The voices of Urban Institute's researchers and staff
November 23, 2015

The link between land-use restriction and growing inequality

November 23, 2015

As the US economy has faced a steep recession and subsequent slow recovery, no sector has influenced its trajectory as significantly as the housing market. At the annual Urban Institute and CoreLogic housing symposium last week, Chairman of the Council of Economic Advisers Jason Furman illustrated just how distinctly housing contributes to the country’s economic health—and its growing inequality.

Furman noted that in 1973, two-thirds of US income went to the bottom 90 percent of households, yet today, that share is around just half. And the total economic pie is growing more slowly, too. In the decades leading up to 1973, productivity was rising at an average annual rate of 2.8 percent, but growth dropped to an annual average of 1.8 percent between 1973 and 2014. The rates at which people move within or across states and between jobs or industries—other significant measures of economic health and opportunity—are similarly slowing.

Restrictive land-use regulations, including zoning laws, are partially to blame for the stagnant growth, argued Furman. Land-use regulations may be intended to protect the environment or people’s health and safety, and even to enhance the supply of affordable housing, but in excess, they restrict housing supply, drive up home prices, and limit mobility.

Many city and regional zoning laws were created in response to the racial turmoil in the 1960s, noted Furman, and they reinforced the segregation already exacerbated by white flight. Homeowners tended to support strict restrictions to protect and increase their own home values. More and more zoning restrictions meant less construction, fewer permits, and a restricted housing supply that drove up prices even further.

The connection between the growth of land-use regulations and house price inflation can be seen by comparing real growth rates of construction costs and of house prices. For decades, construction costs were a solid predictor of home prices, and the two would rise or fall in tandem. But as land use became increasingly regulated, the two started to diverge sharply, with the divergence preceding the housing bubble.

Though these excessive land-use regulations have already contributed to growing inequality, demographic trends in the coming decades mean it could get worse. Urban Institute research has shown that household formation is growing fastest among millennials, minorities, and aging baby boomers, many of whom will seek the very same types of housing most often restricted by zoning: multifamily rentals, accessory and shared apartments and home modifications.

Cities with high productivity—like Boston or San Francisco—are the cities with high wages and high mobility. Increasing their density would make it easier for more people to live closer to the jobs and services that propel the cities’ economic growth and opportunity. But these cities often have stringent zoning laws, a restricted housing supply, and high prices, making it nearly impossible for lower-income residents and newcomers, who would likely benefit most from the opportunities available, to find affordable housing. Without a dynamic housing market, mobility is limited and urban economies don’t grow as much as they could.

But Furman noted that a few promising tools for reversing the trend are emerging. HUD’s recent Affirmatively Furthering Fair Housing Rule will not only give communities the tools to document excessive land-use restrictions, it will help shine a light on the laws’ consequences and potential alternatives. A proposed $300 million initiative in President Obama’s fiscal year 2016 budget could provide grants to cities to encourage more fluid and affordable housing and ease the costs of implementing the changes. HUD and Treasury’s joint risk-sharing mortgage program is also already showing promising results in New York City and could help unlock affordable housing in other underserved communities.

The growth of our economy and the vibrancy of our cities depend on our ability to provide both good jobs and decent, safe and affordable housing in communities in which people want to live. Without housing at the right prices and in the right places, the economy runs the risk of continuing on its slow-growth path, which denies opportunity to all of us. Land-use regulations have their place—no one should have to live next to a power plant or landfill—but as a nation, we’ve taken them to excess. It’s in the interest of states and cities to think through the implications of regulations that have accreted over time and change them where they’re now doing more harm than good. Furman made clear that the Administration is ready to help that process along.

In this November 20, 2015 photo, Chairman of the Council of Economic Advisers Jason Furman presents at the annual Urban Institute and CoreLogic housing symposium at the Newseum in Washington, DC. Photo by Lydia Thompson/Urban Institute.

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