This article was originally published in Harvard Business Review

By Brian Callaci and Sandeep Vaheesan

Summary.   Unaffordable housing is a drag on regional and national economies. In areas where housing costs are high, employers end up effectively transferring significant sums to landlords as the cost of attracting talent. But what will it take to fix this problem? Will market-based solutions suffice? If not, what kinds of interventions are necessary? Recent research shows that the market itself needs to be fixed. Any plan to overhaul the housing market needs to, first, confront the power of landlords to raise rents. Second, it requires rethinking public governance of housing markets behind simplistic prescriptions to just free the housing market from government regulation, assuming lower rents will follow. And third, it needs to provide more muscular government involvement in housing, through price regulation, more robust planning, and even direct public provision.

The United States is experiencing a serious housing crisis, and has been for a long time. Growth in rents continues to exceed overall price inflation. Mortgage rates have been at a multi-decade high due to the Federal Reserve’s aggressive rate hikes since summer 2022. Tens of millions of households spend more than 30% of their income on housing. Shelter is a basic human need and unaffordable housing is — and should be — a national scandal.

It is also an increasingly urgent concern for businesses. Unaffordable housing is a drag on regional and national economies. In areas where housing costs are high, employers end up effectively transferring significant sums to landlords as the cost of attracting talent. High rents and mortgage payments make hiring harder at all levels: Recent research has documented that high housing costs have eroded the urban wage premium for workers with fewer years of formal education. Now, these workers are better off moving to a city with lower cost of living rather than one that offers a higher wages.

In August, Vice President Kamala Harris announced that housing was one of the core features of her economic platform, a position she echoed in the September presidential debate. In a speech laying out her plan — the first major policy announcement of her candidacy for president — she introduced a goal of building 3 million new housing units, using tax credits to promote construction, to address the supply problem that has contributed to higher prices. But she also voiced support for policies that would ban setting rents with algorithmic pricing systems and introduce new regulations for corporate landlords. This follows the Biden-Harris administration’s plan to cap annual rent increases for large landlords at 5% over the next two years.

With this proposal, Harris has waded into a contentious fight over what’s really gone wrong with the U.S. housing market.

Economics 101 teaches that when prices of a good like housing rise, that acts as a signal to producers to supply more of that good. By this logic, if prices remain stubbornly high, something must be impeding the balancing of supply and demand, and when that obstacle is removed new supply will be produced and prices will go down. Many commentators and groups have argued a version of this story: The housing market can be repaired with the simple fix of liberalizing zoning rules and other public regulations allegedly strangling the supply of new homes, which they say will lead to an explosion in housing construction. Once the government gets out of the way, private actors will fix the problem themselves.

There’s another view, however, in which one underappreciated cause of runaway housing costs is the market power of developers and landlords — and more recently, software that allows them to leverage this power in unfair ways. The prime example of this is the recent Department of Justice lawsuit, joined by eight states, against the property management software company RealPage. The DOJ’s suit follows Arizona and the District of Columbia and class-action lawyers filing complaints against the platform. According to the lawsuits, RealPage coordinated with landlords in cities such as Atlanta, Boston, Phoenix, Seattle, and Washington, D.C. to prioritize higher rents and accept lower occupancy rates, with the understanding that their overall profits will be higher under this strategy.

These allegations show the limits of a “trust the market” approach to housing policy. Research from around the world shows that more permissive zoning rules do not, by themselves, lead to a major increase in housing supply, let alone more affordable housing. The truth is that the market itself needs to be fixed. Specifically, any plan to overhaul the housing market needs to, first, confront the power of landlords to raise rents. Second, it requires rethinking public governance of housing markets beyond simplistic prescriptions to just free the housing market from government regulation, assuming lower rents will follow. And third, to that end, we need more — not less — muscular government involvement in housing, through price regulation, more robust planning, and even direct public provision.

Power, Collusion, and a Broken Market

In an Econ 101 land, prices act as signals to market participants. In such a world, government regulations can only impede the functioning of price signals, preventing supply from matching demand. But that is not the world of the housing market. In particular, market participants in housing — notably landlords — have market power: the ability to raise prices above the so-called competitive level and hold back the supply of housing.

The recent story of rent-setting software companies illustrates just how this works, and why government intervention through antitrust and other measures is required, even if only to restore the “competitive conditions” envisioned by economists.

In dozens of cities, rental property managers and owners signed up for “revenue management” services from software companies, notably RealPage and its former competitor Lease Rent Options, which it acquired in 2017. These companies promised to apply algorithms powered by massive volumes of rent, occupancy, and other relevant data to help property managers and owners figure out how to boost profits. Landlords agreed to work with RealPage on the understanding that their competitors are doing so as well, and that if they collectively raise rents they all make more money.

This was classic collusion among rivals — the new tech should not obscure what’s being done. One class action filed against RealPage estimates that its property manager partners may control as many as 19.7 million rental units out of 22 million desirable, “investment grade” apartment units in the country. The federal and class action lawsuits allege that the company worked with landlords in practically every major city in the nation, including Atlanta, Boston, Dallas, Los Angeles, New York, Philadelphia, Seattle, St. Louis, and Washington, D.C. In Washington, D.C., RealPage allegedly priced 60% of units in large multifamily properties in the city and 90% in the broader metropolitan area.

RealPage’s recommendations persuaded landlords to change their pricing strategy, allege attorneys general of Arizona and District of Columbia and private plaintiffs’ lawyers and the latest suit by the Department of Justice and a group of eight states. Traditionally, property managers aim for full occupancy — an empty apartment generates no revenue but still incurs regular maintenance costs, and so property managers priced units to get as close to 100% occupancy as possible. But RealPage convinced landlords that they and their competitors could make more money if they raised rents together and accepted lower occupancy rates (e.g., an occupancy rate of 95% and a higher rent could yield greater profits than at an occupancy rate of 99% with lower rents). These recommendations were practically binding: The company terminated its relationship with landlords that rejected its recommended rents more than a small fraction of the time. If just 1% of nearly 20 million units sit unoccupied due to collusive pricing, that means almost 200,000 rental properties are empty across the United States.

The adoption of RealPage software appears correlated with significant rent increases. Recent economic research has found that landlords using the software were able to increase rent markups by $53 per unit per month. According to the consumer class action noted earlier, rents increased substantially following the adoption of RealPage pricing by a critical mass of landlords in 2016. In Phoenix and Sacramento, rent hikes were especially pronounced, with landlords raising rents 76% and 68%, respectively, between 2016 and 2023.

This is just part of the larger story of the housing crisis, but it exposes the tension that any solution must address: Left to their own devices, profit-motivated landlords will not provide the quantity of housing needed to meet the supply shortage. Rather, they will undertake the profit-maximizing strategy of colluding with each other to raise rents and hold back supply. At a minimum, antitrust enforcement and a ban on algorithmic rent-setting is required. But enabling more competition along the lines of what’s described in Econ 101 textbooks isn’t enough, because there’s little evidence that private developers alone will — or can — provide enough housing to fix this crisis.

What the Private Sector Can — and Can’t — Do

According to proponents of simple “market-based” solutions, relying on the profit motive is a central feature of fixing housing. Some of aspects of the Biden-Harris administration’s housing policy — such as the 5% rent cap — intervene directly in the cost of housing. But other proposals, such as Harris’s plan to provide and expand incentives to developers to build more starter and rental homes or her proposal to provide assistance to first-time home buyers, seek to entice private actors to expand supply by using public money to boost their bottom lines. While nudging developers and landlords with incentives can marginally increase the supply of housing, they ultimately rest on a “trust the market” strategy that has to date failed to solve the problem.

The most extreme version of “trust the market” housing policy is the common refrain — popularly associated with the “Yes in My Backyard” (or YIMBY) cause — that zoning rules are a primary, if not the primary, cause of the present housing crisis. YIMBYs call for the reform or abolition of zoning rules that prevent construction of duplexes, triplexes, and other multi-family housing, along with rules on minimum lot sizes and parking requirements. This cause is commonly captured in the slogan “legalize housing.” The idea is to get out of the market’s way and let the drive for profit solve the problem.

Profit considerations, however, mean that more liberal zoning rules are at most necessary, but not sufficient, to increase the supply of housing. Just because private developers can build housing does not mean they will. Liberalization of zoning regulations appears to increase the supply of housing, but the effect is rather modest. Summarizing the findings of a co-authored paper, Yonah Freemark of the Urban Institute — a leading researcher on land-use reforms — told an interviewer, “[W]e found the average upzoning would result in a 0.8% increase in housing supply in the short- to medium-term after the change, three to nine years after the upzoning.” That is not nothing, but hardly lends strong support to the cause of zoning reform.

The problem, generally, is that building housing is just one way to profit from a piece of land, and zoning reform tends to increase land values. The price of an asset, including land, is its discounted future profit streams. So, if land with a three-unit apartment building today is upzoned for mixed-use developments, that widens its range of possible uses and raises expected profits, making it more expensive today. In many places, expectations of inadequate profits — not zoning — appear to be the primary constraint on further housing construction by the private sector, as profit-motivated corporations are reluctant to build. Developers sometimes acquire and “bank” tracts of land for the future and develop them when expected profits are higher. Alternatively, they may build luxury units and focus their efforts on the affluent. The large-scale acquisition of single- and multi-family housing by asset managers like Blackstone, which promise outsized returns to their investors in a short period of time, has only supercharged the role of profits in the provisioning of housing.

Upzoning alone is also a contributor to displacement. Higher land values are a good outcome for current landowners, but not for their tenants. While wealthy, white suburban communities are often the public face of opposition to zoning reform, the adverse effects of upzoning also fall on poor and working class Black and brown communities where most residents and business proprietors rent. In major metropolitan areas, tight-knit communities with a mix of residential, commercial, and light industrial activities have been disrupted by zoning reform. With the lure of higher land prices, property owners evicted current tenants and sold their plots to developers, pocketing a tidy windfall.

In these cases, upzoning did not produce affordable housing or even a net addition of housing. Instead, it resulted in the replacement of older residential buildings and small businesses with higher-end apartments, condominiums, restaurants, and retail. Families and business proprietors who had lived and worked in one place for decades were forced to uproot and resettle, losing their strong economic and social networks. Communities became wealthier and whiter in the process.

Public Regulation, Planning, and Provisioning

Housing, like healthcare, telecommunications, and energy, may be an example of an industry in which corporations should support stronger public governance due to their own private interest. After all, since every worker needs to be housed, and employers ultimately foot much of the bill for housing their workforce through the wage bill, major employers can help push for policies to solve the housing crisis. Unfortunately, while some employers have become aware of their self-interest in solving the housing crisis, they have been slow to support public solutions to soaring housing costs.

In this, they unfortunately follow in the footsteps of their 20th century predecessors. Indeed, it was not employers but New York City garment unions who in the 1920s pushed for legislation to enable them to build — with pooled worker funds and loans — the large-scale cooperative housing complexes for the industry’s labor force. These profit-capped co-operatives became the model for limited-equity housing co-ops that are a current staple of dense, stable, and vibrant New York City neighborhoods.

Freeing the market through zoning reform alone is not likely to fix America’s housing woes. By contrast, public governance of and direct participation in housing markets can make affordable and decent shelter a universal reality. This requires a three-part program of stronger public governance of housing markets; local, regional, and federal planning; and social housing.

Stronger Public Governance

First, the federal government, states, and private plaintiffs’ bar must vigorously enforce the antitrust laws against real estate entities. Landlords can collude to raise their profits, and new technology is helping them solve longstanding coordination problems. RealPage is a testament to that, and the scale and scope of the conspiracy suggests antitrust enforcement, at present, fails to deter even blatantly illegal conduct.

But collusion is hardly the entire story. Antitrust and other laws against unfair business conduct should be used to stop myriad restrictive practices in housing and land markets.

Recent research indicates that individual landlords have a degree of monopoly power, due to frictions in the housing market making it costly for tenants to leave their current housing and find a new place to live. RealPage’s rich data may have educated landlords about the extent of their own market power, teaching them they can raise rents by more than they previously thought possible.

Private home and community developers have long imposed restrictive covenants, which bar purchasers and all future owners from certain uses. Millions of homes are subject to these restrictions, often put in place by developers to attract buyers that want to live in whiter and wealthier communities. In 1948, the Supreme Court ruled that restrictive covenants prohibiting residence based on race or ethnicity cannot be enforced through legal action, and Congress outlawed them in the Fair Housing Act. But other restrictions are still commonly used and enforced, including ones that prevent the construction of multifamily housing, establish minimum lot sizes, and even restrict non-traditional households from living in a neighborhood. Often enforced by private homeowners’ associations, these covenants function as a form of private zoning, but enacted without public input.

Some of the policy tools are already being used and familiar to the public: Rent-stabilization laws and other tenant protections are important. Given that housing is an essential need and tenants are often in a vulnerable position, landlords have substantial power individually and as a class. Second-generation rent-control laws do not freeze rents but rather generally prevent landlords from raising rents more than the local or regional rate of overall inflation, for instance. They restrain the unilateral and collective price-setting power of landlords and can mitigate the long-term effects of the RealPage cartel described above. (Extensive empirical research shows that the simplistic story of such rent control leading to less and poorer quality rental housing is false.) Similarly, tenants should have just-cause protections that allow evictions only for causes stipulated in the law, such as a failure to pay rent or intentional damage to rental property. In addition to protecting tenants from abusive landlord conduct, these laws can promote housing and community stability as tenants can stay in one place for a longer period.

Public Planning

State, regional, and local governments must engage in public planning. At a minimum, this planning is necessary for building roads, public transit, schools, and other infrastructure needed to support expansion of the housing supply. Uncoordinated housing construction can lead to traffic congestion and overburdened bus, rail, and school systems and even inadequate water supply and sewerage capacity. Further, planning can mitigate the harmful effects of upzoning done in isolation. It can promote economically and racially diverse communities and prevent mass displacement following upzoning.

When upzoning land, some cities try to capture a portion of the increased value through public benefits agreements. For example, as part of the redevelopment of the Gowanus neighborhood in Brooklyn, residents and businesses established the Gowanus Oversight Task Force to negotiate and oversee a deal with the city. Developers got their rezoning, in exchange for a broad range of public benefits, including a new school and affordable housing.

Effective planning requires that decisions be made jointly at the regional, city, and community levels. It should be a system of layered co-governance. Exclusive reliance on regional plans can lead to systemic disregard of local wants and desires while strictly community planning can produce parochial decision-making. A necessary part of planning is zoning reforms that permit the construction of more housing, without also creating easy profit opportunities for speculators at the expense of established communities.

Federal planning is important as well. A common YIMBY refrain is that the current economic geography of the United States, and resulting housing crisis on the coasts, is primarily the product of the economics of agglomeration, in which the productivity of any given firm is a function of the number of other businesses also operating in the same place. The coastal cities where housing costs have exploded, the argument goes, are simply the most productive cities, which naturally attract the lion’s share of labor and capital. In this view, the role of policy is helping people “move to opportunity,” by building more housing for them in wealthy cities.

The agglomeration view, however, neglects other factors that have concentrated wealth in a few cities, such as monopoly power concentrating wealth on the coasts where the largest firms are located, and the powerful role federal policy has played in creating and entrenching the regional economies of places like Silicon Valley in the first place. (In the case of Silicon Valley, defense contracts and publicly-funded university research have played a key role.) Seen in this light, reforming housing policy to cram 10 million more people into San Francisco and New York in blind obedience to the laws of agglomeration is the wrong tool for the job, when directing industrial policy to create jobs and generate opportunities where people currently live is also on the table.

Social Housing

The public sector should build and operate housing. Between the 1930s and 1970s, the federal government financed the large-scale housing construction by municipal authorities. Due to a combination of federal and local policy, white flight, and deindustrialization, some of this housing became shelter of last resort for many poor Black families. Academic and popular commentary offered public housing developments like the now-demolished high-rise complexes Cabrini-Green in Chicago and Pruitt-Igoe in St. Louis as warnings against further public development of housing. This distorted and incomplete history has stigmatized publicly operated housing in this country ever since.

Global experience shows public or social housing can work well. Public authorities in places as diverse as Singapore, Vienna, and Montgomery County, Maryland have successfully developed housing in pursuit of community, as opposed to purely pecuniary, aims. They offer affordable homes, attractive to a wide segment of the population, and Singapore and Vienna have made affordable housing the norm for their residents.

Social housing done right can advance at least two public policy objectives. It can supply decent housing for poor and working-class households that are often not profitable for private developers to serve. In addition, social housing development can impose competitive discipline on private rivals. As a public option in the housing market, it can rein in the pricing power of private landlords and pressure them to raise standards of habitability for poor, working, and middle-class families.

• • •

The housing crisis in the United States is chronic and has become more acute in recent years. Millions struggle to keep a roof over their heads, and even many more affluent households cannot buy a home. One solution — liberalizing zoning rules — has gained popularity and been touted as the key fix to the American housing market. But empowered private actors, free to build, are still in the business of making money, not providing shelter for all. Even under thoroughgoing zoning reform, they will still lack the incentives to build and rent out sufficient affordable housing. The landlord cartel orchestrated by RealPage in cities across the nation attests to that. The country’s housing crisis will not be solved through simple deregulation of zoning laws and building codes — it requires ambitious public action. Federal, state, and local governments must pursue stronger public governance of housing markets, undertake systematic planning, and build homes themselves.

This article was originally published at the University of Virginia

By Josette Corazza

Home prices keep rising and some blame restrictive zoning laws for limiting new housing supply. But zoning laws may not be the culprit, according to new research by Professor Richard Schragger and co-author Sarah New at the University of Virginia School of Law.

In their article “Underdevelopment Despite Upzoning,” Schragger and New studied zoning and development in Charlottesville, where the median home price currently hovers at around $500,000.

The pair aimed to determine whether parcels were fully developed under current zoning rules, to get a sense of whether “upzoning” — altering the local zoning laws to allow more development — would bring down housing costs. Schragger and New found a more complex story that may affect how cities approach zoning across the nation.

Schragger, the Walter L. Brown Professor of Law, co-directs the Program in Law, Communities and the Environment and is the author of “City Power: Urban Governance in a Global Age.” New, a web services librarian, used her master’s degree in geographic information systems to help dive into the data.

Why did you do this study?

The conventional wisdom is that eliminating land use restrictions — especially single-family zones — will lead property owners to build more housing, which will increase the housing supply and lower the cost to buy or rent a home. The studies that have looked at this question to this point are somewhat mixed, however. We decided to look at Charlottesville to try to figure out whether the residential zones of the city were too restrictive — that is, whether all their development potential had been utilized. If so, that would lend support to the theory that land use restrictions were limiting supply. If not, that would raise questions about the efficacy of upzoning. As we undertook the study, the city of Charlottesville proposed and adopted an extensive zoning reform, which basically eliminated single-family zones throughout the city, so we also wanted to establish a development baseline so that we can determine in the future whether those reforms worked.

You found that the Charlottesville area is underdeveloped even under the old zoning policies. How did you come to this conclusion, and were you surprised by the findings?

We relied on Sarah’s expertise in mapping the city; by matching addresses to parcels, studying some features of those parcels, and examining allowable density under the then-existing land use code, we could identify parcels that were: vacant; oversized and therefore potentially subdividable; underused, for example, if a single family home stood on a lot that allowed multi-family units; and lacking an allowable accessory dwelling unit. We found significant underdevelopment along all these dimensions, which was somewhat surprising. Housing costs are high in the city and the recent zoning reform was premised on the idea that the existing zoning code was too restrictive. We found that hundreds of units could have been built under pre-reform regulations.

Why are so many parcels underdeveloped? What are some of the obstacles to development?

We do not know for sure. It may simply be that the previous zoning regime didn’t provide landowners with sufficient development potential. Maybe giving them more allowable units will induce them to build — upzoning could theoretically make a housing project cost effective. But it also may be the case that single-family homeowners aren’t interested in building more; they like their large lots and aren’t interested in becoming landlords. Financing for small-scale, infill development might not be available. Local developers might not be interested in such projects at any scale. Parcel location might matter too; multifamily or apartment development might not make sense in certain areas of the city, especially for developers trying to cater to students.

Are Charlottesville’s development challenges somewhat unique, as a small college town?

To some extent, Charlottesville has a bifurcated housing market, with many single-family homeowners and many student renters. Student renters can push up the price of rental housing, especially close to the University, and so encouraging the construction of dorm-style developments might help increase supply for that group. But young families and others interested in single-family homes are likely going to avoid those student neighborhoods. The city’s zoning code has to manage these two sub-markets with different characteristics.

What are the implications of your finding that allowing more density does not necessarily generate it?

Housing affordability has become a significant concern, not just in this country, but globally. The YIMBY (“Yes in My Backyard”) movement in the U.S. has had some success, especially in California but also in cities like Charlottesville, in eliminating zoning restrictions with the promise that legal reform will bring down housing prices. But the movement to kill zoning might be promising more than it can deliver. If we find that allowing more density doesn’t generate it, or that it produces more market-rate housing without increasing regional affordability, then we should be looking at other ways to lower housing costs. That might include subsidizing low- and moderate-income housing projects, building public housing, adopting rent control or providing subsidies to homebuyers. Cities like Charlottesville are making efforts along these lines as well, but the emphasis on upzoning has sometimes skewed the debate by assuming that the market can respond to high housing costs so long as we deregulate and give developers more leeway to build. Our study provides some evidence in support of a more nuanced approach. That is not to say that zoning limits are inconsequential or don’t have bite in certain places, but only that we should have a healthy skepticism that zoning restrictions are as important a problem for affordability as advocates of zoning reform sometimes assert.

This article was originally published in Taylor & Francis

By Kirk McClure & Alex Schwartz

Abstract

This article examines the extent to which the US as a whole and its metropolitan areas face a housing shortage by comparing change in total housing units and total households from 2000 to 2020. Although various studies indicate that the nation has a shortage of anywhere from 2 million to 4 million units, Census data show little evidence of a shortage. Household formation did exceed the growth of households from 2010 to 2020, but that does not take into account the large surplus of housing produced during the previous decade. From 2000 to 2020, housing production exceeded the growth of households by 3.3 million units. Of the nation’s 381 metropolitan areas, only four experienced a housing shortage during this time, as did only 19 of the nation’s 526 micropolitan areas. Even though the stock of housing is adequate in most markets, the mismatch between the distribution of incomes and the distribution of housing prices results in housing affordability problems, especially for extremely low-income renters.

Notes

1 Because of its scale, the decennial census is considered the most accurate information on the counts of the housing stock both occupied and vacant compared to other Bureau of the Census surveys which are drawn from samples of various sizes. However, the 2020 census experienced data collection problems due to the COVID pandemic as well as efforts to suppress participation by immigrants (Bozick et al., Citation2023). Given these problems, the 2020 census is believed to be accurate at the national level, but, unlike prior decennial census counts, the 2020 census suffers from both overcounts and undercounts of some states (Cohn & Passel, Citation2022).

2 If the desirable vacancy rate is 9.3 percent of the total stock, then the stock should be 1.093 times the number of households. For 2022, this would be 140.6 million units, which is 3.1 million fewer units than were in the stock.

3 The ceiling rents for each income category are the ceiling annual income/12 months * .3 for acceptable rent to income burden. The ceiling home values for each income category are the ceiling annual income/12 * .28 for an acceptable cost burden of principal, interest, property taxes, and Insurance using 2021 loan terms, which results in an income multiplier of 4.8.

This article was originally published in Jacobin

By Seth Ackerman

YIMBYs are right that the US needs a major expansion of its housing supply. Unfortunately, eliminating restrictions on private housing development won’t do much to get us there.

Twenty years ago, “the hot-button issue of land use” was a phrase that could only have been uttered as a joke. Today, it would barely raise an eyebrow. Jacobin contributor Ross Barkan, writing in New York magazine last year, described the “YIMBY war breaking out on the Left,” in which “progressives and outright socialists find themselves on all sides,” as one of the fiercest ongoing. Even for those most inured to online Sturm und Drang, the sheer vitriol that’s unleashed these days at the first breath of terms like “zoning,” “density,” or “YIMBY/NIMBY” can be jarring.

Lately the fight has become a war of movement. The center of gravity of left opinion has shifted rapidly and unambiguously: away from what used to be a widespread, rather unreflective antidevelopment position (driven partly, as Barkan put it, by a desire to “keep bucolic, low-lying neighborhoods as they are”) to a much more intellectually considered support for pro-density public policy.

In the process, the Left has become more receptive to certain ideas once primarily associated with economists and policy writers, like Ed Glaeser or Matt Yglesias, who could — accurately and nonpejoratively — be classed as “neoliberals.” According to their line of thinking, the main obstacle to plentiful and affordable big-city housing is the restrictiveness of metro-area land-use policies. These policies, which favor single-family, low-rise homes, severely curtail the construction of apartment buildings and other density-friendly types of development. Eliminate the restrictions, these voices insist, and more affordable housing will proliferate.

There are plenty of good things to say about this shift. It reflects a greater savviness on the Left about urban policy and a heightened attentiveness to evidence and debates from the social sciences. It’s led activists and writers to push for a range of worthy pro-density policies, like an end to the “apartment bans” that perpetuate the soft apartheid of the heavily zoned surburbs. And it should go without saying that just because an idea is espoused by some people with the wrong politics doesn’t make the idea itself wrong.

However, the shift has also led to unrealistic expectations about how far cities can be changed for the better by “liberating supply,” due to a too-ready acceptance of models that try to adapt Econ 101 thinking (of questionable relevance even in the best of circumstances) to the sui generis problem of urban housing.

What Upzoning Actually Accomplishes

In the Econ 101–inspired picture of housing markets, the problem of housing scarcity is almost trivially simple: local metro-area governments have made it illegal to build more than a certain number of housing units on each section of urban land; this cap on supply, combined with rising demand, results in a bidding up of the price of the “product,” just as you’d expect in any “normal” industry. Lift the cap, and market incentives will send new housing supply rushing in.

But there’s a problem with this logic: it glosses over the critical role of land.

Urban land, whose value accounts for about 80 percent of the geographic variation in residential property prices, is what makes housing fundamentally different from other sectors of the economy. It’s unique among production inputs, for at least two reasons. For one thing, unlike machine tools or office supplies, it’s a speculative asset; its value fluctuates according to investors’ shifting guesses about future developments. For another, it is inescapably monopolistic: the land in a given location of a city is the only land there can be in that location.

In “normal” industries, the cost of production is driven by productivity: the more output can be squeezed out of a given amount of labor and capital, the less the product costs. And that logic does, in fact, apply to the nonland portion of housing development costs (most obviously construction costs — but also, importantly, lawyers and red tape).Unlike machine tools or office supplies, land is a speculative asset; its value fluctuates according to investors’ shifting guesses about future developments.

But the cost of land itself is determined in an entirely different way: not by productivity but by how much rent the land is expected to yield. Just as a company’s stock price reflects investors’ beliefs about its future profits, the price of a parcel of land reflects investor beliefs about the parcel’s future rent-generating capacity.

The first point to note, then, is that when a city “upzones” — that is, when it allows denser development by lifting the cap on the number and size of housing units that can be built on a given piece of land — the price of land actually goes up, which makes it more expensive, all else equal, to build housing there.

Some may find this paradoxical: How can eliminating a restriction on the supply of something make it more expensive? The logic should be clear enough, but anyone not satisfied by mere a priori reasoning can find a wealth of empirical evidence in the spring 2020 issue of Valuation, the journal of the professional society of real estate appraisers, which features an article — snazzily headlined “In the Zone” — on exactly this question: “Many cities see upzoning as an effective way to increase density and affordable housing,” it begins, “but how does it affect property values and land use?”

The piece is full of quotes from real estate professionals around the country, all of whom say basically the same thing: “If there is the prospect of upzoning, investors will start sniffing around and land values will increase as sellers start doing the math on a larger bulk allowance.” (That was “Theresa M. Nygard, senior vice president at KTR Real Estate Advisors in New York”; a “larger bulk allowance” means more permitted floor space per land plot.)

So if upzoning increases the price of land, and if land is the decisive determinant of housing costs, does that mean upzoning — touted as a way to make housing cheaper — actually makes it more expensive?

No, not necessarily. But in order to work as intended, upzoning needs to clear a high hurdle: it needs to result in the number of homes per plot of land expanding by more, proportionally, than land prices increase. If it doesn’t, then housing is unlikely to get any cheaper.

A YIMBY Blind Spot

Let’s take a concrete example. Right now, a downtown apartment in a superstar city is an insanely expensive commodity, something many people would love to have but can’t afford. If you view housing as a more or less normal “product” — and land as a more or less normal production input — the mystery is why this hasn’t prompted enterprising capitalists to swoop in and offer a competing product at a more attractive price.

Why not find a dilapidated two-story building somewhere in town, buy it from the current owner, tear it down, and build a four-story building in its place? Then you can spread the cost of the land over twice as many apartments, offer each apartment for rent at somewhat less than the current going rates in town — say, 10 percent less — and be flooded with applications from eager would-be tenants. Everybody wins: apartment-seekers get lower rent, you make a huge profit, and the previous landowner gets to sell his dilapidated property at a price that surely exceeds what it would have been worth in the absence of redevelopment. The only losers, presumably, are the incumbent landlords in town, who will now be forced to offer their own tenants lower rents to stay competitive.In order to work as intended, upzoning needs to clear a high hurdle: it needs to result in the number of homes per plot of land expanding by more, proportionally, than land prices increase.

Given how costly housing is these days, and given how everybody wins in this scenario, surely this sort of business should be going on all around us, at a massive scale. If it’s not, there must be something afoot that’s stopping it from happening: zoning regulations. Remove the regulations, and this kind of redevelopment will proliferate. Or so many people think.

But if you look at land as a speculative investment, rather than as a normal production input, the whole issue appears in a rather different light.

From this perspective, the mystery is why the owner of this land would want to sell it for a price that reflects rents that are lower, per apartment, than the current market level. The idea of “spreading the cost of the land over twice as many apartments” may sound clever to you. But from the owner’s point of view it amounts to a crude form of “shrinkflation.” Presumably, apartment rents in town have been rising — year after year, for many years; that’s exactly the problem upzoning is supposed to solve. Why should the owner believe that trend has suddenly gone into reverse?

At some point the owner will presumably engage the services of a professional real estate appraiser to advise them about how much the site might be worth, and why. The appraiser’s job will be to estimate its value at its “highest and best use,” in the jargon of the field, using data on recent rents for comparable apartments in the neighborhood, as well as information on current zoning limits. (Recall the quote from the real estate executive in Valuation magazine: in the wake of an upzoning “land values will increase as sellers start doing the math.”)

Imagine how foolish this owner would feel if they did sell the property to you now at the price you’re offering — a price that assumes lower rents — only to read in the newspaper a year from now that average rents in the neighborhood have, yet again, risen at a double-digit clip. You’re probably not the first developer who’s called to inquire about the property; you probably won’t be the last. Surely the best option for this owner is to politely decline your offer and wait for a better one.

Astute readers might recognize this scenario as conveying the insights formalized in “real options theory,” a mathematically abstruse branch of the finance literature that stresses the value of waiting, rather than going ahead with an investment, whenever the investment would be costly to reverse and the future is unknowable. Just a few months ago, a theoretical paper by a pair of Dutch economists applied real options theory to the problem of urban land use, and while I wouldn’t recommend the paper to anyone lacking an appetite for heavy jargon and glowering equations, its authors mercifully summarize their conclusion right in the paper’s title: “The option value of vacant land: Don’t build when demand for housing is booming” (my emphasis).

At a basic level, though, it’s a simple point: the advocates of upzoning say it will lead to a house-building boom and a consequent fall in rents. But in order for that to happen, investors must already believe it will lead to a housebuilding boom and a consequent fall in rents. Why should they? On what grounds? This is the blank spot at the heart of the YIMBY case.

When Land Management Is Private

YIMBY economics must, then, be based on a kind of circular reasoning: upzoning causes rents to fall because rents are expected to fall, due to the fall in rents.

But isn’t there something circular about my argument, too? After all, what I’m saying is that rents are determined by land values. But I’m also saying that land values are determined by expected rents. What, ultimately, determines both?

That question is easily answered. Rents and land values in a particular location are determined by the income and wealth of the people and businesses in and around that location. Put plainly, it’s the presence of rich people that makes rents expensive: they can pay more. This was the valuable kernel of insight embedded in the old “unreflective” left attitude toward urban development; its replacement by the new focus on supply — however valuable that focus might be in its own right — represents knowledge that’s been, if not lost, then at least injudiciously devalued.

If we want to know why housing has gotten so expensive, it helps to look at which locations have seen housing costs rise the fastest and which have seen costs rise more slowly, and to figure out what accounts for the difference. That’s the purpose of the chart below, which is based on data for about seventy-two thousand Census tracts: very small geographic units averaging about four thousand residents each, each of which can be thought of as a “neighborhood.”

The chart groups the seventy-two thousand tracts into eight “bins” along the horizontal axis, sorted according to the percentage change in median housing costs they experienced between 2012 and 2019; the bins range from -10 percent to +30 percent. (All data in the chart are from the Census.)

What we want to know is: What kinds of characteristics determine whether a neighborhood ended up in one of the far-right bins, with skyrocketing housing costs; and which neighborhoods ended up in the far-left bins, with only modest increases, or even outright declines, in housing costs?

Start with the yellow line on the chart. It shows how the median tract within each bin performed in terms of building more housing units: each dot displays the national percentile rank of the median tract in that bin in terms of housing-stock growth.

Did the neighborhoods experiencing less housing cost growth build lots of new homes? There’s a chart that’s been making the rounds on Twitter/X lately purporting to show (in a different way, using different data) that they did. But on my chart, you can barely see a difference: the median rankings of the eight housing-cost-growth bins range from the forty-sixth percentile to the forty-ninth percentile of housing-stock growth. So that doesn’t appear to be a major factor.

But looking at the rate of growth of housing units doesn’t necessarily settle the issue, because what we really want to know about, specifically, is the effect of zoning regulations. Luckily enough, there’s data on that. A team of economists at the Wharton School maintains an index of local zoning restrictiveness, called the Wharton Residential Land Use Regulation Index (WRLURI), based on a detailed survey of municipal zoning authorities.

That’s what the blue line on the chart shows. Like the yellow line, it displays the percentile rank of the median tract of each of the housing-cost-growth bins — but this time in terms of its score on the Wharton index. (Strictly speaking, it’s the score for the municipality to which the tract belongs.)

Did neighborhoods that experienced the fastest housing-cost growth have more restrictive zoning? Again, the difference is just barely perceptible: between the best and the worst housing-cost-growth performers, the range of median rankings on the Wharton index runs from the forty-sixth to the fifty-second percentile.

Now we come to local income growth, represented by the green line. Here there’s no need to squint at the chart. Every single bin in the housing-cost distribution experienced faster growth in median household income than the bin before it. Across the eight housing-cost-growth bins, the national income-growth rankings of the median tract range from the thirty-third to the sixty-fourth percentile, a remarkable spread. No other variable comes close in determining how much costlier housing has grown across different localities.

That housing is invariably expensive in places where rich people live and cheaper where they don’t is a familiar fact of life — so much so that it may be tempting to shrug at these data and say they’re just stating the obvious: plus ça change. But this, as they say on MSNBC, is not normal.If it’s the speculative nature of urban land that stymies housing supply, it’s the monopolistic nature of it that gives its owners the power to extract so much wealth.

Other products and industries do not have prices that rise in lockstep with local incomes, hoovering up the fruits of all the other industries’ productivity gains. According to the McDonald’s app, a Big Mac costs $5.79 in the impoverished South Bronx and only sixty cents more ($6.39) on the gilded Upper East Side. By contrast, when it comes to housing, a recent study by the Berkeley labor economist David Card finds that “local housing costs at least fully offset local pay premiums, implying that workers who move to [better-paying areas] have no higher net-of-housing consumption” (emphasis added).

If it’s the speculative nature of urban land that stymies housing supply, it’s the monopolistic nature of it that gives its owners the power to extract so much wealth. This is not a monopoly conferred by restrictive zoning; it’s inherent in the phenomenon of urbanization. The capitalization of mobile wealth into land values happens because location matters: urban land in one place is not a perfect substitute for land in another place (it’s barely a substitute at all). That’s what “density” is all about: agglomeration economies, network externalities, production synergies, and so on. These forces make economic activity more remunerative in a given place; but by the same token they raise the cost of switching to a different place. That’s what gives urban land its monopolistic power.

When the management and ownership of land is left to the free play of private speculation and investment, it creates a trilemma between density, affordability, and inequality. When inequality is high, you can have affordability but not with density (viz. the Sunbelt); or you can have density without affordability (Manhattan, Boston, etc). I’ll have more to say about what is to be done in a subsequent article.

This article was originally published in Mercury News

By Susan Candell

California clearly has a housing affordability crisis. Unfortunately, the response from Sacramento politicians has only made the problem worse. Cities and resident groups are now pushing back, and a recent court filing by one of the country’s leading planning experts confirms their contention that state leaders have got it wrong.

The narrative widely circulated is that if we simply densify our cities, eliminate single-family zoning and remove the ability of our local councilmembers to review housing developments, the result will be
more affordable housing. In a stunning legal filing, this narrative was upended by a top urban planner.

Professor Michael Storper, from UCLA’s Luskin School of Public Affairs, filed a legal declaration in support of the Southern California cities’ lawsuit against the state of California over the passage of SB9. SB9 is the law that eliminates single-family zoning and allows owners to split their
lot and build as many as four to six units. The cities’ lawsuit claims that although SB9 was
passed on the premise that it would lead to more affordable housing, it has no affordability requirements, so will not improve affordability.

Storper agrees based on his 2019 paper, and he is willing to testify under oath to prove that the currently popular narrative supporting the state’s policies is unabashedly untrue. He says the current narrative is “fundamentally flawed and lead(s) to simplistic and misguided policy recommendations” and actually harms residents and communities due to gentrification and displacement.

Gentrification results when new expensive housing is built and the current residents can
no longer afford to live there, which occurs most often in communities of color. Over 100
laws have been passed recently that require denser cities and eliminate local planning, but
affordability has only gotten worse with more unhoused residents.

Storper says that the states’ erroneous narrative “diverts attention away from the real need
to address housing affordability for low- and moderate-income groups already residing in
the prosperous metropolitan regions.” These state policies are an unqualified failure, and a
respected world policy expert is willing to testify that this whole narrative is not only false
but is leading to widespread gentrification and displacement.

To make matters worse, the state has weaponized the housing planning processes, adding
steep fiscal penalties on cities, hiring lawyers to sue cities and removing local input for
projects if production goals are not met. An old law called the “Builder’s Remedy” allows
developers to build almost anything, anywhere, if a city does not have a certified Housing
Element that satisfies state bureaucrats. Hundreds of Builder’s Remedy projects have been
filed across the state, taking local elected officials and residents completely by surprise.

How do we fix the untenable position that our state has imposed on us? The only solution
is to pass a constitutional amendment that would allow cities to override the state laws
that are failing to solve our affordability and homelessness crisis — the Our Neighborhood
Voices Initiative. The state should return their attention to working with the cities, as we
have done successfully in our past. Sacramento’s one-size-fits-all policies don’t work — only
strong local democracy and city leaders working with the residents can achieve our shared
goals.

Thank you, Professor Storper, for your willingness to testify that the popular narrative of
upzoning, densification and deregulation of California’s housing markets does not and will
not work.

We must unite, fight for local democracy and solve the complex problem of housing
affordability together

This article was originally published in Cal Matters

By Matt Levin

For most California housing experts, the solution to the state’s housing crisis is pretty intuitive: Build more housing. Study after study has indicated that too much demand and too little supply has led to the state’s exorbitant rents and sky-high home prices.

But what policies will actually induce more homes to be built? And once those homes are built, do things really play out in the real world as you would expect in an Econ 101 textbook?

A new and highly publicized study from a doctoral student at the Massachusetts Institute of Technology casts some doubt on whether “upzoning”—allowing taller, more dense building to built—actually results in more construction and lower housing prices. It’s been cited as a cautionary tale, but the study’s author now says proposed California legislation to allow upzoning avoids at least some of the policy pitfalls revealed in his research.

The study finds that a Chicago policy allowing more dense housing around rail stations in the early 2010s induced no new construction over a five-year period. At the same time, the city-wide upzoning resulted in higher land values—conceivably meaning pressures for higher rents, but no new supply to alleviate those pressures.

The study has already been weaponized in the debate around state Sen. Scott Wiener’s SB 50, a bill that would force cities to permit denser housing around public transportation. Loathed by advocates for local control over housing approvals, the bill is arguably the most radical proposal in a fleet of new legislation aimed at compelling cities to approve new housing.

“I don’t think the study should be used to not pursue a specific policy or another,” Yonah Freemark, the author of the MIT study, said on Gimme Shelter, the California Housing Crisis Podcast. “I think it should be used as a cautionary tale about a concern that is raised by upzoning.”

But Freemark adds that many of the issues raised by his study now appear to be addressed in Wiener’s proposal, including major protections for low-income renters and communities at risk of gentrification. Those protections were originally lacking in last year’s version of the bill.

“These (tenant protection) policies actually are going to go a long way in addressing my concerns that my study raises in Chicago,” said Freemark, while declining to take a position on the Wiener bill. “In California they’ve taken to heart the effect that upzoning is not going to have one singular effect.”

On this episode of Gimme Shelter, CALmatters’ Matt Levin and the Los Angeles Times’ Liam Dillon discuss the limitations of the MIT study with Freemark and ask what lessons it does and doesn’t hold for California. They also chat with Michael Lens, associate professor of urban planning at UCLA and an advocate for upzoning as a solution to the state’s housing woes.