Opinion: Restrictive zoning is the main factor depressing housing supply

One consequence of the COVID-19 pandemic was a significant increase in real estate prices. Prices increased by 13.5% from March 2020 to March 2021 and by a further 20.6% from March 2021 to March 2022, measured on Case-Shiller US Home Price Index. This has increased focus on the lack of affordable housing in the United States.

While there are numerous factors driving the rise in house prices, the increasing scarcity of housing units has risen to the fore. This problem has been building (or not, as the case may be) for decades. But the pandemic has taken it to a whole new level.

Rex nutting: Property prices have risen 100 times faster than usual during the COVID-19 pandemic

In the United States, fewer housing units have been built relative to the number of households over the past three decades than the historical trend.

Econofact.org

The facts:

The United States faces a housing stock gap. While estimates of the deficit vary, analysts agree that the available housing supply in the United States has not been large enough to adequately meet existing demand. A analysis by Freddie Mac, for example, estimated the housing stock gap at 3.8 million units in 2020, up from 2.5 million units in 2018.

We have built fewer units relative to the number of households over the past three decades than the historical trend. The annualized number of housing starts per 1,000 households was 22.2 between 1960 and 1990, but fell to 12.2 housing starts per 1,000 households between 1990 and April 2022 (see chart). It’s important to note that this decline preceded the sharp drop in housing starts during the Great Recession.

A key to understanding this housing shortage is the role of local zoning and land use restrictions. After control of zoning was ceded to local jurisdictions, homeowners were able to persuade their local officials to restrict housing supply.

This is especially true for the construction of cheaper single-family houses and multi-family houses in US suburbs. The prevalence of this so-called “NIMBY (Not in My Backyard)” syndrome has led to a proliferation of restrictive zoning, which has restricted construction of new homes and pushed up prices.

For example, the proportion of jurisdictions that limited the maximum number of dwelling units in the highest residential zone to fewer than 8 per acre increased from 15.5% in 1994 to 16.0% in 2003 and to 22.4% in the year 2019, based on data from National Longitudinal Land Use Survey (1994, 2003, 2019) for countries that responded to all three surveys.

Two land-use regulations have had a particularly strong impact on reducing housing supply: minimum lot size restrictions and single-family zoning. If the minimum lot size restriction (MLR) is one acre, any new construction must be on a minimum lot size of one acre. in the research With Maurice Dalton, we find that increasing the size of the minimum lot required resulted in a large and significant increase in home prices, using data for the greater Boston area.

The fact that single family home only zoning also has a limited housing supply has only recently become apparent and this has led to cities like Minneapolis and states like Oregon and California Prohibition of development only for single-family houses.

There are other restrictions on the supply of new housing that have been exacerbated by the COVID-19 pandemic that will take time to resolve. The new construction is hampered by the lack of construction workers.

The tightening of the supply of construction workers is reflected in a significant increase in job vacancies in the construction sector: monthly job vacancies in the construction sector rose from a low of 24,000 in 2009 to 434,000 in May 2022 (cf here). And a 2020 opinion poll of Associated General Contractors of America found that 81% of construction companies reported staffing difficulties and 72% expected labor shortages to be the biggest hurdle over the next year.

In addition to the labor shortage, the cost of building materials has increased dramatically since the start of the COVID-19 pandemic (see chart below). It is very likely that the labor shortage will last longer than the high cost of materials. But the shortage of workers and the high costs for upfront services could already be a burden on construction: private housing construction began in May 14.4% below the number in April.

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Econofact.org

Are purchases by large investors also driving the rise in real estate prices? The share of large investors in home purchases has increased, peaking in February 2022 at 28% of all single-family home purchases outlook that these investors have crowded out first-time homebuyers through their purchases and by raising house prices.

The surge in bulk buying comes from investors who then Rent the units instead of flipping them, which is at the heart of these concerns. However, the percentage of first-time home buyers was among all home buyers 34% in 2021 and it has been at or near this level since 2014 (it was around 40% before the Great Recession). There is no evidence (yet) that this recent surge in buying by large investors has boosted house prices (it could be that the rise in large investors is a reaction to the large price hikes as opposed to the opposite).

And on a positive note, there is evidence that the rise of large investors has helped support the post-Great Recession recovery through the purchase of owned properties (REO) in distressed local housing markets (see here and here).

How the recent sharp rise in mortgage interest rates will affect the housing supply is unclear. When the Federal Reserve launched a series of hikes in the discount rate in its bid to curb inflation, mortgage rates saw one of them Fastest climbs in decades: The average 30-year fixed-rate mortgage rose from 3.2% in early 2022 to 5.8% in mid-June. This is primarily a demand-side problem as it increases the cost of borrowing. Falling demand due to higher mortgage rates is likely to dampen future residential property growth rates. But rental prices have also risen, so the alternative of renting versus owning (for first-time buyers) isn’t particularly good. How this will affect the supply side of the housing market is unclear.

What that means:

In May, the Biden-Harris administration announced the Housing Supply Action Plan to address this housing shortage. The Biden-Harris plan includes policies to combat restrictive zoning and provide additional funding for affordable housing construction. It proposes working with the private sector to address disruptions in the building materials supply chain, promoting ready-made housing and research and development in construction, and hiring more workers for high-paying construction jobs.

The plan also envisages countering the rise of large investors by taking steps to direct home purchases to owner-occupiers and nonprofit organizations rather than large investors, but it’s not clear how this will be achieved. The management plan claims the housing supply gap is 1.5 million units, well below Freddie Mac’s estimate of 3.8 million units, and that its plan will close the housing supply gap in five years.

While the plan is comprehensive, it will likely take much longer to fully solve our housing crisis, especially since many of the programs the government is pushing will have to go through Congress and will almost all take years to show significant results.

Jeffrey Zabel is an economics professor at Tufts University. His research interests include housing economics, valuation of environmental assets, brownfield economics, economics of education, and welfare analysis.

More about housing

Jeffrey Zabel: Where are house prices rising the most? And why are they rising so fast?

Aarthi Swaminathan: According to a Fannie Mae poll, Americans are increasingly frustrated with the economy and gloomy about the housing market

Katie Marriner: Here’s how much the housing stock has risen with higher rates. Our interactive map can help you track the number of homes for sale in your area.

https://www.marketwatch.com/story/restrictive-zoning-is-the-main-factor-squeezing-the-supply-of-housing-11657218446?rss=1&siteid=rss Opinion: Restrictive zoning is the main factor depressing housing supply

Brian Lowry

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