations are causing inadequate supply don’t appear to have looked at the numbers. One of them is HUD Secretary Ben Carson, who, on a trip to San Francisco last fall, pronounced that “Evidence shows us quite clearly that the places that have the most regulation also have the highest prices and the most homelessness. Therefore, it would seem only logical to attack those things that seem to be driving the issues.” Evidence also shows that the places that are closest to the Pacific Ocean have the highest prices and the most homelessness, but no one, so far, has suggested draining the ocean as a solution to homelessness.
And besides, the evidence doesn’t actually support Carson’s statement.
The basic assumption of the market is that where the demand is highest, builders will build more. Thus, if the market is working, you’d expect it to show up in the numbers. And it does. I looked at how many building permits each of a number of either hot-market or struggling cities had issued in the past six years and calculated the annual average relative to each city’s existing housing stock, as shown in the table. Nationally, during six fairly good years for the housing market overall, average annual building permits amounted to a little less than 1 percent of the nation’s housing stock. But in Austin and Seattle, they amounted to nearly 3 percent of each city’s stock—or three times the national average. Conversely, in Pittsburgh and St. Louis, where demand is weak, permits were less than one-half of 1 percent of the housing stock. Clearly, builders build where the demand is.
The reason prices are low in St. Louis and Pittsburgh, despite the fact that builders aren’t adding much to the supply in either city, is that demand is low, and most of it can easily be met by turnover in the ample supply of existing homes and apartments. Housing affordability problems in those cities have far more to do with poverty than with housing supply. This is true of a lot of the United States. At the other end, prices are high in Seattle despite the fact that builders are adding nearly 10,000 units per year in a smallish built-up city, because demand is even higher.
But it’s not just about the size of the demand—the number of households looking for housing—it’s about who is looking for housing and what type of housing they’re looking for. That’s one thing that people who point to Houston as a counterexample don’t appreciate. Yes, Houston has strong housing demand and relatively affordable prices. But the people who are moving to Houston and driving the demand there are not wealthy; most of them are working-class or struggling middle-class people who can’t afford $3,000/month apartments in high-rise buildings even if they wanted them. They’re looking for modest single-family houses and garden apartments, and that’s what the market is building. And, as we can see from the chart, Houston isn’t actually building that much. In fact, relative to the existing housing stock, the pace of building in Houston is a lot slower than in D.C. or Seattle, and isn’t much greater than in San Francisco, which is badly lagging its peer cities.
Seattle’s demand, on the other hand, is driven by a booming high-tech sector which draws highly skilled young, single techies making six-figure incomes. As a result, Seattle is creating huge amounts of expensive, high-density multifamily housing (85 percent of all building permits in Seattle are for multifamily housing), including high-rise towers in downtown and mid-rise buildings in areas like South Lake Union, where rents for studios typically start at around $2,000. San Francisco is building the same type of housing for the same market, but not as much, and it’s even more expensive.
So If Seattle Is Building Lots of Housing, Why Is It Still So Expensive?
What is notable about all of the really high-cost cities is that they combine the two things that draw people to a place: good jobs and attractive amenities. Some places in the United States have one or the other, many places, sadly, have little of either. But very few large cities have both. For whatever reason, a disproportionate share of them are in California, and most of the rest are also coastal cities. We all know which ones they are: San Francisco, Los Angeles, San Diego, San Jose, Seattle, and Portland on the Pacific, and Boston, New York, and Washington on the Atlantic. The only unequivocally hot markets off the coast are Denver with its mountains and Austin with its unparalleled music and entertainment scene (and both are still highly affordable compared to San Francisco or Seattle), with a few others perhaps headed in that direction. Economists at the UCLA Anderson Forecast who graphed affordability against amenities using an amenity scale developed by the U.S. Department of Agriculture found that even independent of job growth, amenities alone push prices upward.
When you add in the explosive job growth in the Seattle area, Silicon Valley, and other tech centers, it’s hard for development to keep pace. What makes it even harder is that while in the Seattle area, the jobs are being created not just in Seattle but all over King County—in Bellevue, in Redmond (where Microsoft employs 47,000 people), and so on—an awful lot of the people who fill those jobs want to live in Seattle, just as a lot of Google techies want to live in San Francisco.
Since the tech jobs and the affluent residents spin off lots of lower-paying service jobs, that attracts a lot of people who aren’t techies. They may get jobs, but they also discover that trying to live there on the wages those jobs pay is a tightrope act. They may become homeless even while holding down a job, or become homeless if they lose their job or are evicted from a room or apartment they can’t really afford. As elsewhere, other issues are also involved in homelessness—mental health issues, drug use, health problems—but the gap between wages and housing costs is what makes the issue worse in Seattle or San Francisco than in other parts of the country.
This reflects the painful reality that in 21st-century America, more and more of the jobs, particularly the high-paying jobs, are being created in fewer and fewer places, creating more price pressure in those places, and less in others. The latter includes most of rural and small-town America, as well as quite a few major cities and regions. And when the places that are creating large numbers of well-paying jobs are also the places with the amenities—climate, arts, history, beaches, and so forth—the pressures are doubled. And because a disproportionate share of the affluent in-migrants to those areas want to live where the action is in the central cities even if they work in the suburbs, urban prices skyrocket. While in most parts of the United States, houses cost the same or less in central cities than in their suburbs, in the hot markets, houses cost more in the central cities (Fig.2). The median house in Seattle sells for $250,000 more than the median house in the rest of the Seattle metropolitan area. By contrast, the median house in Birmingham, Alabama, sells for little more than one-third of the median price in the rest of its metro.
There’s another factor, too, which is particularly powerful in San Francisco, but affects all the hot-market cities to varying degrees. They are built-up places. Buildable sites are hard to come by, and when they are found, they are inordinately expensive. Check out San Francisco on Google Earth. It’s the tip of a peninsula. Few places in the U.S. are as tightly built up; even the city’s few industrial areas are wall-to-wall buildings, with few of the sprawling parking lots that characterize industrial areas elsewhere. With a few isolated exceptions, houses are cheek to jowl, often interspersed with apartment buildings. What that means is that to build in San Francisco (or Seattle or Boston) a developer must acquire expensive, already developed land, which usually means having to assemble multiple parcels at great time and expense, then demolish the buildings and prepare the site, all of which entails spending millions before even breaking ground. That is why nobody is going to build modest houses or garden apartments in San Francisco, no matter what the zoning allows.
According to a presentation I listened to by UCLA economist Jerry Nickelsburg on his interviews with Los Angeles developers, the cost and difficulty of finding sites they could build on was the greatest constraint on their ability to produce more housing. Second was the shortage of skilled construction workers. Regulations came in third.
A second fallacy of the “build, baby, build” school is the idea that it doesn’t matter what you build, as long as you create more supply. The proposition that adding supply aids affordability is based on the principle of filtering, and the idea of a chain of moves. If you build a new house, the family that moves into it comes from an older house, which is bought (at a slightly lower price) by a family moving from another (less desirable) older house, and so forth. It does happen. But how well and how much it happens depends on the type of new housing being built. In Seattle, what’s being built is largely aimed at young, affluent, mostly single in-migrants. This has far less effect on the rest of the housing market, especially families with children looking for larger homes, than the new subdivisions being built around the edges of Phoenix or Dallas. It may even have a negative effect. As two scholars from the London School of Economics, Michael Storper and Andrés Rodriguez-Pose, argue in a recent paper, “Policies such as blanket upzoning, which will principally unleash market forces that serve high income earners, are therefore likely to reinforce the effects of income inequality rather than tempering them.” Their paper, which is far more detailed and rigorously argued than this short article, is available online and is well worth reading.
Does Zoning Matter?
Yes, it does, but not necessarily in the way a lot of people seem to think today. Recently, people have been pointing to Minneapolis as a model of how to do it. Last year, Minneapolis amended its master plan to allow up to three units per lot in formerly single-family residential zoning districts. That means that in any such area a developer can build a one-, two- or three-family structure on a lot formerly limited to a single-family house. That makes perfect sense. Lots of older neighborhoods have long had a mix of one-, two- and three-family houses along with small apartment buildings, and they work well.
But will it lead to more affordable housing? Let’s do a thought experiment. Suppose a developer wanted to buy three houses, tear them down, and build a nine-unit condo. According to Zillow, the median sales price in Minneapolis in the summer of 2019 was around $270,000, which happens to be a price that a family earning under the HUD Area Median Income for the Minneapolis area can afford. What that price means, though, is that the land cost basis for that developer, including acquisition, demolition, and transaction costs, will be at least $110,000 for each of the nine units they plan to build. Assuming they want land costs to be no more than 25 percent of the finished price, they will aim to price the condo units at a minimum of $440,000 each, or 63 percent more than the price of the houses they demolished to build their condos. That number is probably conservative, given that the construction cost alone of a 1,200-square-foot unit, not counting soft costs, is likely to be $200,000–$250,000. Yes, more units would be added, but only by removing larger, more affordable ones.
Admittedly, not all increases in housing in Minneapolis would require removing existing units. It will now be easier for property owners to create accessory units than before (and not limited to owner-occupants, as it was under the previous ordinance), but that is likely to lead to only a small trickle of additional units, many of which may be meant for family members and won’t be available on the open market.
More aggressive zoning reforms have been proposed in different cities, including some that could lead to significant numbers of existing modest homes or job-productive industrial and commercial areas being redeveloped to accommodate high-density multifamily development. But aside from the potential damage to neighborhood fabric—which does matter—they all suffer from the same basic problem. With rare exceptions, to densify meaningfully in built-up urban areas, something has to be removed and replaced. If the resulting housing is more expensive than what it replaces, or if it eliminates working-class jobs, any benefits from increasing supply—assuming they exist at all—will be offset by these negative impacts. Densifying urban areas is not a free lunch.
We Should Upzone the Suburbs
Does that mean that rezoning is always irrelevant, or worse, counterproductive? No, but most of the current crop of rezoning advocates is looking in the wrong place for solutions. It is both ironic and unfortunate that almost the entire focus on rezoning in the last few years has been on urban central cities, most famously New York City, Minneapolis, Seattle, and San Francisco. Yet while central city zoning could certainly benefit from improvement, urban areas, including all four of those cities, have always offered more diverse zoning options than their suburbs, have always allowed large numbers of apartments, provide the vast majority of most regions’ affordable housing stock, and in most of their single-family zones have allowed developers to build on much smaller lots than are permitted in most suburbs.
Housing advocates and progressive politicians promote rezoning in central cities, mainly, as far as I can tell, because that’s where almost all of them live. But the real target is hiding in plain sight nearby: those cities’ suburbs. As many people have pointed out and extensively documented since the 1960s, suburban municipalities are all about zoning exclusion. Indeed, quite a few were created for just that reason. Vast amounts of suburban land are zoned for commercial and industrial uses, well beyond the potential need or demand. Multifamily housing is allowed sparingly, if at all. In the 1970s, when I was trying to build affordable housing on Long Island, there was not a single piece of property zoned as of right (meaning that one could build without a discretionary approval such as a variance or special permit) for apartments in the entire town of Brookhaven, a sprawling township with a population of over 300,000 covering over 300 square miles. I doubt it’s any different today.
While Minneapolis’s R-3 zone requires a minimum lot of 5,000 square feet (and imposes a maximum of 7,500 square feet), nearby Maple Grove requires a minimum lot of 10,000 square feet in its highest-density single-family zone. Many suburban zoning ordinances require half an acre, an acre (43,560 square feet), or more for each house. In the exurban townships that surround the small New Jersey village where I live, almost all the land is zoned for two-acre or larger lots. Moreover, as I mentioned earlier, in many strong or emerging market areas, suburban property values are at most no higher, and often lower, than in central cities. Existing base densities are much lower and large amounts of vacant land are still available in many suburban areas, although there’s less than a few decades ago. Many suburban municipalities also contain large amounts of vacant or underutilized commercial and industrial space, including obsolete strip malls and half-empty office parks, which could be redeveloped with no loss of jobs or existing housing.
Exclusionary suburban zoning drew serious attention in the 1960s and 1970s, led by the advocacy of the late Paul Davidoff, with whom it was my privilege to work for many years. That attention led to some important initiatives, including the New Jersey Supreme Court’s Mt. Laurel decision and the enactment in Massachusetts of Chapter 40B, known as the “anti-snob zoning” law. In both states, those initiatives have led to large numbers of affordable housing units being created in high-opportunity suburban areas, both by making it possible to find sites to build Low Income Housing Tax Credit and other affordable housing projects and—particularly in New Jersey—through aggressive inclusionary requirements in market-rate multifamily developments.
Contrary to many fears, as thousands of affordable housing units were built in many New Jersey suburbs, the sky didn’t fall. Moreover, since most lower-income residents of most cities work in the suburbs, the effect of their moving on their commuting times and costs might even be positive. While exclusionary sprawl has gobbled up many valuable opportunities over the past decades, the room to create large amounts of affordable housing—as well as middle-market housing—in high opportunity suburbs still exist. But the suburbs are all but ignored in the current conversation.
It would be unfair to say that nobody is looking at suburban zoning. The California Renters Legal Advocacy and Education Fund (CaRLA) has brought lawsuits against a couple of suburban cities for turning down higher-density projects, and YIMBY Law, which uses the tagline “sue the suburbs,” also uses legal action, or the threat of it, to promote approval of denser housing. So, however, they are operating at a far smaller scale than the work of Suburban Action Institute, the New Jersey Department of the Public Advocate, the New Jersey ACLU, the Western Center on Law and Poverty, and a host of others in the 1970s and 1980s. In Massachusetts, Gov. Charlie Baker proposed legislation last year to allow cities and towns to make zoning changes by a simple majority vote of the city council or town meeting, rather than the current required two-thirds supermajority. If adopted, it would have probably had little more than symbolic value, but it nonetheless withered and died in the state legislature. But these are modest, barely visible gestures compared to what is needed, and compared to the scale of urban upzoning efforts in Minneapolis, Seattle, or New York City.
It would be unfortunate if the current climate, in which rising housing costs have led to the inherently exclusionary character of zoning being discussed more widely than ever before, were allowed to come and go without a determined effort to reopen the issue of suburban exclusion. Yes, it is politically more difficult to tackle suburban zoning, where exclusion is solidly entrenched and where progressive mayors and councils are few and far between, but if we are to be serious about trying to increase affordable housing opportunities, as distinct from symbolic gestures, that’s where we need to be.
Source: shelterforce
