Exploring the Current State of Knowledge on the Impact of Regulations on Housing Supply

Exploring the Current State of Knowledge on the Impact of Regulations on Housing Supply

Highlights

• Researchers have developed analytical tools to test the effect of regulations on housing costs and have found that the stricter the regulatory environment is, the greater its impact on the cost of housing.
• Density requirements limit housing options for low- and moderate-income families seeking quality housing in high-cost markets.
• Researchers can determine both costs and benefits of land use regulations and make empirical distinctions between necessary regulations that enhance public health and safety but increase cost, and regulations that are burdensome without offering commensurate public benefits.

Although local and state housing regulations are usually passed with good intentions, they often serve as barriers instead, impeding the development and availability of affordable housing without providing residents with a commensurate health and or safety benefit. Many of these regulations prolong the completion of new construction and rehabilitation and exacerbate the high housing costs that burden residents of certain communities. This article will review early research on the cost of regulatory barriers, discuss how this research has evolved since the Great Recession and the ensuing housing crisis, and offer recommendations for further inquiry.

Environmental requirements and other regulations, including those that respect and preserve historical and cultural tradition, are necessary. Significant regulatory trends over the past 10 years, however, have exacerbated an already serious affordability problem. Both anecdotal and empirical research indicate that in the suburbs, NIMBYism (Not in My Back Yard, or resistance to unwanted development in one’s own neighborhood) may have worsened; many suburbs have enacted restrictions on affordable housing development, employed exclusionary zoning, imposed restrictive subdivision controls, and established complex review processes and requirements for permit approvals. These barriers can effectively exclude rental and affordable housing developments from a community. In addition, some environmental protection regulations have increased in complexity, creating new mitigation requirements, lengthy approval processes, and added consultant expenses that raise development costs and restrict development opportunities. Schill argued that researchers should carefully consider regulations that, while costly, are effective at promoting the health and safety of community residents versus those that respond to demand for additional development beyond what is necessary to maintain a high quality of life for those residents. He examined changes in the median sales price of new residential housing starts over time and found that from 1990 to 2002, the cost of new development rose by 52 percent, driven in part by the costs associated with restrictions on design and building type.1

Large-lot zoning limits or prevents the development of affordable housing.

A growing number of communities have introduced poorly conceived growth management and growth containment strategies without also implementing policies to ensure a stable supply of land to accommodate community growth. Communities are also increasingly imposing impact fees that are intended to cover the upfront infrastructure costs of development; in some cases, these fees have exceeded the actual costs generated by growth and have had a regressive impact. Urban barriers such as slow and burdensome permitting and approval systems, obsolete building codes, and difficulties associated with infill development are also significant impediments to the development of affordable housing in cities. For example, Quigley and Raphael created an analytic tool to test the effect of regulations on housing costs. Applying the hedonic pricing method to California housing costs between 1990 and 2000, they found that the more strangled the regulatory environment, the greater the impact on the cost of housing, increasing prices by nearly 5 percent for single-family homes and 2.5 percent for rental units.2

Regulations also restrict the supply of housing by depressing housing starts. Quigley and Raphael found evidence that land use controls such as minimum and maximum allowable densities, delays in the permitting process for residential construction, and growth containment strategies such as urban growth boundaries are all strongly associated with high-cost housing.3 Increasing evidence suggests that many communities, particularly those in growing suburbs, are engaging in practices that limit the construction of high-density multifamily housing, particularly affordable rental housing. These practices may persist even when high-density housing is legally permitted in the community and demand for such housing exists.

Indeed, residents of growing suburban communities are demonstrating strong demand for low-density housing. Renowned economist Ed Glaeser and his colleagues’ seminal work involved an analysis of land use restrictions on rental housing supply in New York City, Boston, San Francisco, and Washington, D.C., between 1980 and 2000. They hypothesized that competition among builders to respond to consumer preferences for certain housing options drives down development costs in the absence of regulations. The argument is that the home building industry exerts considerable influence on the decisionmaking process, as elected officials often take cues from builders who are attuned to the preferences of voters who put them in office. If voters are unhappy with a development plan that does not reflect these preferences, they can and often do “vote with their feet.” As such, decisionmakers respond by finding ways to strike a balance between satisfying voter preferences and reasonable land use regulations that address larger community health and safety needs while reducing the development cost burden and negative spillover effects. The researchers rely on American Housing Survey (AHS) data to estimate the marginal value of available land and compare it with rising construction costs in these areas. Their analysis indicates that height restrictions on buildings, imposed to prevent overcrowding and congestion, could be responsible for increased housing costs. Their conclusion confirms that density requirements limit the available choices for low- and moderate-income families in search of quality housing in these high-priced markets.4

Although multifamily rental housing is not automatically or exclusively affordable, it makes up a substantial portion of the nation’s affordable housing stock. AHS data indicate that growing suburban communities throughout the country are experiencing severe shortages of affordable housing, and many of these communities likely have a substantial amount of land zoned for multifamily housing development. Empirical evidence, however, suggests that these communities are engaging in practices that severely restrict the development of high-density multifamily housing despite the existence of as-of-right zoning laws that permit its development.

Slow and burdensome permitting processes add to housing development costs.

In addition to these regulatory trends are extensive regulatory barriers, including high infrastructure costs, restrictive and obsolete local building practices, bureaucratic inertia, exclusionary zoning practices, protracted project reviews, and excessive property taxes and fees as well as public opposition to affordable housing. These barriers significantly raise development costs; prevent the development of affordable housing in areas with high job growth, forcing lower-income households to live far from job opportunities; and limit available market-rate and affordable housing options, including higher-density housing, multifamily rental housing, accessory units, and manufactured homes.5

Several researchers have measured the effects of housing regulations. Joseph Gyourko and his team developed the Wharton Residential Land Use Regulatory Index, an analytical tool to quantify the impact of regulations on the amount of housing built and the cost of housing. The researchers created a national survey of more than 2,500 municipalities across the country to understand variations in regulatory policies, practices, and procedures and their effects on the land development process. From the data, they developed an aggregated index that tests for “regulatory stringency” to estimate the cost of development over time for state and local governments, ranking states based on their degree of regulatory strictness. They concluded that the more stringent a state’s regulatory environment, the higher the cost of its housing, which prices low- and middle-income Americans out of high-opportunity communities.6 Their continued work to measure the effects of the local, regional, and state regulatory environment on housing development has been used by researchers nationwide.7

Dalton and Zabel developed a fixed-effects model that accounts for the endogeneity of local land use regulations and controls for cross-jurisdictional spillover. Their analysis of unit characteristics and lot size requirements in San Francisco and the greater Boston area from 1987 to 2006 found that policymakers implemented most zoning regulations in response to political pressure to keep taxes low and to meet the communities’ demands for public goods and amenities. These pressures, however, also resulted in negative externalities, including the unequal distribution of public services and increased housing costs, that adversely affect low-income families. The findings themselves are not surprising, but they confirm and quantify a well-known but unverified observation: that large-lot zoning and various site development requirements limit or prevent the development of affordable housing.8 These requirements, therefore, can harm a community’s ability to provide moderate-income residents with broad access to homeownership and rental opportunities.

Current Research on Regulatory Barriers to Housing Affordability

More recently, scholars have attempted to update their analyses on the regulatory impacts on availability of affordable housing. For example, Haifang and Tang studied housing price fluctuations by examining market trends in 300 large cities before and after the Great Recession. Holding all else constant, they found that governments impose more regulation on less developable land, resulting in higher housing prices after the recession.9 Hilber and Robert-Nicoud confirmed that land use restrictions increase the cost of housing, especially in high-demand markets.10

On the positive side, Furman noted that housing starts have recently increased and existing housing has appreciated in value, which has generated wealth for middle-income families. Land use restrictions, however, have not only continued unabated but have also become more expansive.11

The evidence is clear that land use regulations disproportionately affect low- and moderate-income families by limiting housing options and driving up housing costs.12 And, as Gyourko and Molloy pointed out, most researchers agree that the costs of regulations are quantifiable.13 However, more studies are needed to empirically measure the efficiency and public benefits of regulations. Reaffirming this point, Reeves et al. confirmed that land use regulations still pose significant challenges for low-income families searching for quality neighborhoods with access to good schools, job opportunities, and attractive community amenities.14 Even though post-recession household incomes have improved as low- and semiskilled workers take advantage of employment opportunities, the authors found that in modest and high-cost housing markets, local governments use their zoning powers to price out low-income families, bowing to pressure from upper-middle-income households to preserve or increase home values.

The United States continues to grapple with rising inequality in housing. Lens and Monkkonen examined the regulatory environment of the 95 largest U.S. cities and found that the number of local approvals for new residential development is highly correlated with income segregation. In addition, they found that only specific types of land regulations, most prominently, density requirements, result in high levels of income segregation. They argued that local governments require more assistance from state governments to address increasing inequities resulting from fragmentation and burdensome bureaucratic requirements that slow down the permit approval process.15

Higher density for single-family housing can be achieved through reduced setback requirements or zero lot line development.

Recommendations for Further Inquiry

With the rising demand for quality, affordable housing choices, regulatory reform has reemerged as a prominent issue at the federal, state, and local levels. As states and municipalities grapple with the challenges involved in meeting this demand, researchers should respond by advancing evidence-based research on regulatory barriers. Researchers could, for example, continue to develop measures of the degree and intensity of the effects of regulatory restrictions on housing outcomes at the local and regional levels and update existing measures as needed. Researchers are also documenting local and state regulatory practices to help understand how the regulatory environment affects the supply elasticity of housing. This research could eventually be compiled into a data repository that could be used to create indices or for further investigation.

Researchers should also make empirical distinctions between necessary regulations that enhance public health and safety but may increase the cost of housing and regulations versus those that are simply unnecessary or burdensome. More evidence is needed to determine both the costs and benefits of land use restrictions on housing development.

More research is needed to quantify the impact of minimum-parking requirements on housing development. Ikeda and Washington, for example, suggested that minimum-parking regulations themselves, rather than the public demand for additional parking spaces, are associated with the high cost of housing in urban areas.16

In addition, ample evidence confirms that the permitting process is often slow and burdensome.17 Researchers should continue to review procedural practices, such as the use of special permits rather than the as-of-right permitting process, that may impede the development of affordable housing. Studies on the availability of fast-track permitting are also needed for a richer analysis of impacts. To understand how certain types of regulations affect development decisions, researchers should compare the ways that residential regulations and commercial and industrial regulations affect land values and housing outcomes. Planning decisions that will greatly affect a community’s future built environment could be driven, in part, by policymakers’ inability to anticipate the community’s needs.

Finally, studies are needed to examine incentive-based strategies employed at the state level to strengthen local and regional capacity to respond to regulatory challenges to housing. Williams, Sturtevant, and Harper’s review of state policies that allow for enhanced jurisdictional reviews of housing needs, evaluation of state housing requirements that align with local and regional goals, and examination of how states can offer communities technical advice and assistance, for example, considerably improves our knowledge base in these areas.18

Conclusion

Between 2000 and 2030, the United States will develop approximately 213 billion square feet of homes, offices, and other commercial and industrial building — two-thirds the amount built as of 2000.19 Adopting a path that favors more compact forms of development can lead to greater environmental quality and social equity as well as create more housing choices for American families.

The evidence demonstrates that a positive relationship exists between land use regulations and the cost of America’s housing. State and local land use regulations still constitute a significant part of the review process for housing development projects, representing a significant investment of resources and time by applicants, who must respond to these requirements, and by the public agencies who administer the reviews. To ensure that local and state policies significantly reduce the regulatory cost barriers associated with land and site development standards, policymakers would have to focus on the most significant land use controls identified by researchers: excessive zoning regulations and house size requirements. Researchers who commit to further investigation of the costs and potential benefits of regulations would be making a critical contribution to evidence-based research on affordable housing policy.

— Regina C. Gray, HUD Staff

1. Michael H. Schill. 2005. “Regulations and Housing Development: What We Know,” Cityscape: A Journal of Policy Development and Research 8:1, 5–19.
2. John Quigley and Steven Raphael. 2005. “Regulation and the High Cost of Housing in California,” American Economic Review 95:2, 323–8.
3. Ibid.
4. Edward L. Glaeser, Joseph Gyourko, and Raven Saks. 2005. “Why is Manhattan So Expensive? Regulation and the Rise in Housing Prices,” Penn IUR Publications 8, 333.
5. Glaeser and Ward (2009) noted that the lack of affordable housing is not necessarily a national epidemic; the problem is subject to local housing market conditions. To illustrate the point, they examined housing supply elasticity in Boston during the past 25 years and found that the greater Boston area has been facing a land shortage because of increasing demand for low-density development. However, they warn against assuming that the lack of available land alone drives up the cost of new construction. Rather, they found evidence that land use regulations — primarily subdivision requirements such as minimum lot sizes — drove both the decline in construction starts and the rise in housing costs through the mid-2000s. Edward L. Glaeser and Bryce A. Ward. 2009. “The causes and consequences of land use regulation: Evidence from Greater Boston,” Journal of Urban Economics 65, 265–78. Also note that Gyourko and Saiz (2006) argued that regulatory impositions on where and how housing is built greatly affect the total costs of land acquisition and construction. Joseph Gyourko and Albert Saiz. 2006. "Construction Costs and the Supply of Housing Structure," Journal of Regional Science 46:4, 661–80.
6. Joseph Gyourko, Albert Saiz, and Anita Summers. 2008. “A New Measure of the Local Regulatory Environment for Housing Markets: The Wharton Residential Land Use Regulatory Index,” Urban Studies 45:3, 693–729.
7. See, for example, Turner's (2015) seminal analysis of the acquisition process, how land is parceled out for different types of housing, and the “degree of restrictiveness” of regulations across borders. Matthew Turner. 2015. “The Economics of Land-Use Regulations,” PERC Reports 33:2.
8. Maurice Dalton and Jeffrey Zabel. 2009. “The Impact of Minimum Lot Size Regulations on House Prices in Eastern Massachusetts,” discussion papers series, Department of Economics, Tufts University.
9. Huang Haifang and Yao Tang. 2012. “Residential Land Use Regulation and the US Housing Price Cycle between 2000 and 2009,” Journal of Urban Economics 71:1, 98–9.
10. Christian A.L. Hilber and Frédéric Robert-Nicoud. 2013. “On the Origins of Land Use Regulations: Theory and Evidence from US Metro Areas,” Journal of Urban Economics 75, 29–43.
11. Jason Furman. 2015. “Barriers to Shared Growth: The Case of Land Use Regulation and Economic Rents,” remarks prepared for proceedings at the Urban Institute, Washington, DC, 20 November, 3.
12. Sanford Ikeda and Emily Washington. 2015. “How Land-Use Regulation Undermines Affordable Housing,” Mercatus Center, George Washington University.
13. Joseph Gyourko and Raven Molloy. 2015. “Regulation and Housing Supply,” in Handbook of Regional and Urban Economics 5B, Gilles Duranton, J. Vernon Henderson, and William C. Strange, eds. Oxford, UK: Elsevier, 1289–337.
14. Richard V. Reeves and Dimitrios Hilikias. 2016. “How Land Use Regulations are Zoning Out Low-Income Families,” Social Mobility Memos, Brookings Institution, 16 August.
15. Michael C. Lens and Paavo Monkkonen. 2016. “Do Strict Land Use Regulations Make Metropolitan Areas More Segregated by Income?” Journal of American Planning Association 82:1, 8. See also Calder's (2017) work examining variations in regulatory environment across states. Specifically, she used a dataset containing count decisions affecting land use activities in 44 states, then compared them with the distribution of federal aid. She found that more restrictive zoning regulations are associated with increased average housing prices in 36 states, thus limiting housing options for low- and middle-income families and increasing those families' reliance on federal rental subsides. Vanessa Brown Calder. 2017. “Zoning, Land Use Planning, and Housing Affordability,” Policy Analysis 823: 1–15, CATO Institute.
16. Ikeda and Washington, 14.
17. Leslie Braunstein. 2016. “Increased Use of Wood, Reduced Parking May Reduce Multifamily Construction Costs,” Urban Land Newsletter, 16 November; Vicki L. Been. 2016. Testimony Prepared on behalf of the Department of Housing Preservation and Development City Council Subcommittee on Zoning and Franchises Hearing on the Zoning for Quality and Affordability Proposal, 10 February.
18. Stockton Williams, Lisa Sturtevant, and Rosemarie Harper. 2017. “Yes in My Backyard: How States and Local Communities Can Find Common Ground in Expanding Housing Choice and Opportunity,” Urban Land Institute, Terwilliger Center for Housing, Washington, DC.
19. Arthur C. Nelson. 2004. “Toward a New Metropolis: The Opportunity to Rebuild America,” 7.