The Big Solution

There is a way forward

Photo by Josh Olalde on Unsplash

Earlier this week I wrote about how the biggest acute threat to the American economy is the housing market (read that post here). The rapid increase in housing prices, coupled with higher interest rates, is making homeownership the most unaffordable it’s ever been. If housing prices stay this expensive relative to incomes, and I expect them to, then it will do substantial damage to the economy. People will be unwilling to move because they are locked in at low interest rates, middle-class Americans will not be able to build equity through homeownership, and stagnation is a likely outcome. Every time an individual doesn’t move because they can’t afford to, that represents a loss in efficiency. Compound that over millions of people over several years and it produces a real drag on growth. Worse yet, hundreds of thousands of Americans can’t afford housing at all and are left homeless.

This problem has been discussed by many, and several solutions have been mooted. Government intervention is often one of the first ideas. Have the government build thousands of properties for people and rent or sell them at subsidized rates. Others suggest more regulation to force builders to decrease the amount of market-rate housing and increase the amount of affordable housing. The problem with the first is that the government usually does a terrible job building housing; look at their track record anywhere in the country and you’ll find plenty of government housing projects from the 1950s onward that have already met the wrecking ball. A government project of the magnitude needed would be incredibly expensive and undoubtedly lead to government corruption and waste. The problem with the second is that forcing developers to build affordable units may be costless from a government spending perspective, but is incredibly expensive in terms of lost welfare. Developers build units that people most want to live in. Deviating from this is going to result in suboptimal units, suboptimal tenants, or both.

No, the answer to America’s housing problem won’t be fixed by more government intervention. It will be fixed with less. American zoning and building regulation need a radical overhaul.

Building requirements in the United States have done a slow creep from the sensible to the insane. There is a dizzying patchwork of rules and regulations that strangle residential construction across the United States. Most of these regulations on their own do little. Taken together, however, they work very well to strangle residential development. The result? The perpetual enrichment of the land-owning class while the rest are kept outside the market or outside on the streets. The rules are everywhere. Height restrictions to preserve views or to explicitly limit growth. Minimum lot and unit square footage that are laughably high. Parking requirements. Prohibitions on four people living in the same house. Single-family zoning.

Start with occupancy limits. To take one example, Fort Collins, Colorado, prohibits more than three unrelated individuals from living together in a single-family house. If four friends rent 2,000 square-foot house with four bedrooms and live there, they are breaking the law. This is done of course “to help ensure health and safety of residents, and to help protect the quality and character of neighborhoods.” It’s also nonsense. Occupancy limits are done to increase the value of property. If four friends have to rent two houses instead of one, that increases the demand for rentals and thus increases property value.

Nearby Boulder County, Colorado has a strict height limit. No residential building can be above 30 feet tall. The entire county has banned mid-rise apartment buildings! This “is an important tool in minimizing the impact of structures on the landscape and in increasing the compatibility of new structures with the surrounding neighborhood.” In other words, the building limit is there to make sure no one loses their view of the mountains (God forbid). Given that a lot of Boulder County land is “open space”, and can’t be built on at all, there isn’t any way to significantly increase density. People are not allowed to build out or up. The result? The median home price listing in the city of Boulder, Colorado is now $1.3 million.

New Haven, Connecticut has a bunch of rules that limit density. Want to split a three-story rowhouse into a garden-level one-bedroom apartment and a two-story main unit? Good luck. Each unit has to have its own parking spot. Never mind that New Haven is a compact city with decent public transportation and high walkability. Each unit has to have room for cars that aren’t even being used! On top of that, there is a minimum gross floor area of 1,500 square feet. That is absurdly large.

The worst offender, however, is zoning requirements. Specifically, neighborhoods in cities across the country only allow single-family homes to be built. This effective ban on what were the most common urban residential structures has fundamentally changed the US property market forever. According to Henry Grabar in his book Paved Paradise, “the production of buildings with two to four units fell more than 90 percent between 1971 and 2021”. What we think of as residential construction has been entirely defined by regulations.

The idea that in major US cities, townhomes, let alone high-rise apartments, are banned, is ludicrous. Things have reached the point of parody in New Hampshire, where 84 percent of the buildable land in the state has a limit of one house per acre. These rules do nothing more than push property prices to the moon. People will often say zoning is necessary and point to Houston as what happens when there is no zoning. The reality is that Houston may not have zoning, but it does have plenty of other rules that still make dense residential development illegal in much of the city. Plenty of US cities had little to no zoning until the 20th century, and today those places are some of the most desirable parts of the country.

All these rules are great for property owners. By making it difficult to impossible to build housing in much of the country, property prices will be inflated to artificially high levels far higher than the free market would ever allow. This brings us to the first hard truth everyone needs to accept. Truth the first: housing can either be affordable, or it can be a good investment. It cannot be both. If we as a society agree that the average earner should be able to purchase a home in most of the country, then housing cannot appreciate at a rate faster than inflation. If we as a society agree that housing should be a good investment that slowly makes property owners wealthy, then housing will cease to be affordable. Housing can be a wise investment, in the sense that building equity in property slowly but surely increases wealth in the same way that buying treasury bonds does. It cannot, however, be a good investment in the sense that one can make a substantial amount of money by just buying property and waiting.

The second hard truth people need to accept is that there is a large tradeoff to protecting a neighborhood's “culture” or “character”. It makes housing unaffordable and forces people to be homeless. It also reveals a strong affinity for status quo bias. Status quo bias is the distaste for change. The idea that the world needs to stay exactly as it is. The desire to preserve culture or character is understandable. Wonderful neighborhoods are wonderful for a reason. But change is also good. Neighborhoods are always changing. Old character is replaced by new character.

A great example of this is the Pilsen neighborhood in Chicago. Pilsen is named for Pilsen, Czech Republic. Unsurprisingly, it was named that because thousands of Czech immigrants moved to the neighborhood in the 19th century. The neighborhood was a hub of immigrants from Central and Eastern Europe who moved there en masse. For decades people from Poland, Lithuania, Slovakia, and other nations moved to Pilsen. They started churches and opened businesses.

Today, that culture is gone. During the 20th century, immigration to Chicago changed. Thousands of Latino immigrants, mainly from Mexico, moved to Chicago. Then thousands became tens of thousands. Many of them moved to Pilsen. The descendants of Eastern European immigrants moved to the suburbs. Restaurants selling perogies were replaced by restaurants selling tacos. And what was the result? Did Pilsen become a soulless neighborhood populated by indistinguishable masses? No. Instead, Pilsen has been named one of the coolest neighborhoods by several publications. Not one of the coolest neighborhoods in Chicago, or even the United States, but the entire world! The character changed from one great thing to another. As one would expect, that has led to gentrification and another round of handwringing. Will Pilsen’s unique Latino character be preserved exactly as it is today? No. And that’s ok. Pilsen will continue to evolve. It won’t be frozen in the 2020s or the 1920s, nor should we want it to.

Neighborhoods will always be evolving and changing and developing. We must let them. Throughout history, one of the reasons America has been so wealthy is the flexibility to move towards wealth. From the Great Migration to “Go West, young man”, America has thrived when people could up sticks and move to a region that was more prosperous than their current homes. The system only works, however, if housing can increase to satisfy demand. Under a free market, it will. Yes, neighborhoods will change and buildings will be destroyed. But it will be affordable, and it will put people in the best position to prosper.

This is not a claim that all residential regulations should be ripped up (although that would be an improvement over the status quo). It’s a claim that building regulations need to be significantly scaled back. Some rules can stay. To preserve the most valuable historic properties, a municipality could be allowed to preserve some moderate amount, say 20% of existing structures. But development should be assumed to be good, and rules need to be targeted to prevent only the most egregious structures that are totally out of place.

Happily, the YIMBY (yes-in-my-back-yard) movement is gaining steam. Cities and even states are banning single-family zoning. People have begun to realize that parking requirements only cement the car's status as necessary. Stratospheric rents next to homeless encampments are making people question why more isn’t being built. But this will take time. Many of the laws are reinforcing. A ban on single-family zoning only works if building multi-unit structures is allowed. Dismantling them will take years of hard work. Development afterward will take decades. This is not a problem that will be fixed overnight. But as the saying goes, the best time to plant a tree was twenty years ago, but the second best time is today.