State & Local Housing Reform: A Catalog of Ideas

‘Yes-in-my-backyard’ reforms can increase the supply of housing and bring prices down.

While there are sometimes genuinely new approaches to solving housing inflation, the best policy is always the simplest one: more housing. This might seem obvious, but too often, “affordable housing” policy involves offering subsidies to purchase or rent the scarce housing that already exists: a formula for yet more housing price inflation.

Because my writing appears in multiple outlets, this living document is designed to serve as a comprehensive repository of my most useful writing on the topic of how states and localities can increase housing supply. The links lead to the complete post or article addressing the topic in the paragraph.

Affordable Housing in the 21st Century

More housing supply is always the solution

Housing inflation is always and everywhere a phenomenon created by a lack of supply combined with rapid increases in demand due to population and job growth. This is the immutable principle that guides the best approach to housing: the cure for rising housing prices is always more housing, not more money. This is why I say, “We don’t need more affordable housing, we need more housing so that it is affordable.”

State legislatures can make a difference

It is time for states to start crafting local housing and land use policy. For most of the last 100 years, state governments have typically left housing policy to local governments. Courts have largely deferred to locals as well. But increasingly, state governments are expressing their frustration with local governments. Most haven’t move ahead by leaps and bounds however. When states do get engaged, here are some principles to keep in mind.

• Measure what matters; cost burden isn’t a good planning metric.
• Require local governments to reform local zoning and housing laws.
• When zoning is reformed, don’t include inflationary affordability requirements.
• Condition state funds and LIHTC allocation on measurable reductions in regulations.
• Preempt local governments from passing inclusionary mandates and price controls.
• Simplify and consolidate tenant/landlord laws.
• Base state funding on need (e.g., poverty rates, vacancy rates) rather than political clout or population.
• Allow use of debt for projects that capture value and deliver cost savings.

Measure what matters

The old rule of thumb that housing should cost no more than 30 percent of gross pre-tax monthly income is arbitrary. Residual income cost burden — the measure of whether a household has enough money for housing after paying other essential expenses — is a more realistic indicator of affordability. There is too much expectation placed on the rule of thumb, as if the housing price problems in the country would be over if every household sorted perfectly into units of housing that were exactly 30 percent of monthly income. Some people pay more and are fine, some people pay less and still struggle. Along with redefining poverty measures, affordability needs a closer look.

Measuring housing cost burden — the amount a household pays over the 30 percent threshold — in isolation is no way to plan for the future and should not define housing policy. The Census data that informs cost burden is at best a snapshot in time. The amount above 30 percent might be from housing price increases or loss of a job or changes in wages. And assuming that the number of people paying more than 30 percent means a city should build exactly that many units at huge costs doesn’t follow. Maybe those families need modest help with their rent payments or with day care or other costs. Measures of affordability need to include the full picture of household expenses and income.

End traditional zoning

There is a cheap and easy way to add more housing supply: declaring independence from zoning. Since the Euclid decision, a Supreme Court decision from hundred years ago, segregation of uses has led to segregation of people, pushing them apart from each other with some living in sprawling suburbs and others in dense apartment zones. That’s why zoning is a 20th century solution to a 19th century problem. Work and life have changed in the last century, and people want to live in dense, walkable neighborhoods that provide easy travel between their jobs, leisure, and home. Building codes that ensure safe housing should be maintained, but zoning laws add unnecessary complexity, and limits on density which can make housing scarce and expensive.

When the market fails, use fast, efficient, cash subsidies for housing

Subsidies for housing are important when markets fail to provide sufficient options without substitutes. Today, funds to help families with housing follow a long, inefficient, and overly complicated path that doesn’t lead to housing for people who need it now. Worse, those funds usually wind up with government agencies, non-profits, for-profit lawyers, accountants, contractors, and developers. Policymakers should understand that efficiency is compassionate and people can solve problems when given the right tools. State and local governments need to reform zoning and land use laws to allow the maximum production of housing. This means solutions like smaller apartments, flexible uses, using modular construction components, and building on community land trusts.

If all of those fail to provide housing for people who don’t earn enough money to pay rent that covers the costs of financing, construction, and operations, then subsidies make sense. But those subsidies should be fast and easy to get and in the form of cash. Reviews of cash-based programs during the COVID pandemic show that providing cash for housing is better than adding more building alone. The Housing Choice Voucher program — more commonly known as Section 8 — was devised to act like cash, limiting big capital costs for government like buying land and construction. But today, the program needs reform because its voucher rules stifle genuine opportunities to help people.

The Low-Income Housing Tax Credit needs reform

For almost 40 years, the single largest housing intervention from at federal level is the Low Income Housing Tax Credit (LIHTC), a complex scheme that allows private companies and individuals to avoid taxes. The program is expensive and hard to use. In 2023 alone, the program will forgo more than $13 billion in federal revenues which will be allocated to state housing finance agencies to build rental housing with rent restrictions. Total development costs per unit are rising to shocking levels, as much as $1 million per unit in California.

I’ve previously written about the LIHTC’s unintended consequences, specifically that it ends up subsidizing bad local housing policy. When local governments add regulation, fees, and exactions to the production of market rate housing, prices go up. This creates an artificial “housing crisis” which the LIHTC offsets with a flood of tax credit equity. This is inflationary and inefficient, since the private sector gets the blame for the prices and the answer to the pain for people with less money is expensive LIHTC units with long waiting lists.

The federal government needs to unwind the LIHTC program, making it much easier to use for developers and individuals. For example, a developer could get a tax benefit if she builds a 100-unit apartment building and restricts rents in half the units to 50 percent of Area Median Income. After the building is in service, she can get back the difference between what she charged for rent and what the market would bear every year for 12 years. She could also borrow all that money up front and claim the interest as well. This gives her a capital infusion at the beginning of the project and tax benefits. At the same time, the community gets 50 units of subsidized housing. And individuals could claim a deduction for any rent they pay above 30 percent of their monthly income. While this next best solution is also inflationary, it is nowhere near as inflationary as $1 million dollar apartment units.

Eviction, fair housing, and housing as a ‘right’

Fortunately, in the United States, there is no eviction epidemic. When we took a closer look at one city, Cincinnati, we found that less than one percent of 160,000 rental housing units actually experienced a complete eviction. When eviction does happen, it is often necessary and unfortunate — but not economic. Sometimes people behave in unsafe ways. And when it is because a household is struggling, the best intervention is to just pay for that family’s rent! Cash for rent is the fastest, and most efficient and compassionate solution.

Everyone should have a safe, decent, and reasonably priced place to live. The reality in the United States is that poverty disproportionately affects people of color. That’s why on the 50th anniversary of the passage of the Fair Housing Act, FREOPP argued that expanding housing supply is a civil rights issue. We said that:

Funding from the [HUD Community Development Block Grant] program should be exclusively given to local jurisdictions that measure housing issues using established Fair Market Rent and market data to analyze price trends, the impact that regulation has on prices, establish serious efforts to roll back and eliminate regulation that limits supply, and proposes models for subsidy dollars that are not reliant on capital expenditures but investment in reducing poverty and creating improved access to economic opportunity for families.

The best thing the federal government can do to advance fair housing and eliminate the persistent racial gaps is to demand accountability from local governments and require measurable improvements in supply.

Some advocates base their policy suggestions on the idea that housing is a right, and should therefor be an entitlement, available to everyone regardless of ability to pay. But housing is not a “right” in the traditional sense of the word. But supposing that if it were, and policymakers endeavored to guarantee 500 square feet of housing to every person in America, someone would have to find land, figure out how to pay for it, build it, and then operate it. With state and local laws being what they are, people who need housing would still face disutility of long waits because of rationing. I’ve said over and over that people expect housing policy to be fair, efficient, and that there should be more.

Homelessness

It is too simple to say that housing is fundamentally an economic issue, or a drug issue, or a function of mental illness. It is all these things in a complex. The sooner we step away from ideological frameworks and blame, the sooner we can recognize that most homeless people need more than just an apartment key. If we allowed market production to achieve its maximum benefit and subsidized households with cash where the market reaches its limits, we could turn resources to provide not just housing, but comprehensive services to support recovery and self-sufficiency. In Salt Lake City and Boston, efforts to relieve people living on the street were successful when the problem was carefully defined and resources adequately brought to bear, specifically with intensive case management.

In Memphis, Tennessee, the answer to growing encampments on public land was a combination of enforcement with asking the practical question, “Is there any place you’d rather be?” Local leadership realized that many people living outside simply don’t want to live in a congregate shelter and they took this seriously. They responded with more individualized shelter options that warranted the tradeoff of the freedom of living outdoors with the benefits of being safer and healthier. They found that homelessness is, for the most part, a solvable problem with the enough proper resources.

Where can those resources come from? Value capture works. In Seattle, people who were using fortified alcohol purchased from local convenience stores were getting injured and arrested. A program of “wet housing” was offered; residents could drink in their units. Arrests and emergency visits fell, and so did costs. And eventually many of the residents sought treatment. An instrument called a social-impact bond could be used to borrow money to make big interventions and the debt retired from real savings; again, this is efficient and compassionate.

Rural housing challenges

There is a conundrum in rural communities in America; housing is cheap and rents are low, so there is no incentive to invest in new housing. But people in those areas still need more housing. So, vacancy rates drop down to almost zero, and rural workers and families find themselves in a real bind, facing lower wages and rising housing costs. But an analysis I completed found that in Washington state, subsidy funds weren’t making it to rural counties. They were consumed by urban areas with restrictive land use and zoning policies. Wealthy, urban counties receive billions of dollars in LIHTC while poorer areas with housing scarcity get little. Congress should review and consider expanding the 514, 515, 516, and 521 rural rental housing programs, and the 236 program which incentivizes low interest home loans. But more attention is needed to address this ongoing disparity.

What not to do: Mandatory inclusionary zoning and rent control

Local governments are leaning on market rate developers with demands that they include rent-restricted housing in their developments; if they don’t, the local jurisdiction will extract fees to leverage LIHTC for subsidized housing projects. This is inflationary: the fees get paid by renters in the buildings and is a form of enforced bribery. In many cases, laws passed might be unconstitutional. In any event, the best thing local governments can do is resist the urge to indulge in these policies , despite their popularity, particularly from groups on the populist left. When feasible, states should preempt local governments from passing these measures.

Legislatures should also do what Ohio recently did and preempt rent control. Every single jurisdiction that has rent control has skyrocketing rents. That’s because rent control is inflationary and has a net negative effect on housing supply, harming people who need housing the most: those with less money. At FREOPP, I published a primer on why rent control doesn’t work.