Why Housing Reform Must Start Local

However healthy the larger economy might be at any given moment, the U.S. housing market seems to suffer from a chronic ailment. During his recent State of the Union address, President Trump reiterated his plan to ban large institutional investors from purchasing single-family homes—falsely deeming them culpable for the housing affordability problem. This policy, which has been included in recent legislation albeit with large exemptions, would enlist regulators to remedy a fictional market failure. Meanwhile, lower short-term interest rates—which the president claimed would “solve the Biden-created housing problem”—would at best slightly lower mortgage rates, hardly enough to unfreeze home turnover.

Instead of unwarranted housing-market interventions with unwanted effects that would likely spill over into rental costs, federal government should let states and localities take the lead in reforming land-use and zoning rules.

In many U.S. cities, roughly 75 percent of residential land is designated exclusively for detached single-family homes, which means that all other forms of housing—duplexes, small and large apartment buildings, and even single-family attached houses—are confined to only one quarter of residentially zoned land. 

Moreover, rigid land-use controls—minimum parking requirements, minimum lot sizes, setback rules, and limits on how many homes can be built per acre—further dictate what can be built, where, and how much of it.

Through local ordinances, elected bodies largely set the rules on zoning and land use, which are typically recommended by planning commissions. State legislatures create the legal authority for local zoning and land-use regulation, but they can intervene too—and have increasingly done so as concerns over housing affordability compel state lawmakers to act. But statewide, one-size-fits-all legislation overriding local governance often struggles to secure buy-in from communities. 

Over the decades, land-use and zoning regulations have proliferated in most U.S. cities. While land-use and zoning policy might have been well-intentioned at the outset, local governments have long since used it to lessen density in their jurisdictions through both a growing body of codified restrictions and the policy of discretionary permit approvals—which enables an unrepresentative group of local residents to exert outsized influence over housing development in their neighborhoods. 

The outcome is predictable. Even while confounding factors contribute to changes in home prices, the positive relationship between land-use and zoning regulation and home prices is clear and significant. Increased land-use regulation is associated with higher real average home prices in 44 states, and rising zoning regulation is linked to higher prices in 36 states. Evidence demonstrating that restrictive zoning and land-use controls constrain supply and slow construction abounds.

Yet reform proposals that would liberalize zoning and land use are thankfully plentiful. One popular example is the American Enterprise Institute’s “light-touch density” approach: a set of land-use reforms that would lower policy barriers to housing construction and legalize accessory dwelling units, duplexes, triplexes, townhomes, and small apartment buildings in areas long reserved for detached single-family homes. This approach offers a politically feasible way to address the nation’s housing shortage at the local level, while promoting affordability.

Other pro-affordability reforms—such as expanding by-right approval to more types of housing development—could also streamline construction and increase the supply of housing.

Some jurisdictions have started to implement pro-development reforms, and the results show early signs of success. Austin is a recent and especially clear example of the benefits of light-touch density reform. After seeing home prices rise under large-lot, one-home-per-lot rules applied across most single-family zones, the Texas capital adopted its HOME initiative. It first allowed up to three homes on lots where only one had previously been permitted. It then reduced the minimum lot size from 5,750 square feet to 1,800 square feet—a roughly 69 percent cut. The benefits materialized quickly. Before the reform, builders filed 487 permits that resulted in certificates of occupancy in those single-family zones; a year later, that figure had risen to 906—an 86 percent increase. Much of that increase came from newly legal “missing middle” housing and resulted in 238 two-unit and 261 three-unit projects emerging in the same neighborhoods. This reform enabled smaller homes to be built on smaller lots, naturally leading to the construction of more affordable housing in Austin. The HOME ordinance has reportedly reduced home prices by as much as $200,000.

To the dismay of many Americans awaiting more abundant housing and lower prices, the President’s and other policymakers’ proposals are focused on constraining housing demand. However, it’s the supply side that needs to be addressed. The American housing market simply needs more construction and supply. The door to new builds is locked by onerous rules—and the key lies at the local level.