Biden’s innovative idea for tackling skyrocketing housing prices

A dozen pages into the fact sheet for President Joe Biden’s infrastructure plan, he marks a growing shift in Democratic orthodoxy and a new plan for zoning reform:

Eliminate exclusionary zoning and harmful land use policies. For decades, exclusionary zoning laws — like minimum lot sizes, mandatory parking requirements, and prohibitions on multifamily housing — have inflated housing and construction costs and locked families out of areas with more opportunities. President Biden is calling on Congress to enact an innovative, new competitive grant program that awards flexible and attractive funding to jurisdictions that take concrete steps to eliminate such needless barriers to producing affordable housing.

You’d be forgiven if your eyes glazed over at “minimum lot sizes” and “mandatory parking requirements,” but in this paragraph is an acknowledgment that the seemingly mundane local rules that govern what and where houses can be built have had devastating effects on the American people.

In the past year, the housing market has laid bare the harms of these rules. As mortgage rates bottomed out, would-be homeowners flooded the market only to find they were fighting over scraps. Tales abound of these people desperately shoving all-cash offers well over the asking price to sellers and increasingly making offers on homes sight unseen. Middle- and low-income renters watched from the sidelines, their hopes of homeownership dashed as they shell out dangerously high proportions of their income to rent. This frenzy leads many to a simple question: Where are all the homes?

While the pandemic and low interest rates certainly played a large role, America’s housing supply problem is long-running.

“Even going into the pandemic, there was a shortage of homes for sale,” Redfin’s chief economist Daryl Fairweather told Vox. “From 2010-2019, [we] had the lowest amount of homes built than in any decade since the 1960s.”

Restrictions like minimum lot sizes, mandatory parking requirements, and other prohibitions on multi-family housing that Biden’s plan references have the effect of reducing the supply of housing. For example, if there is a requirement that for every unit a developer has to provide two parking spaces, that ensures they have to set aside land for parking that could otherwise have been used for building more homes. Frequently, this leads developers to build fewer units — and more expensive ones at that.

According to the Urban Institute, by the end of 2020, there was only 2.5 months’ supply left of housing, meaning “at the current sales pace, the inventory of homes nationwide will be exhausted.”

The economic effect of these rules has been well documented. In a 2015 study by University of Chicago economist Chang-Tai Hsieh and UC Berkeley economist Enrico Moretti, researchers find that because metropolitan areas have made it prohibitively expensive for middle- and low-income Americans to move to high-productivity areas, US aggregate economic growth was lowered by more than 50 percent from 1964 to 2009.

These rules are also the outgrowth of explicitly racist desires to keep white neighborhoods from being integrated. Now they function as clear class divides ensuring that less well-off Americans are essentially barred from finding affordable living spaces in high-demand regions with good jobs.

While President Barack Obama made overtures late in his second term toward a federal response to these rules (most notably with the implementation of the Affirmatively Furthering Fair Housing rule), Biden is proposing something new: a competitive grant program for localities that repeal these rules.

Jim Watson/Getty Images

Biden’s “purely carrot and not stick” plan for federal zoning reform

In 2009, as part of the American Recovery and Reinvestment Act, Obama announced a $4.35 billion competitive grant to be awarded by the Department of Education. The goal, according to a report by the Center for American Progress, was “to kick-start key education reforms in states and districts.” By 2012, 40 states and DC had applied for the funding.

The report found that the initiative’s design “scored some significant victories even before any of the money was awarded.” That’s because states were competing with one another in order to win the grant, leading more than 25 of them to reform their education policies in advance of the competition.

Just over a decade later, Biden has a similar plan for zoning reform. The president’s plan is to allocate $5 billion to a new competitive grant program that “awards flexible and attractive funding to jurisdictions that take concrete steps to eliminate such needless barriers to producing affordable housing.”

“This is a new approach. It’s ultimately a process to incentivize communities to end exclusionary zoning that is purely carrot and not stick,” an administration official told Vox. “Cities need to demonstrate that they are taking down some of their exclusionary zoning requirements and then they will be able to access this separate pot of money for whatever they want to use it for — transportation, parks, schools.”

The Department of Housing and Urban Development would be in charge of administering the funding. While details are still in flux, the general idea is that localities would be able to apply for this funding by showing that they are removing existing requirements like height restrictions and bans on duplexes and fourplexes.

Michael Reynolds/Getty Images

In some ways, modeling zoning reform similarly to education reform makes sense — both have been designated as local issues, and a lot of the infrastructure for direct reform exists at the local level. But a program that is “purely carrot” can only do so much if the federal government doesn’t make localities eat their vegetables.

Abundant housing isn’t a universal goal

How the program is designed matters a lot for how impactful it will be. But regardless of design, there’s only so much that incentives can do when it comes to localities that are fiercely protective of their zoning ordinances.

Emily Hamilton, a senior research fellow and director of the Urbanity Project at the Mercatus Center, has previously supported a “race to the top” program.

“In general, I am more optimistic about state or local efforts to reform zoning,” Hamilton told Vox. “Any type of grant program is not going to be as attractive to the wealthiest, most exclusionary jurisdictions.” However, she added that the White House and Congress drawing attention to this issue was “very important.”

Hamilton hopes the program will be focused on outcomes rather than localities just showing that they changed their zoning laws.

“Sometimes when localities just focus on tweaking their zoning ordinances, adding something like the opportunity for homeowners to build accessory dwelling units, that doesn’t always result in accessory dwelling units (ADUs) getting built,” she explained.

Even if a jurisdiction were to legalize ADUs (small detached dwellings on existing properties, such as a converted garage, a basement apartment, or a tiny house in the backyard), it could enact parking minimums that require two parking spaces per structure — in effect making it extremely unlikely anyone would actually build this kind of dwelling.

Jason Furman, who served as chair of the Council of Economic Advisers under Obama, disagrees with an outcome-based approach.

“The problem with outcomes is they’re partly a function of policy and partly a function of a whole lot of things outside of policymakers’ control and the outcomes can happen years later. So I much prefer you, as a governor or mayor, know what you need to do in order to get this money.” he explained. “Saying you might get the money five years from now and whether or not you get it depends partly on your actions, but also partly on all sorts of factors outside of your control. I think that greatly diminishes the incentive.”

It’s hard to see a race-to-the-top proposal making a dent in the most exclusive jurisdictions where the lack of housing is the most pronounced. Unlike with education reform, where people generally agree on the outcome (better-educated children) even if they disagree with the methods, with zoning reform there are plenty of jurisdictions that don’t want the same outcome (abundant housing) that advocates, the Biden administration, and would-be residents do.

Furman noted these obstacles, adding: “The reason we have these rules isn’t because people don’t know what they’re doing, it’s because a subset of people know exactly what they’re doing.”

Many jurisdictions are keenly aware that their policies necessarily reduce the number of homes available, thereby driving up the price of homes and rents for everyone. They keep them in place because some existing residents are either willing to pay through the nose if it means keeping their “neighborhood character” intact or unaware of the trade-offs of low-density development.

One of the most significant aspects of Biden’s infrastructure agenda could be the ability to influence Democratic policymakers and voters’ opinions on how their local zoning rules come into conflict with economic growth and equality of opportunity. Places like New York City and the Bay Area, with the greatest gains to be had in zoning reform, are overwhelmingly Democratic; having the leader of your party draw a clear line about where he stands is no small thing.

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