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The Role of ADUs in Easing America's Housing Crisis

New research points to the policy and market conditions that help spread these small rental units which can be added to existing properties and ease housing shortages.

A basement conversion ADU in Portland, Ore., also commonly called basement apartments, mother-in-law units, in-law units, secondary suites, English basements, accessory apartments, and a host of other names. (
For many Americans, an affordable home is harder than ever to come by. A fed up public is now realizing that local constraints on building housing and resulting high prices and rents have plagued the United States’ most productive regions for decades. In this environment, state policymakers are increasingly searching for statewide solutions to ease the housing crunch.

Accessory dwelling units (ADUs) — small rental units that can be added to existing properties and ease housing shortages — are at the forefront of these efforts. From an affordability perspective, ADUs are an attractive reform option because these units can rent for hundreds of dollars less than apartments in the same neighborhood. In new research, Abigail Houseal and I show how both the overall policy landscape and conditions on the ground can affect the number of ADUs built.

Nationwide, median rent in the United States increased by 22 percent in the five years between 2016 and 2021 while median household incomes increased by only 15 percent. This amounts to an alarming decrease in housing affordability, leading policymakers in some states to establish guardrails on local zoning authority (primarily local governments’ domain for the past century). The most popular approach has been legalizing the building of ADUs for homeowners across an entire state.

ADUs can take many forms. In Washington, D.C., they are most likely to be an apartment in a rowhouse’s English basement. On the West Coast, they’re often backyard cottages or converted garages.

Among the eight states that broadly allow ADUs (California, Connecticut, Maine, New Hampshire, Oregon, Utah, Vermont and Washington), the relevant laws vary widely. At one end of the spectrum, California policymakers have gone the farthest to protect homeowners’ right to build ADUs. On the other, New Hampshire policymakers legalized ADUs but left open the opportunity for local zoning ordinances to put many limits on them.

California legislators first legalized ADUs in 1982, requiring localities across the state to allow homeowners to add a second unit. But in response, local governments established so many barriers to building them that few homeowners found it worthwhile. For example, some localities charged exorbitant “impact fees” for second units despite relatively few new local service costs. Others required homeowners who wanted to build ADUs to go through a discretionary review process including a public hearing, an intimidating, expensive process.

Many California localities only permitted ADUs with deed restrictions preventing a unit from being rented out separately from the main house if the property owner didn’t live on site. These owner occupancy requirements have been a big limiting factor in ADU construction. They mean that a homeowner would never have the option of renting out their primary residence if they also rent out their ADU. They also make ADU financing more difficult.

Starting in 2017, a series of California state laws now prevents localities from implementing any of these important barriers to ADU construction. The results have been an impressive surge in permitting, particularly in Los Angeles and San Diego. Across the state, 60,000 ADUs have been permitted, homes for tens of thousands of people made possible by state reforms.

But having the right policies in place is only part of the picture. Two other key determinants of ADU construction — and of its potential to lower prices in a given city or neighborhood — are how easy it is to adapt the existing housing stock to include them and the willingness of local homeowners to take the leap to build them.

We studied ADU construction under New Hampshire’s much weaker ADU law. While localities there are allowed to hinder ADUs just as California cities once did, some are still experiencing four times as much ADU construction as Los Angeles did prior to California’s recent liberalization.

What explains this rate of construction in New Hampshire? One factor is demographics. New Hampshire has the oldest population of all U.S. states except Vermont. Seniors are important for both the supply and demand of ADUs. Older homeowners are most likely to have the home equity or other savings to finance an ADU. Seniors are also particularly likely to be residents of an ADU on a family member’s property that facilitates intergenerational living. In fact, many ADUs in New Hampshire are built when an elderly person sells their property and uses the proceeds to build the unit at their adult child’s house.

Additionally, New Hampshire’s large lots and large houses make it easy to add ADUs at minimal cost. In New England, many old houses have additions or basements that provide natural spaces to add ADUs relatively inexpensively.

A bill under consideration in the New Hampshire Legislature would expand the state’s homeowners’ options for building ADUs. It would require localities to allow larger, detached ADUs through a by-right process. Today, many New Hampshire localities permit ADUs through slower, riskier conditional use permits. The conditional-use permit process stymied California ADU construction prior to recent reforms.

Are ADUs the right approach for legalizing more housing everywhere? They have much to offer. Because many homeowners can see themselves wanting the right to add an income-generating or relative-accommodating ADU to their property at some point, they may be the least contentious way to create opportunities for more housing within existing residential neighborhoods.

We see from California that even a state where many houses are relatively small and sit on small lots, the right policy can lead to significant levels of ADU construction. In places with underused existing space, like large New England houses that might just house one or two people, conditions are ripe for adding ADUs if some of the existing policy barriers to building them can be rolled back.

Given current ADU construction rates in New Hampshire, implementing California-style ADU policy could potentially go a long way toward more being built in parts of the country where many homeowners already have extra space.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.

Emily Hamilton is a Senior Research Fellow and Director of the Urbanity Project at the Mercatus Center at George Mason University. She can be reached on Twitter at @ebwhamilton.
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