Housing crisis

Can inclusive zoning put a stop to the housing crisis?

Zoning laws have a long history in America, dating back to the early 20and century. Often, exclusions of certain types of property, such as apartment buildings, have been used to separate communities racially. The award-winning book The color of the law by Richard Rothstein gives a detailed history of housing discrimination and the racial segregation that accompanies exclusionary zoning. The Fair Housing Act of 1968 was supposed to rectify some of these unfair policies and practices by prohibiting discrimination based on race, national origin, religion and other areas. But the law fails to prevent discrimination based on class, providing a legal way to confine low-income people to specific neighborhoods. Things like minimum lot sizes and onerous building requirements have consistently prevented low-wage housing construction from locating in areas with better opportunities. Exclusionary zoning is still the norm in many American cities, and it separates communities and worsens America’s housing crisis.

These exclusionary zoning laws come in many forms, but in a nutshell, they are land use restrictions that include only one residence per lot. Exclusionary zoning severely impedes the construction of multi-family housing that would increase housing supply and provide affordable housing. The rules apply at the local level, but overall they add up in cities and towns across the country to contribute to housing unaffordability. Exclusionary zoning was primarily seen in coastal areas and large metropolitan markets, but is now more common in cities of all sizes and market conditions. Restrictions are more prevalent in the suburbs, but urban cores have recently seen more exclusive zoning.

The impact of these restrictions is that they create areas of concentrated poverty and concentrated wealth. Unfortunately, affordable housing is already expensive to build, and recently the pressures of inflation and more expensive building materials have made the situation worse. If the cost of housing is to come down, it will be thanks to the densification that only accompanies multi-family developments.

A difficult beast to tame

Economic experts have warned of rising housing costs for decades. Their prophecies, on the whole, have come true. Multiple solutions have been proposed, but the complex economic factors that contribute to the problem are difficult to sort out and disentangle. An increasingly popular solution is to replace exclusion zoning with inclusionary type. Inclusive zoning policies aim to encourage affordable housing for builders and sometimes make affordable development mandatory. For example, some inclusion policies will require 10-15% of rentals to be booked as “affordable,” typically using median household income requirements for qualification. Often conditions are set to ensure housing remains affordable, and these conditions sometimes extend for up to 30 years.

An example of inclusive zoning can be found in Massachusetts State Law 40B. Chapter 40B is a law that allows zoning boards to approve affordable housing if at least 20-25% of the units have long-term accessibility restrictions. The bylaw was enacted in 1969 to address the state’s affordable housing shortage and reduce barriers created by local zoning, approval processes, and other restrictions. Chapter 40B has helped generate more than 60,000 affordable housing units since the early 1970s. More than half of these units are reserved for households with incomes below 80% of the area median. Inclusive zoning laws such as this have also been tried in Oregon, California, Pennsylvania and New Jersey.

Minneapolis took a more radical stance, and in 2020 became the first major US city to ban single-family zoning in all neighborhoods. Minneapolis officials hope the historic and controversial policy will bring a slew of duplexes and triplexes across the city. Another reason for the ban is that Minneapolis’ population is rapidly proliferating and needs to increase housing for future demand. Minneapolis-St. Paul needs to add about 14,000 homes each year to meet future demand, according to the Family Housing Fund, but right now they’re only building about three-quarters of that on average.

Several approaches and strategies have been tried to stimulate affordable housing, some have made progress, but most have not been sufficient. Inclusive zoning helps, but affordable housing is a tough beast to tame. According to Allen Feliz, vice president of affordable housing managed services at MRI Software, the impact of inclusive zoning and prohibitions like the one in Minneapolis varies because policies often have many different goals, not just increasing affordable housing. For example, other policy goals include reducing racial wealth gaps. Feliz also said a problem with laws is their effective enforcement. “The main driver of success is policy enforcement, and some regulators don’t have the will or the bandwidth to enforce it,” Feliz said. “The only way to ensure compliance is for local governments to register, but enforcement sometimes isn’t done long term.”

Close the gap

It’s not just zoning that’s affecting the housing crisis. Affordable housing is difficult to make profitable for many developers. The federal low-income tax credit is the most abundant financial resource to help fund affordable housing, but Feliz said many transactions cannot be completed without additional resources. Projects still need top-up funding, so housing advocates are pushing governments to do more. The gap between how much revenue a building will generate based on rents and what developers have to pay lenders keeps many units affordable before they even start, according to the National Housing Conference. Without enough tax credits and grants, developers have to take out bigger loans, and many lenders won’t provide them. If the rent is really affordable, the net operating income of the property will often be too low to be justified.

Housing advocates are fighting hard for more subsidized housing assistance, but it’s a fight that will take a long time to resolve. A recent and significant federal step came in the form of a $5 billion competitive grant program passed by the Biden administration in the summer of 2021. The program encourages exclusionary zoning reform by giving money to jurisdictions that remove barriers to more affordable housing. The grant package was part of a larger program to expand access to home and small business ownership in black and minority communities.

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The Biden agenda, particularly the focus on eliminating exclusionary zoning, should help. But in addition to exclusionary zoning, other factors have created a general housing shortage in America. Housing starts have been depressed since 2008, and the shortage is driving up housing prices, according to Charles McNally of NYU’s Furman Center, who studies housing, neighborhoods and urban policy. “The 2008 financial crisis started in the housing market, and we never really recovered,” McNally said. There are plenty of options for building more than single-family homes, but McNally said that just doesn’t happen as much. One reason is that some developers may be reluctant to take on affordable multi-family projects that are more expensive to build, opting instead for safer, more lucrative single-family projects.

Long way to go

Nowhere is the housing crisis worse than in California, where the median home price is expected to hit $834,400 in 2022 and about 161,000 people are homeless. Governor Gavin Newsom recently signed sweeping legislation to address the crisis, the largest commitment to affordable housing in state history. The $22 billion legislative package aims to create 84,000 affordable homes and fund the state’s housing accelerator to streamline affordable deals that had been stalled. The bill also expands the Housing Crisis Act, cuts red tape and is expected to speed up affordable developments. Finally, the law will establish new zoning rules for multi-family units. Feliz said California courts had little incentive to fix things, so there was a need for the state to play a bigger role. The law should have a positive impact, according to Feliz, and will, among other things, help families to live closer to their place of work.

California, of course, is far from the only place in America where housing prices have cost many houses and some directly on the streets. The housing crisis is caused by many structural economic factors that will take years to resolve. For proof of this, look no further than how quickly cities are becoming unaffordable. People leaving the big, expensive metros like New York and San Francisco flock to places like Spokane, Washington, and inevitably, housing prices in those cities spiral out of control. An excellent New York Times article explained how, just a few years ago, a Spokane household earning the median income could afford about two-thirds of the homes on the market, according to Zillow. Over the past two years, an influx of new residents has driven up house prices by 60% and “priced large swathes of the population and fomented an escalating housing crisis marked by resentment, fighting over zoning and tents”. Recent survey data shows that only one out of 167 apartments is currently vacant in Spokane. The same story is playing out in cities and towns across America.

Replacing exclusionary practices with inclusive zoning policies can help fight affordable housing, but it’s only one piece of the puzzle. The housing crisis in the United States reflects several deep inequalities in our society, primarily the growing income gap. Overall, the lowest 10% of incomes in the United States have seen the largest increase in costs since 1980, while the highest 25% of incomes have seen their costs fall, according to a study by Apartment List. Renters of all income levels are spending more on rent than they did in 1980, while landlords are paying a smaller fraction of their monthly salary for housing. Even though the housing crisis is a symptom of larger socioeconomic issues, inclusive zoning and legislation like California’s are steps toward bringing more affordable housing to market and balancing the scales.