Is zoning the answer to the affordable housing crisis?

It’s similar to a bill signed into law in neighboring Oregon last year that bans single-family zoning and gives local governments until the end of 2020 to come up with plans to implement it.

“It’s going to be an interesting experiment,” said Bonnie Hastings, an appraiser in Portland, Oregon, who said her neighbors are worried. “It will be fascinating to see what property values do in these situations.”

In other words, if a developer puts apartments in the middle of a single-family neighborhood, will it make the surrounding homes less desirable, and thus less valuable?

It’s a nearly $30 trillion experiment, if it were to expand across the nation. That’s the combined value of single-family homes in the U.S., based on the U.S. Census Bureau estimate of 95 million houses and National Association of Realtor data on average single-family home prices.

A critical shortage of housing inventory and a lack of affordable homes is pushing some lawmakers to consider extreme measures that just a few years ago would have amounted to real estate heresy. 

But these are extreme times. Homelessness has surged in some areas of the country, particularly in states where housing is the most expensive, like on the West Coast. 

“One thing that really doesn’t help property value is when you have a homeless camp down the street from you, and that is happening more and more,” Hastings said. 

Zoning was put on the radar last year when President Donald Trump signed an executive order establishing a White House Council on Eliminating Regulatory Barriers to Affordable Housing. 

Such regulations include: “overly restrictive zoning and growth management controls; rent controls; cumbersome building and rehabilitation codes; excessive energy and water efficiency mandates; unreasonable maximum-density allowances; historic preservation requirements; overly burdensome wetland or environmental regulations; outdated manufactured-housing regulations and restrictions; undue parking requirements; cumbersome and time-consuming permitting and review procedures; tax policies that discourage investment or reinvestment; overly complex labor requirements; and inordinate impact or developer fees,” according to the executive order signed in June 2019.

THE AFFORDABLE HOUSING SHORTAGE

But regulations, which maintain safety standards and, in some states, address climate change or earthquake issues, aren’t the only culprit when it comes to the housing shortage.

U.S. homebuilders are still on the sideline after the worst housing crash since the Great Depression began in 2007. Today, median home prices have recovered and then some – home prices are about 15% above the bubble peak in 2006, according to the S&P CoreLogic Case-Shiller National Home Price Index.

But construction has failed to keep up with household formation. 

“We are still underbuilding due to supply-side constraints like labor and land availability.”

Robert Dietz, National Association of Home Builders chief economist.

One reason is: Smaller builders that put up most of America’s new homes haven’t gotten back in the game. Many of them were wiped out in the financial crisis.

Another big reason is a dearth of construction workers, according to Federal Reserve Governor Michelle Bowman, one of the people who votes on the central bank’s monetary policy.

It’s an industry that in the past has relied heavily on immigrant labor, with various measures putting the foreign-born share of workers at a quarter of the labor force. Some of those workers left the U.S. when the construction industry crashed over a decade ago and never came back. Others have been scared away by current immigration policies.

“The ratio of job vacancies to unemployment in the construction industry – a measure of labor market strength – shot up to historic highs at the end of 2018, and it has remained near those levels,” Bowman said in a speech in Kansas City, Missouri, earlier this year. “These indicators confirm what I have been hearing from construction industry employers during my visits to different parts of the country – it’s extremely difficult to find and hire workers, skilled or otherwise.”

The lack of new supply has become the housing market’s “chokepoint,” said Lawrence Yun, chief economist of the National Association of Realtors.

“We have an acute housing shortage,” Yun said. “Consequently, people’s rents and home prices are rising faster than income growth, and have been for years.”

Help is on the way. Most major housing forecasters, including NAR, predict single-family housing starts this year will be near 1 million, the highest since 2007. 

But, that’s not going to be enough to solve the housing shortage. Since 2001, 17.6 million single-family homes were built, while 20.2 million households have been formed.

This means that there has been a cumulative supply shortage of 2.6 million units.

realtor.com

INDUSTRY LOOKS TO ZONING TO SOLVE AFFORDABLE HOUSING

When families invest their life savings to buy a home, the expectation until now has been the government would provide a measure of stability for the neighborhood it sits in using zoning regulations.

For most middle-class families, their home is their largest financial asset. The growth in value expected for the property is a big part of their retirement planning, and it may even be part of their plans to educate their children. Some families tap equity using junior mortgages to fund tuition payments when it’s time to send their kids to college.

A property’s zoning is one of the fundamentals concerned family and friends lecture newbie buyers to check before sinking most of their net worth into a home.

If your neighbor opens a car repair business in his driveway, your home will not be as desirable when it’s time to sell. 

And, while single-family zoning bans don’t allow such commercial uses, permitting apartment buildings in areas formerly reserved for houses will create dramatic increases in density, which might detract from a property’s value.

“We’re all going to be hit the same,” said Hastings, the West Coast appraiser. “If an apartment building goes up next door, a home often will sell for less. But if we’re all in the same situation, if all our lots have that potential, we’re going to be equally affected.”

A home’s value usually is measured in comparable sales – meaning, what similar homes in the area recently sold for, excluding transactions that weren’t arms-length. And the mantra you’ll hear about measuring real estate value is: a home is worth what a reasonable buyer will pay.

When it’s time to sell, and potential buyers are coming to look at your home and see a newly built apartment building sticking out like a sore thumb next door, will your property sell for less?

It’s not a given, said NAR’s Yun. And, if there is a reduction in value, it will probably just be temporary, he said.

“If there is a dip, it will be easily overcome with an increase of demand within a few years as the neighborhood becomes more vibrant and more walkable,” he said. “Initially, people will be concerned about more residents moving into neighborhoods, and there will be concerns that maybe neighborhood values will take a hit, but given the housing shortage, real estate prices are rising.” 

Home prices have increased consistently since 2012, according to the S&P CoreLogic Case-Shiller National Home Price Index. Low mortgage rates and a shortage of homes on the market have supported price gains by boosting competition. 

In other words, while no one knows for sure what will happen to the value of houses in areas where single-family zoning is suddenly banned, it may be a good time to find out.

“This time is the perfect opportunity to address the housing shortage,” said Yun. “I think people will understand that because of the housing shortage there is a greater demand for people wanting three- or four-unit buildings, and it could raise overall values in a neighborhood.”

Ultimately, though, it’s up to local governments, he said.

“Locals should consider all the alternative ways to boost housing supply, including zoning relaxation, and perhaps single-family to multifamilies, if the locals desire,” Yun said.

There could be greater profitability for home sellers – whether longtime owners or real estate investors – if they are allowed to increase density. It’s something real estate flippers have been doing in cities for years: Buy a single-family home in neighborhoods that already allow multifamilies and convert it into condominiums.

The individual units sell at a lower price point, but the combined dollar volume is higher. 

For example, take a four-bedroom home in Portland, Oregon, that lists at $500,000. If you put $120,000 into renovating it into a pair of two-bedroom condominiums that sell for $375,000 each, you could walk away with $130,000 after paying for the conversion.

THE HISTORY OF ZONING

Zoning dates to the 1910s when some of America’s largest cities began enacting laws to control development by designating areas for specific uses. Builders wanted to be able to assure potential renters or homebuyers that a factory or a gas storage tank wouldn’t be built next door. 

The main zoning categories were: Residential, business, and industrial. As time went on, those broad categories were given further restrictions, such as whether multifamily or single-family homes could be built in residential zones.

America’s love affair with single-family zoning began after the troops came home from World War II. The government provided both the means and opportunity for explosive growth of suburbia. 

The “means” was low-cost mortgages for veterans, part of the Servicemen’s Readjustment Act of 1944, commonly known as the G.I. Bill. The “opportunity” was highways that connected cities with open land where tracts of homes could be built.

When Gen. Dwight D. Eisenhower became president in 1953, he worked for the passage of the Federal Aid Highway Act that created a network of new highways across the U.S. For “Ike,” as he was known, it was a national security issue – he could more easily move troops around the country if needed. For builders, it was an opportunity to open new markets in suburbia.

Between 1950 and 1960, builders constructed 11 million single-family homes, a record that has never been beaten, according to Census data. 

William Levitt, owner of Levitt & Sons, was one of the most prolific builders. In 1947, he began selling single-family homes built on potato fields on New York’s Long Island. He created an assembly line system that had the capacity to build a house in a single day, with each worker repeating a single task. Eventually, he built seven towns. 

It was during that time, as America was frantically building to accommodate vets returning from the war, when wide swaths of residential neighborhoods were designated as single-family. 

It was common to “grandfather” existing structures, meaning a two-unit building in a single-family zone would be designated as legally non-conforming and exempt from compliance.

Zoning was intended as an inducement for people to invest their money in an undiversified asset – a home.

For most American families, their residence is also their largest financial asset. Zoning was a promise of stability from the government.

Buyers were plunking down their life savings on a house in a neighborhood full of other single-family homes – sometimes on quiet streets chosen so their kids could bike or play without heavy car traffic – and they wanted it to stay that way. 

Some communities passed zoning laws that were racist. In addition to some individual property deeds banning ownership by non-whites into perpetuity, there were cases where cities and towns tried to segregate races into designated neighborhoods, even though a 1917 Supreme Court ruling said such laws interfered with the property rights of owners.

The legality of all types of racial discrimination in housing ended when President Lyndon Johnson signed the Civil Rights Act of 1968, which contained a section that became known as the Fair Housing Act. 

Today, some say racism still exists in zoning, though it’s less obvious. They say exclusionary zoning that keeps affordable housing out of some areas through land use and building code requirements has a racial component. One example would be a suburban town that has a two-acre requirement, or more, to build a single-family home. 

Critics reason that because of long-standing bars to achievement, such as inequality in school systems and systemic racism in business that prevent career advancement, those economic hurdles have a disproportionate impact on non-whites. 

Massachusetts came up with a solution to income-exclusionary zoning in 2008 when it tweaked an old law to give it more teeth. The name of the 1969 law is the Comprehensive Permit Act, but it’s known as “40B” for its chapter in the Massachusetts General Laws.

Under 40B, if less than 10% of a community’s housing qualifies as affordable – meaning it could be purchased or rented by a household making up to 80% of the median income of the area – developers can override zoning and build multifamily units as long as a designated portion are affordable.

That got towns very interested in making sure there were affordable options for people who wanted to live in their communities. 

The law remains controversial, and in 2010 there was an unsuccessful attempt to repeal it using a ballot question. But for now, affordable housing advocates count it as a win in their drive to provide homes for families.

It’s an example of how some states have come up with measures short of single-family zoning bans to address affordable housing issues. 

Whether statewide bans spread beyond the West Coast, or more incremental approaches win the day, will determine the fate of America’s single-family neighborhoods.