Putting Housing in Little Boxes

After 100 years of increasingly strict land-use regulations that particularly target the least expensive types of housing, more Americans than ever are suffering from housing affordability problems. Now, instead of dismantling the rules that make housing scarce, some jurisdictions are piling on new restrictions that target particular uses, like short‑term rentals and investor‑owned homes. It’s another set of limitations — in some cases on the types of homes where housing-poor Americans are seeking refuge — and it risks making the problem even worse.

Progressive reformers brought early zoning rules to U.S. cities, drawing inspiration from German city planning. However, the U.S. iteration took restrictiveness to new levels. For example, even Germany’s so-called “exclusively residential” zones generally allow both single-family and apartment construction as well as shops and hotels.

Some of the earliest U.S. zoning regulations were quite liberal by today’s standards. New York City’s original ordinance separated some commercial uses from some residential uses and required tall buildings to have stepbacks from the public right of way. In the century since, single-room occupancy rentals have been all but eliminated, cutting off a natural landing pad for new residents seeking opportunity.

In America’s suburbs, rules mandating everything from large yards to brick cladding to fancy garage doors have cut out new starter homes. Occupancy restrictions can make it harder to take in roommates and make housing more affordable that way.

The expanding scope of land-use regulations has contributed to deteriorating affordability for renter households and for those hoping to become first-time homeowners. As Figure 1 below shows, the share of income that today’s typical renter household spends on housing costs has increased by more than 50 percent compared to the typical renter household in 1960.
In some pockets of the country, policymakers have successfully relegalized relatively inexpensive types of housing. Cities like Washington, D.C., have opened up new areas to apartment construction. Others like Houston are allowing new single-family houses to be built on smaller pieces of land. California now allows homeowners to add backyard cottages for rent. But in many cases, the rate of housing construction remains far below healthy historical norms.

Regulating Residential Uses by Length of Stay

As these incremental liberalizations take place, policymakers in cities around the world are limiting or banning short-term rentals (stays often booked through platforms like Airbnb). When platforms make it feasible for tourists to stay in housing that would otherwise be occupied by locals, data does indicate that the increased added demand leads to an increase in house prices and long-term rental rates. However, housing construction also increases in response.

More importantly, short-term rentals’ effect on affordability pales in comparison to that of land-use regulations. One widely cited study of the effects of short-term rentals on the price of long-term rentals estimates that a 1 percent increase in Airbnb listings increases the typical renter’s costs by 0.018 percent and increases the typical home value by 0.026 percent.

Contrast this “Airbnb tax” with estimates of the “zoning tax” — the cost that land-use regulations that constrain housing supply add to house prices. One estimate finds that in the San Francisco region, home of the country’s largest zoning tax, the cost of zoning accounts for more than $180,000 of the price of the typical new house built on vacant land. Even if the city’s share of short-term rentals were to double, its house prices could be expected to increase by $29,000 (a comparatively modest percentage increase on already-expensive homes).

Keeping Renters Out of Single-Family Houses

Investor-owned single-family houses are another recent boogeyman in the housing affordability discussion. Even people who do not oppose new owner-occupied single-family housing or new rental apartments may oppose these homes. They fall outside of the housing arrangements envisaged by 20th-century U.S. housing policy: single-family subdivisions intended for owner-occupants, with renters mostly confined to apartment zones. Unsurprisingly, policymakers have introduced bills that would ban purpose-built single-family rentals in states.

As my colleague Kevin Erdmann explains, build-to-rent single-family housing is an anomaly caused by a confluence of policy decisions. Zoning regulations are tightly constraining the supply of more natural types of rental housing, including apartment buildings and mobile home parks. Changes to lending standards have made it more difficult to secure mortgages for buyers who would have qualified prior to Dodd-Frank, but are now cut off because their incomes are too low or too difficult to prove, or their credit scores are anything less than pristine.

Like short-term rentals, investor-owned single-family homes provide one route for capital to flow toward residential real estate in a market that is starved for it. Structures built to serve as build-to-rent single-family houses or short-term rentals will likely be converted to another use down the line, so this investment may one day directly benefit long-term renters or owner-occupants.

We cannot fix an affordability problem by banning its side effects. Major reforms to land-use policy remain the necessary step toward a return to the low-cost types of housing that used to be prevalent in U.S. cities. They remain the way to create better options for shelter for those who are shut out by our now-rigid systems.

Rather than chasing out Airbnbs and institutional buyers, policymakers have to relegalize the housing they have spent decades regulating away.