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Urban Planning, Foreclosures and the Recession

sam.staley@reason.org (Samuel Staley) — Thu, 12 Mar 2009 00:35:00 EDT

My recent blog post on Planetizen.com's Interchange sparked an extensive debate and discussion on the role of land-use planning and the housing bubble. The discussion thread does a good job of encapsulating some of the main concerns and rebuttals by professional planners when someone raises the simple possibility that growth controls increase housing costs.

Reason has published several studies on the impact of growth management laws, including ones on Washington State and Florida here, and an update on Florida for the James Madison Institute here.

Statewide Growth Management and Housing Affordability in Florida

sam.staley@reason.org (Samuel Staley) leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 01 Oct 2007 00:00:00 EDT

Florida is recognized as a national leader in the “Smart Growth” movement. The state has given housing goals a special prominence in regional and urban planning, explicitly requiring its cities to plan for a diverse range of housing needs and types.

However, a growing body of research strongly suggests that some of the goals of Smart Growth’s advocates may be inconsistent with the realities of housing development. To the extent that more compact, higher density urban development is encouraged through growth-management laws such as Florida’s, higher housing prices could result.

In fact, despite statewide planning goals and programs designed to promote affordable housing, housing costs have been increasing in Florida faster than the national average. According to the National Association of Realtors, home prices in Florida exceeded the national average for the first time in 2005.

Housing price increases have outpaced income growth. Indeed, since 1994, housing price inflation has outstripped income growth by a factor of two to one. Not surprisingly, housing affordability has suffered.

Housing affordability in Florida tracked the national average for much of the 1990s but declined significantly after 2000. Florida’s housing opportunity index – a measure of how many households can afford the “median” home based on income and housing price — has eroded sharply, particularly since 2005, falling well below the national level by 2007. While affordability nationwide was just over 10 percent lower in 2007 than in 1991, affordability in Florida has plummeted by more than 50 percent over the same time period and has eroded by nearly 60 percent since its peak at 80.7 in 1994.

Despite these trends, few analysts have examined Florida’s statewide growth management law and its impact on housing markets and prices. This is surprising because a large body of research has shown that local and statewide regulations on development significantly impact housing production and costs. Among the handful of studies that have examined Florida’s housing market, one conducted by Reason Foundation in 2001 found that Florida’s Growth Management Act (GMA) may have contributed as much as 20 percent to rising housing costs between 1994 and 2000.

This report updates and extends that previous study by analyzing housing price data from 1990 to 2006. A statistical analysis of housing trends in the 56 of Florida’s 67 counties found that as much as 16 percent of housing price inflation can be attributed to planning under the state’s GMA, a result consistent with previous analysis and research.

End, Don't Mend, County's Inclusionary Housing Program

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 28 Oct 2005 00:00:00 EDT

The housing crisis in Monterey County and the Bay Area is getting worse by the day.

Monterey now ranks as the third least affordable major metro area in the entire country behind only Santa Barbara and Los Angeles, according to the latest National Association of Home Builders/Wells Fargo Housing Opportunity Index. Just 3.7 percent of homes in Monterey County are affordable to families making the county's median income of $60,300 per year.

Certainly, a large part of the recent price increases is due to the historic real estate upswing and low interest rates. But it is also time for officials to start looking in the mirror and re-evaluating laws and regulations with unintended consequences that have seriously hurt first-time homebuyers and middle-income families.

The county planning commission recently started down this road by creating a subcommittee to study its controversial inclusionary housing program, which was supposed to increase the affordable housing available by requiring developers to build at least 20 percent of new units at below-market prices.

According to the county's latest Annual Housing Report, less than 20 inclusionary units were built in 2004, compared to a projected annual need of almost 340 new affordable homes.

Unfortunately, instead of asking the obvious questions — Why are we short 94 percent of our affordable housing goal? Did the plan drive away home builders or stunt other development? — the subcommittee is focusing on restrictions that prohibit owners of the "affordable" homes from reselling them at market rates. Housing advocates justifiably complain that these resale restrictions prevent homeowners from benefiting from their investments, effectively making them long-term renters.

But by failing to ask real questions, politicians are missing the big picture. Inclusionary housing programs have a proven track record of failure: they make affordable housing problems worse.

A Reason Foundation study by two San Jose State professors found that inclusionary zoning increased the price of new homes by up to $44,000 in the 45 Bay Area cities that had enacted the regulations. The average city produced less than 15 affordable units per year, and the authors estimated that inclusionary zoning would only produce 4 percent of the Bay Area's projected affordable housing need. Just as worrisome, the economists found that new housing construction decreased by 31 percent the year following the adoption of the mandates.

This isn't just a Bay Area phenomenon. The researchers, San Jose State's Benjamin Powell and Edward Stringham, found strikingly similar results in Southern California. Inclusionary zoning laws in Los Angeles and Orange Counties increased the price of new homes by up to $66,000 to compensate for the mandatory discounts on the "restricted" homes. And over the seven years following the mandates, new housing construction decreased by 61 percent, meaning 17,000 fewer homes were produced during the seven years after the adoption of inclusionary zoning.

The message is clear: inclusionary zoning laws have a disastrous effect on local housing markets, helping a select few — just 20 buyers in Monterey last year — while making homes more expensive for everyone else.

To effectively target the affordable housing crisis, Monterey County should assist and leverage non-profit organizations like Habitat for Humanity, who has built tens of thousands of affordable homes across the country. Encouraging the expanded use of market innovations like location-efficient mortgages — which offer preferential mortgage terms to families living in places deemed efficient in terms of auto commuting — is another idea worth exploring.

There are no quick fixes to the affordable housing problem. But removing self-implemented obstacles — like inclusionary housing mandates — that are needlessly driving prices even higher and failing to deliver anywhere close to the affordable units promised is a good place to start.

Leonard Gilroy is a certified planner and policy analyst at the Reason Foundation

Affordable Housing in Monterrey County

Sun, 01 Aug 2004 00:00:00 EDT

Executive Summary

Monterey County is in the process of updating its General Plan. The old proposed General Plan Update (GPU) had a number of problems and was voted down by the Board of Supervisors in May 2004. Now that Monterey County has an opportunity to draft a new General Plan Update, it can learn from the mistakes in previous work.

This report analyzes the old proposed General Plan Update and the Economic Impact Analysis (EIA) conducted by Applied Development Economics, Inc. We find that the economic analysis for the county is based on false premises and faulty economic logic. The future General Plan Update should seek to avoid the mistakes in the old proposed GPU and the EIA.

The old proposed GPU included numerous regulations that would have severely affected the livelihood of Monterey citizens. Among the documents’ stated goals were the reduction of residential development and the promotion of affordable housing. Unfortunately, these goals are contradictory. By mandating large minimum lot sizes and requiring developers to provide a certain amount of money-losing “affordable housing” units, the county would only reduce the available supply of housing. This would lead to price increases, quite the opposite of more affordable housing.

In addition, the GPU and the EIA made unrealistic assumptions about the cost of additional services and infrastructure required by new development, particularly in rural areas. Such rural areas currently do not receive full government services. Thus, including the cost of full government services in rural development impact projections is disingenuous. Those projects that require additional services in rural areas should instead be encouraged to ensure that developers provide the necessary infrastructure in their new developments or to form homeowners’ associations or other voluntary cooperative organizations to adequately address the homeowners’ needs.

The preservation of agricultural land is also a major issue. While supporters of the old proposed GPU and the EIA claim that the policies they advocate will aid farmers, the truth is that restrictive land-use regulations will only reduce the value of the farmer’s chief asset: his land. Scientific and technological advances have increased agricultural productivity. Farmers should have the flexibility to use their property as they see fit and the ability to make their own land-use decisions to improve their well-being. The old proposed GPU attempted to micromanage the economy of Monterey, and it would have led to dire consequences. In every case, the old GPU and EIA call for additional land-use regulations that would have only led to greater economic hardship and a diminished quality of life for Monterey County residents. The new General Plan Update should seek to avoid these mistakes.

Huge Hidden Tax on Homes

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Wed, 30 Jun 2004 00:00:00 EDT

Orange County Register

The median sale price of a home in Orange County hit $543,000 in May, according to Data-Quick, a real-estate information service. Now imagine finding out you paid a hidden tax of $66,000 as part of the purchase price of your new home.

Most buyers would regard this as unfair, yet that is exactly what is already happening in a number of communities in Orange County and Los Angeles. The hidden tax is called "inclusionary zoning" — and a number of cities such as Brea, Laguna Beach, San Clemente and San Juan Capistrano have already implemented it.

Inclusionary zoning is a price control that requires homebuilders to sell a portion of new homes in a development at below-market prices. A typical ordinance caps the maximum home value for 10 to 20 percent of a development so that it is "affordable" to families with low to moderate incomes.

It sounds harmless enough, but proponents of these programs mislead the public when they say there is no cost to these ordinances. Someone must pay for the subsidized units. That someone is you, when you buy a home.

When a subsidy to each "affordable unit" is required for permission to build, the subsidy acts as a tax on the remaining market-rate homes. This tax can be quite large. In some cities such as San Juan Capistrano and Laguna Beach, our research show inclusionary zoning drives up housing prices by more than $100,000 for each market-rate home.

Builders pass on this tax to land- owners and market-rate homebuyers. If they cannot pass it on, they simply stop building and move to other jurisdictions. Exactly how the tax is split between landowners and homebuyers varies depending on market conditions. Our new Reason Foundation report estimates that the inclusionary tax adds $33,000 to $66,000 to the price of a new home in the median Orange County and Los Angeles jurisdiction.

Allowing new home production to keep up with demand is the key to keeping housing affordable for everyone. Unfortunately, inclusionary zoning does the opposite. When landowners and builders are forced to absorb part of the tax, it lowers the incentive to build new homes. In the eight Southern California cities with data available, we found that in the seven years after passing an inclusionary ordinance, new housing production decreased by 61 percent. That amounts to 17,296 fewer homes in those eight cities. Yet during that time inclusionary zoning in those eight cities led to only 770 "affordable" units.

Homebuyers and taxpayers have to question whether a paltry 770 units are worth the cost when it means some 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, an estimated $11 billion worth of housing was essentially destroyed.

A housing production decrease of this magnitude forces buyers to bid up the price of both new homes and old. Housing becomes less affordable. Some might consider these costs worth it if the ordinances produced a significant number of "affordable units." Unfortunately, they do not.

The average jurisdiction with inclusionary zoning produces only 34 "affordable" units per year. Are the few homes produced really worth this enormous cost?

A number of Southern California cities, including Los Angeles, are considering imposing affordable housing mandates. Voters and their representatives would do well to study the track record of the existing Southern California ordinances before they move forward. They will find that inclusionary zoning acts as a tax, raises the price of most homes, produces few units and actually makes most housing less affordable.

Benjamin Powell, Ph.D. and Edward Stringham, Ph.D. are professors of economics at San Jose State University.

Affordable Housing Mandates Make Bay Area Less Affordable

info@reason.org (Owen Courrèges) — Tue, 15 Jun 2004 00:00:00 EDT

In the Bay Area it is "Affordable Housing Week," comprised of events aimed at raising awareness and educating area citizens about the problem of rising housing costs.

It's a great opportunity for constructive dialogue regarding the many problems currently being faced by families entering the Northern California housing market.

Yet many will no doubt use this week to boost affordable housing mandates, which are more prevalent in the Bay Area than in any other part of the state. These typically take the form of inclusionary zoning policies, which require developers to sell a certain percentage of their properties at prices well below what the market demands.

It all sounds very reasonable, at least at first blush. Developers sell for less, and buyers buy for less. What could be simpler or more effective?

Alas, these policies have yielded nothing but failure — and worse.

Despite the widespread implementation of inclusionary zoning, home prices in the Bay Area have become astronomical. The California Association of Realtors recently reported that a mere 21% of Bay Area residents can currently afford a median-priced home.

Today, in fact, the Bay Area is notorious for being the most expensive place to live in the entire country.

To make matters worse, home prices are still climbing. Although the increases have largely been modest, housing in the Vallejo-Napa corridor has risen by a staggering 12% since last year. Santa Rosa has risen by 9.9%.

Nationwide, on the other hand, housing affordability has been improving. Average home prices actually declined in the first quarter of 2004. According to David Lereah, Chief Economist for the National Association of Realtors, "most of households in the United States can readily afford a typical home."

But that's not the case for the Bay Area, and misguided government intervention is largely to blame.

A report released this April from the Reason Foundation found that the 45 cities in the San Francisco Bay Area with affordable housing mandates in place are actually losing approximately 2,300 homes to inclusionary zoning each year. This has increased median home prices by a staggering $22,000 to $44,000 in most areas, with some cities experiencing price increases of more than $100,000.

Moreover, upwards of $553 million in local tax revenue is lost each year, because inclusionary zoning dramatically reduces the accessed value of the homes that fall within its purview.

This occurs because inclusionary zoning, for all its good intentions, is still a distortion of basic market forces, and as Newton's third law states: "For every action, there is an equal and opposite reaction."

The "equal and opposite reaction" in this case is the passing on of costs from low-income homebuyers who purchase properties regulated by inclusionary zoning to virtually everybody else concerned.

The costs don't disappear; they're merely shifted around.

In your average city, inclusionary zoning costs homebuilders $45 million a year, since they are forced to sell at below-market prices. As a result, homebuilding becomes less profitable, and they elect to build fewer homes. This trickles down to the rest of society.

Homebuyers pay far more on average because fewer homes are built. Realtors lose money because there's less real estate to sell. Public services suffer because of the resulting decreases in tax revenue.

The only "winner" here, then, is the person who buys a home whose price is regulated. Everybody else pays, but they just don't know about it. That's why inclusionary zoning is often referred to by economists as an "implicit tax."

And since inclusionary zoning fails to keep up with the demand for low-income housing, most poor families end up paying more, along with every other homebuyer. Accordingly, inclusionary zoning hurts precisely those whom it is intended to help.

That's what happens when the government steps in. Instead of solving the problem, it only makes it worse.

Rather than focusing on what the government can do, "Affordable Housing Week" ought to emphasize what good can come from the unfettered market. If there's anything free enterprise does well, it's keeping costs low. The less the government regulates, the lower housing prices in the Bay Area will be.

Still, there is no silver bullet for high housing costs, and finding one should not be the point of "Affordable Housing Week." For in the end, what is billed as a panacea is usually no solution at all.

Owen Courrèges is a research fellow in urban and land use policy at the Reason Foundation

Do Affordable Housing Mandates Work? Evidence from Los Angeles County and Orange County

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Tue, 01 Jun 2004 00:00:00 EDT

Executive Summary

California and many urban areas nationwide face a housing affordability crisis. New housing production has chronically failed to meet housing needs, causing housing prices to escalate. Faced with demands to “do something” about the housing affordability crisis, many local governments have turned to “inclusionary zoning” ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable for people with lower incomes.

The number of cities with affordable housing mandates has grown rapidly, to about 10 percent of cities over 100,000 population as of the mid-90s, and many advocacy groups predict the trend will accelerate in the next five years. California was an early leader in the adoption of inclusionary zoning, and its use there has grown rapidly. Between 1990 and 2003, the number of California communities with inclusionary zoning more than tripled—from 29 to 107 communities—meaning about 20 percent of California communities now have inclusionary zoning.

Inclusionary zoning attempts to deal with high housing costs by imposing price controls on a percentage of new homes. During the past 20 years, a number of publications have debated the merits of inclusionary zoning programs. Nevertheless, as a recent report observed, “These debates, though fierce, remain largely theoretical due to the lack of empirical research.”

Our recent report, Housing Supply and Affordability: Do Affordable Housing Mandates Work?, filled the empirical research void. We measured the actual performance of these ordinances in the San Francisco Bay Area. This study follows up on our previous study by examining data from communities in Los Angeles County and Orange County to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. In Los Angeles and Orange Counties, 13 cities have an affordable housing mandate. These communities vary in size and density with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is working in Southern California.

These are our findings:

Inclusionary Zoning Produces Few Units

Since its inception, inclusionary zoning has resulted in few affordable units. The 13 Los Angeles and Orange County cities with inclusionary zoning have produced only 6,379 affordable units, with 70 percent of those units being produced in Irvine. After passing an ordinance, the median city produces less than eight affordable units per year. Inclusionary zoning cannot meet the area’s affordable housing needs.

Inclusionary Zoning Has High Costs

Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Los Angeles County and Orange County jurisdictions this cost associated with selling each inclusionary unit exceeds $575,000. In current prices the cost of inclusionary zoning in the average jurisdiction is $298 million, bringing the total cost for all inclusionary units in Los Angeles and Orange County to date to $3.9 billion.

Inclusionary Zoning Makes Market-priced Homes More Expensive

Who bears the costs of inclusionary zoning? The effective tax of inclusionary zoning will be borne by some combination of market-rate homebuyers, landowners, and builders. How much of the burden is borne by market-rate buyers versus landowners and builders is determined by each group’s relative responsiveness to price changes.

We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $33,000 to $66,000. In high market-rate cities such as San Juan Capistrano and Laguna Beach we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.

Inclusionary Zoning Restricts the Supply of New Homes

Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers—the very problem it was instituted to address.

We find that new housing production drastically decreases the year after cities adopt inclusionary zoning. For all 13 cities average production of housing fell the year following the adoption of inclusionary zoning. In the eight cities with data for seven years prior and seven years following inclusionary zoning, 17,296 fewer homes were produced during the seven years after the adoption of inclusionary zoning. In those cities 770 “affordable” units were produced. One must question whether 770 units are worth the cost in terms of 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, $11 billion worth of housing was essentially destroyed.

Inclusionary Zoning Costs Government Revenue

Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Los Angeles and Orange County inclusionary zoning ordinances is upwards of $752 million.

Price Controls Do Not Address the Cause of the Affordability Problem

Price controls fail to get to the root of the affordable housing problem. Indeed, by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply.

Supply has not kept up with demand due to these artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.

The solution is to allow more construction. When the supply of homes increases, existing homeowners often upgrade to the newly constructed homes. This frees up their prior homes for other families with lower income. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available, middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone.

Conclusion

Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market-rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable.

Inclusionary zoning ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.

Housing Mandates May Hit Los Angeles

info@reason.org (Owen Courrèges) — Wed, 05 May 2004 00:00:00 EDT

With some members referring to a "housing crisis," the Los Angeles city council recently voted 15-0 to request that the City Attorney's Office draft an inclusionary zoning ordinance. This would place L.A. among roughly 100 municipalities that require developers to charge below-market prices for a certain percentage of units for low to moderate income families.

At first blush, the proposal sounds reasonable. The cost of housing has been continually rising in L.A., and those lacking high incomes feel the pinch the most. Moreover, advocates claim that inclusionary zoning will promote more environmentally-friendly development and reduce congestion by placing employees nearer to their jobs. Some even argue that there might be an economic benefit for some communities, since such laws would attract a more diverse cross-section of income brackets, thus creating "income-integrated communities."[1]

Yet in spite of these seemingly good intentions, inclusionary zoning simply doesn't work—see Reason's recent report Housing Supply and Affordability (../ps318.pdf). Moreover, inclusionary zoning entails costs far beyond what advocates are willing to admit, and, worse, it is borne out of the unwillingness of planners to learn from their mistakes, stop fighting the market, and allow individuals to make their own choices sans interference.

A costless subsidy, or a phantom tax?

One advantage often attributed to inclusionary zoning over say, direct subsidies to low-income families, is that it costs local taxpayers very little. This, however, is not actually the case. Although inclusionary zoning generally does not expend much in the way of public funds, it shifts costs to homebuyers, landowners, other renters, and even low-income workers generally — the very people this policy is supposed to help.[2]

This is because inclusionary zoning, by providing below-market rents, must therefore pass the costs somewhere. They don't simply disappear. Dr. Arthur O'Sullivan, an economics professor with Oregon State University, wrote that "[t]he requirement of subsidized housing has the same effect as a development tax," and as such, "housing consumers and landowners pay for inclusionary zoning."[3]

What's truly troubling, however, is that these individuals are probably not aware that they're paying. In this way, inclusionary zoning is analogous to the Value Added Tax (VAT) which has come to such popularity in Europe. Unlike a sales tax, which is levied at the time of purchase, the VAT tax is assessed on products at various times during production. Thus it increases the price of goods before they even reach the shelves, and consumers have absolutely no idea exactly how much they're paying.

Politicians no doubt depend on this. By creating a zoning restriction that levies only an implicit tax onto housing consumers and landowners, they rightly believe that the existence of the tax, as well as the amount being paid, will not be known. This differs from direct subsidies, which have easily documented costs.

Accordingly, it would not be inaccurate to label inclusionary zoning as a kind of political subterfuge, a brand of which is simple to institute and difficult to abolish.

Reducing congestion, or reducing quality of life?

L.A. City Councilman Ed Reyes recently claimed that the implementation of inclusionary zoning will "mean that people who clean up buildings, people who assist our doctors, people who attend to public safety will not have to drive between two and four hours a day just to get to work." Thus Reyes contends that "[i]t will mean a relief of congestion and traffic."[4]

One can quickly identify Reyes's unfounded premise — that inclusionary zoning, by encouraging poorer workers to move to high-density areas, must therefore lessen the overall traffic load. In reality, cities with higher population densities tend to have higher rates of congestion. Wendell Cox, a Los Angeles native and founder of the Wendell Cox Consultancy, has shown that there is a solid positive relationship between population density and traffic volumes, which leads to an uptick in congestion.[5]

According to Cox, this trend even applies internationally. "The higher densities of urban areas outside the United States,— Cox writes, "are associated with much higher traffic volumes per square mile (despite their usually far superior transit systems)."[6] London's legendarily horrendous traffic, for example, is primarily the result of high density combined with an automobile-oriented society. Just imagine the implications for California!

Now this is often regarded as counterintuitive, but the data speaks for itself. Greater density, far from cutting traffic, actually slows down traffic by confining it to a smaller area. As expected, this causes travel times to increase and a marked decrease in air quality. Overall, it constitutes a net loss for quality-of-life issues.

Helping the poor, or a wider agenda?

By raising the issue of density, Councilman Reyes makes clear he has invested himself in the ideology of smart growth, which holds in its crudest form that higher population densities are always better. Alas, this is more an article of faith than of reason. It is also usually a matter of one group attempting to force their personal living preferences on society at large. Regrettably, the very nature of zoning accommodates this kind of localized tyranny.

Yet in this case, Reyes is attempting to exercise that control in a way that benefits a select few low and middle-income workers at the expense of virtually everyone else. Although the housing costs are slight in apartments regulated by inclusionary zoning, the vacuum created leads to higher rents for all other tenants, the poor included. It is unlikely that this fact has escaped Reyes or the rest of the council.

Hence the claim that inclusionary zoning is designed to help the poor is more of a ruse than anything else. It�s about molding a city in an image desired by city planners, an image that must invariably collapse under the weight of its own impossibility.

The poor simply don't fit into this. If the L.A. city council truly desired to assist the indigent, they would instead abolish zoning entirely. It is zoning, after all, that commonly allows communities to ban multi-family dwellings. It is zoning that stifles the market and restricts residential living to certain areas. It is zoning that allows anyone with political power to manipulate development in whatever way and for whatever purpose.

The Los Angeles city council is acting like a fool trying to get out of a deep hole. Instead of trying to climb their way out, they're digging deeper with hopes of reaching the other side. The sooner they realize that this strategy doesn't work, the sooner the citizens of L.A. can finally solve their own problems. They have little need for this brand of "help."

Owen Courrèges is a research fellow in urban and land use policy at the Reason Foundation

Footnotes

[1] Burchell, Robert W. and Catherine C. Galley, "Inclusionary Zoning: Pros and Cons," New Century Housing 1 (2000).

[2] Jerald W. Johnson, "Issues Associated With the Implementation of Inclusionary Zoning in the Portland Metropolitan Area," The American Dream Coalition 1 December 1997: 8.

[3] Ibid.

[4] Stewart, Jocelyn W. and Jessica Garrison, "Affordable Housing Set for Debate," Los Angeles Times 6 Apr. 2004.

[5] Wendell Cox, "How Higher Density Makes Traffic Worse," The Public Purpose 57 (2003).

[6] Ibid.

Housing Supply and Affordability

info@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) — Thu, 01 Apr 2004 00:00:00 EST

Executive Summary

This study attempts to fill the research void. In this paper we use data from communities in the San Francisco Bay Area region to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. We chose the Bay Area because inclusionary zoning is particularly prevalent there; today more than 50 jurisdictions in the region have inclusionary zoning. These communities have various sizes and densities with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is probably working nationwide.

These are our findings:

Inclusionary Zoning Produces Few Units

Since its inception, inclusionary zoning has resulted in few affordable units. The 50 Bay Area cities with inclusionary zoning have produced fewer than 7,000 affordable units. The average since 1973 is only 228 units per year. After passing an ordinance, the average city produces fewer than 15 affordable units per year.

Inclusionary zoning cannot meet the area’s affordable housing needs. At current rates, inclusionary zoning will only produce 4 percent of the Association of Bay Area Governments’ estimated affordable housing need. This means inclusionary zoning will require 100 years to meet the current five-year housing need.

Inclusionary Zoning Has High Costs

Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Bay Area jurisdictions this cost associated with selling each inclusionary unit exceeds $346,000. In one fourth of the jurisdictions the cost is greater than $500,000 per unit, and the cost of inclusionary zoning in the average jurisdiction is $45 million, bringing the total cost for all inclusionary units in the Bay Area to date to $2.2 billion.

Inclusionary Zoning Makes Market-priced Homes More Expensive

We estimate that inclusionary zoning causes the price of new homes in the median1 city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.

Inclusionary Zoning Restricts the Supply of New Homes

Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers—the very problem it was instituted to address.

In the 45 cities where data is available, we find that new housing production drastically decreases the year after cities adopt inclusionary zoning. The average city produced 214 units the year before inclusionary zoning but only 147 units the year after. Thus, new construction decreases by 31 percent the year following the adoption of inclusionary zoning.

In the 33 cities with data for seven years prior and seven years following inclusionary zoning, 10,662 fewer homes were produced during the seven years after the adoption of inclusionary zoning. By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing was essentially destroyed.

Considering that over 30 years inclusionary zoning has only yielded 6,836 affordable units, one must question whether those units are worth the cost in terms of fewer and higher-priced homes.

Inclusionary Zoning Costs Government Revenue

Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Bay Area inclusionary zoning ordinances is upwards of $553 million.

Price Controls Do Not Address the Cause of the Affordability Problem

Price controls fail to get to the root of the affordable housing problem. Indeed by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply. From 1990 through 2000, the Bay Area added nearly 550,000 jobs but only about 200,000 new homes. The California Department of Finance recommends 1.5 new jobs per new home—the Bay Area produced only 55 percent of the suggested amount of housing.

Supply has not kept up with demand due to artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.

Conclusion

Inclusionary ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.